As filed with the Securities and Exchange Commission
on July 28, 2005
Registration No. 333-125629
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
To the
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:
Justin L. Bastian
Stephen J. Schrader
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto CA 94304-1018
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) 100,000,000 $1.00 $100,000,000 $11,770
- ---------------------
(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
Results of Operations of 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
$100,000,000 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 100,000,000 units ($100,000,000) 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, August ____, 2005 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
84).
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 $100,000,000 $0 $100,000,000
================================================================================================================
(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 August ____, 2005
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...........................6
Conflicts Of Interest.........................................................6
Prior Performance Summary.....................................................6
Investment Objectives And Criteria............................................7
Federal Income Tax Consequences...............................................7
Liquidity, Capital Withdrawals And Early Withdrawals..........................7
Summary Of Limited Partnership Agreement And Limited Partnership Units........7
Additional Information........................................................8
Subscription Procedures.......................................................8
RISK FACTORS..................................................................8
Mortgage Lending And Real Estate Risks........................................8
We Have Not Identified Any New Loans From Additional Proceeds Of This
Offering....................................................................8
Suitable Mortgage Loans May Not Be Available From Time To Time................9
Loan Defaults And Foreclosures By Borrowers May Adversely Affect Partnership..9
We Must Rely On Appraisals Which May Not Be Accurate Or May Be Affected By
Subsequent Events...........................................................9
Competition Risks.............................................................9
Risks Associated With Junior Encumbrances....................................10
Risks Associated With Construction Loans And Rehabilitation Loans............10
Risks Of Real Estate Ownership After Foreclosure.............................10
Risks Of Real Estate Development On Property Acquired By Us..................11
Bankruptcy And Legal Limitations On Personal Judgments May Adversely
Affect Our Profitability...................................................11
Risks Associated With Unintended Violations Of Usury Statutes................11
Risks Associated With High Cost Mortgages....................................11
Loan-To-Value Ratios Are Determined By Appraisals Which May Be In
Excess Of The Ultimate Purchase Price Of The Underlying Property...........12
Larger Loans Result In Less Diversity And May Increase Risk..................12
Use Of Borrowed Money May Reduce Our Profitability Or Cause Losses
Through Liquidation........................................................13
Changes In Interest Rates May Affect Your Return On Your Investment..........13
Equity Or Cash Flow Participation In Loans Could Result In Loss Of
Secured Positions In Loans.................................................13
Marshaling Of Assets Could Delay Or Reduce Recovery Of Loans.................13
Potential Liability For Toxic Or Hazardous Substances If We Are
Considered Owner Of Real Property..........................................14
Potential Loss Of Revenue In The Event Of The Presence Of
Hazardous Substances.......................................................14
Potential Conflicts And Risks If We Invest In Loans With General
Partners Or Affiliates.....................................................14
INVESTMENT RISKS.............................................................14
Lack Of Liquidity Of Units Increases Their Risk..............................14
There Is No Assurance You Will Receive Cash Distributions....................15
Your Ability To Recover Your Investment On Dissolution And
Termination Will Be Limited................................................15
Certain Kinds Of Losses Cannot Be Insured Against............................15
i
Risks Related To Concentration Of Mortgages In The San Francisco Bay Area....15
You Must Rely On General Partners For Management Decisions; Limited
Partners Have No Control Over Operation Of The Partnership.................16
You Will Be Bound By Decision Of Majority Vote...............................16
Net Worth Of The General Partners May Affect Ability Of The General
Partners To Fulfill Their Obligations To The Partnership...................16
Risks Regarding Formation Loan And Repayment Thereof.........................16
Delays In Investment Could Adversely Affect Your Return......................17
No Assurance Of Limitation Of Liability Of Limited Partners..................17
No Assurance That California Law Will Apply With Respect To
Limitation Of Liability Of Limited Partners................................17
We Cannot Precisely Determine Compensation To Be Paid To General
Partners And Affiliates....................................................17
Working Capital Reserves May Not Be Adequate.................................17
We May Be Required To Forego More Favorable Investments To Avoid
Regulation Under Investment Company Act of 1940..............................17
Conflicts Of Interest Risks..................................................18
Use Of Forward Looking Statements............................................18
TAX RISKS....................................................................18
Risks Associated With Partnership Status For Federal Income
Tax Purposes...............................................................18
Your Ability To Offset Income With Our Losses May Be Limited.................19
Your Tax Liability May Exceed The Cash You Receive...........................19
We Expect To Generate Unrelated Business Taxable Income......................19
Risks Of Audit And Adjustment................................................19
Risks Of Effects Of State And Local Taxation.................................20
ERISA RISKS..................................................................20
Risks Of Investment By Benefit Plan Investors And Other Tax-Exempt
Investors..................................................................20
NOTICE TO CALIFORNIA RESIDENTS...............................................20
TERMS OF THE OFFERING........................................................21
No Escrow Established........................................................21
Investment Of Subscriptions..................................................21
Purchase By General Partners And Affiliates..................................21
Election To Receive Periodic Cash Distributions..............................21
ESTIMATED USE OF PROCEEDS....................................................21
CAPITALIZATION OF THE PARTNERSHIP............................................23
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES..........................23
OPERATING STAGE..............................................................24
LIQUIDATION STAGE............................................................25
CONFLICTS OF INTEREST........................................................28
Conflicts Arising As A Result Of The General Partners' Legal and
Financial Obligations to Other Partnerships..................................28
Conflicts Arising From The General Partners' Allocation Of Time
Between The Partnership And Other Activities.................................29
The Amount Of Loan Brokerage Commissions, Other Compensation To The
General Partners And The Quality And Types Of Loans Affects Rate Of
Return To You..............................................................29
Arrangement Of Loans By Redwood Mortgage Corp................................29
Terms Of Formation Loan Are Not A Result Of Arms Length Negotiations.........29
Potential Conflicts If We Invest In Loans With General Partners Or
Affiliates.................................................................30
General Partners Will Represent Both Parties In Sales Of Real
Estate Owned To Affiliates.................................................30
Professionals Hired By General Partners Do Not Represent You
Or Any Other Limited Partners..............................................31
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNERS.............................31
Present State Of The Law.....................................................31
Exculpation..................................................................31
Indemnification..............................................................32
Terms Of The Partnership Agreement...........................................32
PRIOR PERFORMANCE SUMMARY....................................................32
Experience and Background Of General Partners And Affiliates.................32
ii
PUBLICLY OFFERED MORTGAGE PROGRAMS...........................................32
Redwood Mortgage Investors VIII..............................................33
Redwood Mortgage Investors VII...............................................33
Redwood Mortgage Investors VI................................................33
PRIVATELY OFFERED MORTGAGE PROGRAMS..........................................33
Redwood Mortgage Investors V.................................................34
Redwood Mortgage Investors IV................................................34
Redwood Mortgage Investors III...............................................34
Redwood Mortgage Investors II................................................34
Redwood Mortgage Investors ..................................................34
Corporate Mortgage Investors.................................................34
Additional Information.......................................................34
No Major Adverse Developments................................................35
MANAGEMENT...................................................................35
General......................................................................35
The General Partners.........................................................35
Michael R. Burwell...........................................................35
Gymno Corporation............................................................35
Redwood Mortgage Corp........................................................35
Affiliates of the General Partners...........................................36
The Redwood Group, Ltd.......................................................36
Theodore J. Fischer..........................................................36
Diana B. Mandarino...........................................................36
SELECTED OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............36
SELECTED FINANCIAL DATA......................................................37
ORGANIZATIONAL CHART.........................................................39
INVESTMENT OBJECTIVES AND CRITERIA...........................................40
Principal Objectives.........................................................40
General Standards For Loans..................................................40
Priority Of Mortgages........................................................40
Geographic Area Of Lending Activity..........................................41
Construction Loans...........................................................41
Rehabilitation Loans.........................................................41
Loan-To-Value Ratios.........................................................41
Terms Of Loans...............................................................42
Equity Interests In Real Property............................................42
Escrow Conditions............................................................42
Loans To General Partners And Affiliates.....................................42
Purchase Of Loans From Affiliates And Other Third Parties....................42
Note Hypothecation...........................................................43
Loan Participation...........................................................43
Diversification..............................................................43
Reserve Liquidity Fund.......................................................43
Credit Evaluations...........................................................43
Loan Brokerage Commissions...................................................43
Loan Servicing...............................................................43
Sale Of Loans................................................................43
Borrowing....................................................................43
Other Policies...............................................................44
CERTAIN LEGAL ASPECTS OF LOANS...............................................44
Foreclosure..................................................................44
Tax Liens....................................................................44
Anti-Deficiency Legislation..................................................44
Special Considerations In Connection With Junior Encumbrances................45
"Due-On-Sale" Clauses........................................................46
Due-On-Sale..................................................................46
Due-On-Encumbrance...........................................................46
Prepayment Charges...........................................................46
Real Property Loans..........................................................46
iii
BUSINESS.....................................................................46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF
THE PARTNERSHIP............................................................49
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.....................................70
TAX CLASSIFICATION OF THE PARTNERSHIP........................................70
Partnership Status...........................................................70
Publicly Traded Partnerships.................................................71
Anti-Abuse Rules.............................................................71
TAXATION OF PARTNERS.........................................................72
General......................................................................72
Allocation Of Profits And Losses.............................................72
Distributions; Tax Basis.....................................................72
Tax Consequences Of Reinvestment Election....................................73
Sale Of Partnership Units....................................................73
TAXATION OF PARTNERSHIP INVESTMENTS..........................................73
Treatment Of Loans Containing Participation Features.........................73
Repayment Or Sale Of Loans...................................................73
Property Held Primarily For Sale; Potential Dealer Status....................74
Original Issue Discount; Imputed Income......................................74
OTHER ASPECTS OF TAXATION OF PARTNERS........................................74
At-Risk Limitations..........................................................74
Passive Activity Loss Limitations............................................74
Investment Interest Limitations..............................................75
Deductibility Of Partnership Investment Expenditures.........................75
Partnership Organization, Syndication Fees And Acquisition Fees..............75
Section 754 Election.........................................................75
Tax Returns; Audits..........................................................76
Reportable Transaction Rules.................................................76
INVESTMENT BY TAX-EXEMPT INVESTORS...........................................76
General......................................................................76
Investment By Charitable Remainder Trusts....................................77
FOREIGN INVESTORS............................................................78
STATE AND LOCAL TAXES........................................................78
ERISA CONSIDERATIONS.........................................................78
General......................................................................78
Fiduciaries Under ERISA......................................................79
Prohibited Transactions Under ERISA And The Code.............................79
Plan Assets..................................................................79
Annual Valuation.............................................................80
Potential Consequences Of Treatment As Plan Assets...........................80
DESCRIPTION OF UNITS.........................................................81
SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT.................................81
Rights And Liabilities Of Limited Partners...................................81
Capital Contributions........................................................82
Rights, Powers And Duties Of General Partners................................82
Net Profits And Net Losses...................................................82
Cash Distributions...........................................................82
Meeting......................................................................82
Accounting And Reports.......................................................82
Restrictions On Transfer.....................................................83
General Partners' Interest...................................................83
Term Of Partnership..........................................................83
Winding Up...................................................................83
Dissenting Limited Partners' Rights..........................................83
TRANSFER OF UNITS............................................................84
Restrictions On The Transfer Of Units........................................84
Restrictions Related To Tax Status...........................................84
Withdrawal From Partnership..................................................84
iv
DISTRIBUTION POLICIES........................................................86
Distributions To The Limited Partners........................................86
Cash Distributions...........................................................86
Allocation Of Net Profit And Net Loss........................................86
REPORTS TO LIMITED PARTNERS..................................................86
PLAN OF DISTRIBUTION.........................................................87
Sales Commissions............................................................87
Sales By Registered Investment Advisors......................................87
Election Of Investors To Pay Client Fees.....................................87
Client Fees Are Not Sales Commissions........................................87
Representations And Warranties Of Registered Investment Advisors.............88
Payment Of Sales Commissions.................................................88
Payment Of Other Fees To Participating Broker Dealers........................88
Suitability Requirements.....................................................88
Formation Loan...............................................................88
Escrow Arrangements..........................................................91
Termination Date Of Offering.................................................91
Subscription Account.........................................................91
SUPPLEMENTAL SALES MATERIAL..................................................91
LEGAL PROCEEDINGS............................................................92
LEGAL MATTERS................................................................92
EXPERTS......................................................................92
ADDITIONAL INFORMATION.......................................................92
TABULAR INFORMATION CONCERNING PRIOR PROGRAMS................................92
GLOSSARY.....................................................................93
INDEX TO THE FINANCIAL STATEMENTS............................................94
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
$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 (determined
with the same exclusions). 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 70). 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, including 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 81 and "SUMMARY OF
THE LIMITED PARTNERSHIP AGREEMENT - Restrictions on Transfer" at page 83).
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 subject to ERISA or to the
prohibited transaction provisions of Section 4975 of the Code (a "Benefit Plan
Investor"), including tax-qualified pension and 401(k) plans and IRAs, 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 Benefit Plan Investors and Other Tax-Exempt
Investors." at page 20)
The general partners are not permitted to allow the purchase of units with
assets of any Benefit Plan Investors if the general partners (i) have investment
discretion with respect to the assets of the Benefit Plan Investor 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.
2
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 93.
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.
3
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. 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 100,000,000 units ($100,000,000) 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 additional 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 this offering.
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 this
offering. A portion of the proceeds of this offering will be used to fund the
formation loan. Consequently, until the formation loan is repaid, not all of
such 96% of the proceeds will be available to make loans or be held as cash
reserves and, until such repayment, a minimum of 87% of the proceeds will be
used to make loans or be held as cash reserves. If all of the units we are
offering are not sold, the amount of proceeds available to make loans will be
less. Historically, our offering expenses have been below the estimated 4%
resulting in greater than 96% of offering proceeds being used to make loans or
held in cash reserves. 96.10% (first offering), 98.00% (second offering), 97.95%
(third offering), 98.70% (fourth offering) and as of December 31, 2004, 98.9%
(the then ongoing fifth offering) of the respective offerings were available to
be used to make loans or to be held in cash reserves after the repayment of the
formation loan. 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.
The table below sets forth the gross proceeds, the resulting cash available
for extension of loans and other items in the event that (i) all $100,000,000 of
partnership units to which this prospectus pertains are sold and (ii) only
$50,000,000 of such partnership units are sold.
4
Estimated 50%
Maximum Offering (1) Offering Sold (1)(2)
100,000,000 Units 50,000,000 Units
($100,000,000) sold ($50,000,000) sold
==================================================================================================================
Dollar Amount % Dollar Amount %
- ------------------------------------------------------------------------------------------------------------------
Gross Proceeds $100,000,000 100% $50,000,000 100%
Leveraged Funds 0 0 0 0
Total Partnership Funds $100,000,000 100% $50,000,000 100%
Less: Public Offering Expenses (3) $4,000,000 4% $4,000,000 8%
Amount Available for Investment $96,000,000 96% $46,000,000 92%
Less:
Formation Loan to pay sales commissions (4) $9,000,000 9% $4,500,000 9%
Reserve Liquidity Fund (5) $2,000,000 2% $1,000,000 2%
Cash Available for Extension of Loans (6) $85,000,000 85% $40,500,000 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 82).
(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.
(3) Consists of expenses incurred in connection with 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. 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,
including reimbursements for education meetings for associated persons of an
NASD member, payable by the partnership. In no event will all compensation
payable to participating broker dealers, including sales commissions, (see
footnote 4 below), expense reimbursements, including reimbursements for training
and education meetings for associated persons of an NASD member (estimated to be
$700,000) 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 23).
(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%.
Consequently, as the maximum sales commission is 9%, the formation loan will not
exceed nine percent (9%) of the total gross proceeds of the offering, (See "PLAN
OF DISTRIBUTION - Formation Loan" at page 88). 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 $9,000,000. 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 $5,000,000 assuming
all investors elected to receive current cash distributions to a maximum of
$9,000,000 assuming all investors elected to compound their earnings.
5
(5) The partnership anticipates maintaining an average balance of a reserve
liquidity fund equal to the lesser of two percent (2%) of the gross proceeds of
the offering and two percent (2%) of the net capital of the partnership.
(6) These proceeds will be used to make loans (See "INVESTMENT OBJECTIVES
AND CRITERIA" at page 40). The exact amount of the cash available for extension
of loans will depend upon the amount of the formation loan, the amount of the
offering expenses, use of leveraged funds and cash reserves.
Compensation of the General Partners and Affiliates - The general partners
and their affiliates have received and will continue to receive 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 such entity, any person owning directly or indirectly 10% or more of a
general partner and any officer, director or partner of 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 23). 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 Loan brokerage commissions paid by the borrowers
o Processing and escrow fees paid by the borrowers
o Loan servicing fees paid by the partnership from operations
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
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 affiliates of the
general partners 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 fees
and asset management fees.
Prior Performance Summary - We have previously sponsored 8 prior
partnerships with investment objectives similar to the partnership. We have made
5 prior offerings in the partnership with contributed capital as of December 31,
6
2004 totaling $172,223,000. Total contributed capital as of March 31, 2005
equaled $182,356,000. 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 32. 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:
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
Preserve and protect the partnership's capital.
Federal Income Tax Consequences - The section of this prospectus entitled
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES" at page 70 contains a discussion of
the most significant federal income tax issues pertinent to the partnership.
Prospective investors should consult their tax advisors concerning the tax
consequences of an investment in the partnership in light of the investor's
particular circumstances.
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 last day of 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 (described below) will be
permitted only upon the terms set forth above.
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 81 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 of all or substantially all of the
partnership's assets.
7
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"
below). 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 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.
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 "BUSINESS" at page 46 and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP" at page 49 of
this prospectus.
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 7). The ability to find suitable
loans is more difficult when the economy is weaker and there is less activity in
the real estate market. Although the real estate market in the San Francisco Bay
Area, which is where most of our loans are placed, strengthened during 2004,
there was increased competition for the type of loans that we make. In addition,
as we continue to make offerings of partnership units, and the size of our
capital continues to grow, we must find more and more loans and/or loans of
larger sizes in order to deploy such capital. 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.
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 Defaults and foreclosures may increase if the economy weakens or if there
is an interest rate increase, which may make it more difficult for borrowers to
refinance their loans at maturity or sell their property. Interest rates have
increased recently as the Federal Reserve Board, commencing in July 2004, has
increased its federal funds rate. The effect of such increase has been offset by
a general strengthening, during 2004, of the California economy and the Northern
California real estate market. As of March 31, 2005, the partnership had twelve
loans, totaling $27,932,000 that were past due by 90 days or more on interest
payments or past maturity. Continued increases in interest rates, or a weakening
in the economy, could increase the number of such overdue loans.
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
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.
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. Recently, due to the
Federal Reserve's increasing interest rates, upward pressure on longer term
9
rates, and a healthy real estate market, we have experienced increased
competition as borrowers refinance with lower interest rate lenders than the
partnership. 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 and Rehabilitation 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 44). In addition to construction loans, the partnership also
makes loans, the proceeds of which are used to remodel, add to and/or
rehabilitate an existing structure or dwelling, whether residential, commercial
or multifamily properties and which, in the determination of management, are not
construction loans. These loans are referred to by management as "Rehabilitation
Loans". As of December 31, 2004 the partnership had funded $41,373,000 in
Rehabilitation Loans and $8,880,000 remained to be disbursed for a combined
total of $50,253,000. While the partnership does not classify Rehabilitation
Loans as Construction Loans, Rehabilitation Loans do carry some of the same
risks as Construction Loans. There is no limit on the amount of Rehabilitation
Loans the partnership may make. We currently anticipate that Rehabilitation
Loans as a percentage of our total loan portfolio will increase in the near
term.
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:
The property could generate less income for us than we could have earned
from interest on the loan
If the property is a rental property we will be required to find and keep
tenants
We will be required to oversee and control operating expenses
We will be subject to general and local real estate and economic market
conditions which could adversely affect the value of the property
We will be subject to any change in laws or regulations regarding taxes,
use, zoning and environmental protection and hazards
We will be potentially liable for any injury that occurs on or to the
property
10
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. Depending upon the location of
the property and market conditions, the development done by us could be either
residential (single or multifamily) or commercial. Currently, the partnership is
pursuing development of a single family residential property which it acquired
in September 2004 through a foreclosure sale. The partnership is developing this
property by processing plans for the creation of two condominium units on it.
Development of this residential property as well as any other type of real
estate involves risks including the following:
We will be required to rely on the skill and financial stability of third
party developers and contractors
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
Any type of development and construction is subject to delays and cost
overruns
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
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 44).
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. The partnership is currently in the process of acquiring a
Commercial Financing License, or CFL. As a result, once we are operating under a
CFL, this license will provide the partnership with an exemption from the
applicable California usury provision.
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 eight percent, the yield on Treasury
securities having comparable periods of maturity for first mortgages, or ten
percent for junior mortgages 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. 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
11
o the prohibition of certain terms in the loan including balloon payments
and negative amortization.
The failure to comply with the regulations, even if the failure was
unintended, 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, then 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,
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.
o 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. In the case of a loan made in
connection with a pending property purchase, an appraisal may, for various
reasons, reflect a higher or lower value than the purchase amount; we will
nevertheless base our loan-to-value ratios on the appraised value, rather than
on such purchase amount. 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.
Larger Loans Result in Less Diversity and May Increase Risk - As of
December 31, 2004, the partnership held 75 loans secured by deeds of trust, with
an aggregate face value of $171,745,000. The average value of those loans in
2004 was approximately $2,289,000, which is an increase of $472,000 from the
average loan value of $1,817,000 in 2003. The average loan as of December 31,
2004, represented 1.25% of partners' capital and 1.33% of outstanding secured
loans, as compared to December 31, 2003, when average loan size represented
1.31% of partners' capital and 1.23% of outstanding secured loans. The largest
secured loan as of December 31, 2004, was for an amount of approximately
$12,045,000 and represented 6.56% of partners' capital, 7.01% of outstanding
secured loans and 6.00% of the total partnership assets as compared to December
31, 2003, where the largest secured loan was for the amount of approximately
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$16,010,000 and represented 11.54% of partners' capital, 10.88% of total secured
loans and 9.84% of the total partnership assets. The maximum investment by the
partnership in a loan will not exceed 10% of the then total partnership assets.
The partnership can as a general rule decrease risk of loss from delinquent
mortgage loans by investing in a greater total number of loans. Investing in
fewer, larger loans generally decreases diversification of the portfolio and
increases risk of loss and possible reduction of yield to investors in the
partnership in the case of a delinquency of such a loan. However, since larger
loans generally will carry a somewhat higher interest rate, the general partner
may determine, from time to time, that a relatively larger loan is advisable for
the partnership.
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 43).
Changes In Interest Rates May Affect Your Return On Your Investment - Our
loans typically have fixed rates and the majority of our loans are for terms of
one to five years. Consequently, due to the terms of our loans, if interest
rates rapidly increase, such interest rates may exceed the average interest rate
earned by our loan portfolio. 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, as they are an illiquid investment, 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 44). 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
alternative short term investments with lower interest rates and a corresponding
lower yield to partners. (See "RISK FACTORS" at page 8).
Equity or Cash Flow Participation in Loans Could Result in Loss of Secured
Positions in Loans - The partnership may sometimes participate in the
appreciation in value or in the cash flow from a secured property. If a borrower
defaults and claims that this participation makes the loan comparable to equity
(like stock) in a joint venture, the partnership might lose its secured position
as lender in the property. Other creditors of the borrower might then wipe out
or substantially reduce the partnership's investment. The partnership could also
be exposed to the risks associated with being an owner of real property. If a
third party were to assert successfully that a partnership loan was actually a
joint venture with the borrower, there might be a risk that the partnership
could be liable as joint venturer for the wrongful acts of the borrower toward
the third party.
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
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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.
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
Lack of Liquidity of Units Increases Their Risks - No public trading market
for the units exists. It is highly unlikely that a public trading market will
ever develop. Article 7 of the partnership agreement imposes substantial
restrictions upon your ability to transfer units (See "SUMMARY OF LIMITED
PARTNERSHIP AGREEMENT" at page 81 and "TRANSFER OF UNITS" at page 84). 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
84). 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.
14
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 23). 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 affecting our profitability.
Risks Related To Concentration of Mortgages in the San Francisco Bay Area -
As of December 31, 2004, 76.36% ($131,143,000) of our loans are secured by
properties located in 6 counties that comprise the San Francisco Bay Area. The
San Francisco Bay Area economy is improving from the economic downturn from 2000
to 2003. Employment and job creation has improved but is still lower than
desirable. During 2004 and continuing in 2005, the residential and commercial
real estate market, in Northern California generally experienced solid price
appreciation. Our concentration of loans in the San Francisco Bay Area, however,
exposes us to greater risk of loss if the economy in the San Francisco Bay Area
weakens 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:
A continued economic recession in or slowdown in the area
Overbuilding of commercial and residential properties
Relocation of businesses outside of the area due to economic factors such
as high cost of living and of doing business within the region
Increased interest rates thereby weakening the general real estate market
If the economy were 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.
15
You Must Rely on the General Partners For Management Decisions; Limited
Partners Have No Control Over Operation of the Partnership - 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 35).
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 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, subject to certain limitations.
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 81" and "TRANSFER OF UNITS" at page 84).
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
35).
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 88).
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 $5,000,000 assuming all investors elected to receive current cash
distributions to a maximum of $9,000,000 assuming all investors elected to
compound their earnings.
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 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 and 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.
16
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 81). 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 - Morrison & Foerster 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, Morrison &
Foerster 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 23. 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
21). 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
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.
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.
17
Conflicts of Interest Risks
o The risk factors below describe certain material conflicts of interest
that may arise in the course of the general partners' management and operation
of our business. The disclosure in the prospectus under the caption "CONFLICTS
OF INTEREST," beginning on page.28, sets forth a more complete discussion of
these conflicts of interest. Our discussion of potential conflicts of interest
reflects our knowledge of the existing or potential conflicts of interest as of
the date of this prospectus. We cannot assure you that no other conflicts of
interest will arise in the future. Conflicts arise as a result of the general
partners' legal and financial obligation to other partners. 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 affiliates of the
general partners 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 fees
and the asset management fees.
Use of Forward Looking Statements - Certain statements in this prospectus
which are not historical facts may be considered forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, including
statements regarding our expectations, hopes, intentions, beliefs and strategies
regarding the future. Forward-looking statements include statements regarding
future interest rates and economic conditions and their effect on the
partnership and its assets, trends in the California real estate market,
estimates as to the allowance for loan losses and the valuation of real estate
held for sale, estimates of future annualized yield, estimates of future limited
partner withdrawals, estimates of the compensation to the general partners and
estimates of the formation loan. Actual results may be materially different from
what is projected by such forward-looking statements. Factors that might cause
such a difference include unexpected changes in economic conditions and interest
rates, the impact of competition and competitive pricing and downturns in the
real estate markets in which we have made loans. All forward-looking statements
and reasons why results may differ included in the prospectus are made as of the
date hereof, and we assume no obligation to update any such forward-looking
statement or reason why actual results may differ.
Tax Risks
Risks Associated With Partnership Status For Federal Income Tax Purposes -
The partnership is intended to be treated as a partnership (other than a
publicly traded partnership) for federal income tax purposes. Although we have
received an opinion from Morrison & Foerster LLP to the effect that the
partnership will be treated as a partnership (other than a publicly traded
partnership) for federal income tax purposes, we will not seek a ruling from the
Internal Revenue Service ("IRS") on the tax treatment of the partnership or its
partners. Counsel's opinion represents only its best legal judgment based upon
existing law and, among other things, factual representations provided by the
general partners. The opinion of counsel 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 challenged by the IRS.
18
If we were taxable as a corporation, the "pass through" treatment of our
income and losses would be lost. Instead, we would, among other things, pay
income tax on our earnings in the same manner and at the same rate as a
corporation, and our losses, if any, would not be deductible by the limited
partners. Limited partners would be taxed upon distributions substantially in
the manner that corporate shareholders are taxed on dividends. In addition, if
we were classified as a publicly traded partnership but nonetheless remained
taxable as a partnership, the passive activity loss rules would apply in a
manner that could adversely affect limited partners. See "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES - Tax Classification of the Partnership" at page 70.
Your Ability to Offset Income with Our Losses May Be Limited - We are
engaged in mortgage lending. We take the position that most of our income is
nonpassive income for purposes of certain limitations on the use of losses from
passive activities. It is possible, however, that the IRS could assert that our
income is properly treated as portfolio income for purposes of those
limitations. Such treatment is subject to the interpretation of complex Treasury
regulations, and is dependent upon a number of factors, such as whether we are
engaged in a trade or business, the extent to which 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 that an IRS challenge to our characterization of our income will not
succeed. It also 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.
Your Tax Liability May Exceed the Cash You Receive - Your tax liabilities
associated with an investment in the partnership for a given year may exceed the
amount of cash we distribute to you during such year. As a limited partner, you
will be taxed on your allocable share of our taxable income whether or not you
actually receive cash distributions from us. Your taxable income could exceed
cash distributions you receive, for example, if you elect to reinvest in the
partnership the cash distributions you would otherwise have received. Taxable
income in excess of cash distributions also could result if we were to generate
so-called "phantom income" (taxable income without an associated receipt of
cash). Based upon historical experience, the general partners anticipate that
the partnership's taxable income will not differ substantially from the cash
flow generated by our lending activities.
We Expect to Generate Unrelated Business Taxable Income - Tax-exempt
investors (such as an employee pension benefit plan or an IRA) may be subject to
tax to the extent that income from the partnership is treated as unrelated
business taxable income, or UBTI. We borrow funds on a limited basis, which can
cause a portion of our income to be treated as UBTI. We may also receive income
from services rendered in connection with making or securing loans, which is
likely to constitute UBTI. In addition, although we do not currently intend to
own and lease personal property, it is possible we may do so as a result of a
foreclosure upon a default. Although we use reasonable efforts to prevent any
borrowings and leases of personal property from causing any significant amount
of partnership income to be treated as UBTI, we expect that some portion of our
income will be UBTI. Prospective investors that are tax-exempt entities are
urged to consult their own tax advisors regarding the suitability of an
investment in units. In particular, 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.
19
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, such as California 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, whether or not
each partner resides in that state. As a result, a nonresident partner may be
required to file a tax return in California and any other such state.
Differences may exist between federal income tax laws and state and local income
tax laws. The partnership may be required to withhold state taxes from
distributions to investors in certain instances. You are urged to consult with
your own tax advisers with respect to state and local taxation.
ERISA RISKS
Risks of Investment By Benefit Plan Investors and other 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) (a tax-qualified plan), 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, as amended
("ERISA"); or (ii) whether the investment is prudent, since there may not be a
market created in which you can sell or otherwise dispose of the units. In
addition if you are a Benefit Plan Investor, including a tax-qualified pension
or 401(k) plan or an IRA, you should consider (i) whether a distribution of
units from a tax-qualified plan or IRA would be accepted by an IRA custodian as
a rollover, and if not, the automatic 20% income tax withholding which you may
need to satisfy out of other assets that you own; (ii) whether a required
distribution from a tax-qualified plan or IRA commencing on the April 1
following the calendar year in which you attain age 70 1/2 could cause you to
become subject to income tax that you would need to satisfy out of other assets
if you were not able to transfer the unit for cash; and (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 could cause
certain transactions with the partnership to constitute prohibited transactions.
Finally, all tax-exempt investors, including tax-qualified pension and 401(k)
plans and IRAs should consider (i) whether the investment will impair the
liquidity of your plan or other entity; and (ii) whether the investment will
create unrelated business taxable income for the plan or other entity. 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 78).
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."
20
TERMS OF THE OFFERING
We are offering a maximum of 100,000,000 units ($100,000,000) 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. 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 offering 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 at the end of the calendar year.
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 and
assuming that all units offered hereby are sold, we estimate that after
deduction of the public offering expenses, approximately eighty-seven percent
(87%) of the proceeds of this offering will be used for making loans or be held
in the cash reserve liquidity fund. 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.
21
Estimated 50%
Estimated 50% Maximum Offering (1)(2) Offering Sold (1)(2)
Maximum Offering (1) Offering Sold (1) 100,000,000 Units 50,000,000 Units
100,000,000 Units 50,000,000 Units ($100,000,000) sold with ($50,000,000) sold with
($100,000,000) sold ($50,000,000) sold leveraged funds leveraged funds
==================================================================================================================================
Dollar Dollar Dollar Dollar
Amount % Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Proceeds $100,000,000 100% $50,000,000 100% $100,000,000 66.67% $50,000,000 66.67%
Leveraged Funds 0 0 0 0 $50,000,000 33.33% $25,000,000 33.33%
Total Partnership Funds $100,000,000 100% $50,000,000 100% $150,000,000 100% $75,000,000 100%
Less Public Offering
Expenses (3) $4,000,000 4% $4,000,000 8% $4,000,000 2.67% $4,000,000 5.33%
Amount Available for
Investment $96,000,000 96% $46,000,000 92% $146,000,000 97.33% $71,000,000 94.67%
Less:
Formation Loan to pay
sales commissions (4) $9,000,000 9% $4,500,000 9% $9,000,000 6% $4,500,000 6%
Reserve Liquidity Fund (5) $2,000,000 2% $1,000,000 2% $2,000,000 1.33% $1,000,000 1.33%
Cash Available for
Extension of Loans (6) $85,000,000 85% $40,500,000 81% $135,000,000 90% $65,500,000 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 82).
(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. The partnership may borrow funds for the purpose of
making loans, for increased liquidity, reducing cash reserve needs or for any
other partnership purposes. 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.
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,
including reimbursements for education meetings for associated persons of an
NASD member, payable by the partnership. In no event will all compensation
payable to participating broker dealers, including sales commissions, (see
footnote 4 below), expense reimbursements, including reimbursements for training
and education meetings for associated persons of an NASD member (estimated to be
$700,000) 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 23).
(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%.
Consequently, as the maximum sales commission is 9%, the formation loan will not
exceed nine percent (9%) of the total gross proceeds of the offering, (See "PLAN
OF DISTRIBUTION - Formation Loan" at page 88). 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 of $100,000,000 of gross proceeds is raised and assuming
that sixty-five percent (65%) of the investors elect to retain their earnings in
22
their capital accounts and thirty-five percent (35%) elect to receive
distributions. To the extent the actual amount of the formation loan is less
than the amount stated in the table, the cash available for extension of loans
will be increased proportionately. As of December 31, 2004, the formation loans
for the five prior offerings totaled 7.49% 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. 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 $5,000,000 assuming all investors
elected to receive current cash distributions to a maximum of $9,000,000
assuming all investors elected to retain their earnings in their capital
accounts. Except for the formation loan made to Redwood Mortgage Corp., 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 the lesser of two percent (2%) of the gross proceeds of
the offering or two percent (2%) of the net capital of the partnership.
(6) These proceeds will be used to make loans (See "INVESTMENT OBJECTIVES
AND CRITERIA" at page 40). The exact amount of the cash available for extension
of loans will depend upon the amount of the formation loan, the amount of
offering 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, 2004, 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) $183,368,000 $270,368,000
- ----------------------
(1) Adjusted to reflect sales of all $100,000,000 of partnership units
offered hereby, determined after deduction of certain offering expenses
aggregating $4,000,000 and maximum formation loan of $9,000,000. (See "ESTIMATED
USE OF PROCEEDS" at page 21)
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 in connection with the
offering to which this prospectus pertains and the use of proceeds from that
offering. With respect to such offering and such use of proceeds, 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 partnership's net 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
23
o collected data regarding compensation from trade association meetings
and/or other relevant periodicals. Thus, we believe 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 length of time the partnership continues to
operate, 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, the level of liquidations and sales of
partnership units. 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 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 affect the nature of
the compensation by undertaking different actions is 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 among the general partners of the various entities referred to
herein are described under the caption "MANAGEMENT" at page 35.
The "Operating Stage" and "Liquidating Stage" tables below set forth the
fees that the general partners might receive from the offering of $100,000,000
of partnership units to which this prospectus pertains and the use of proceeds
from such offering. These tables assume that all $100,000,000 of such
partnership units are sold and that such proceeds are fully invested in mortgage
loans. There can be no assurance that all $100,000,000 of such partnership units
will be sold or that all proceeds from such sales will be fully invested in
mortgage loans.
OPERATING STAGE
Entity Receiving Estimated Amount
Compensation Form and Method of Compensation Payable
Redwood Mortgage Corp. Loan brokerage commissions range from approximately three to $4,120,000 per year (8)
six 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 21).
Redwood Mortgage Corp. Processing and escrow fees for services in connection with $44,000 per year (6)
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.
Redwood Mortgage Corp. Loan servicing fee payable monthly up to a maximum amount $892,000 per year (6)
equal to 1/8 of 1% per year of the outstanding principal
amount of each loan. (1)(2)
24
Redwood Mortgage Corp. (50%) Asset management fee payable monthly in an amount up to 1/32 $388,000 per year
Gymno Corporation ( 25%) of 1% of the "net asset value."(3)
Michael R Burwell (25%)
Redwood Mortgage Corp. Reimbursement of expenses relating to administration of the $271,000 per year (7)
partnership, subject to certain limitations; see Article 10 of
the partnership agreement. (4)
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 $16,000 per year (5)(6)
between 1/2 and 1 1/2 percent of the loan.
Redwood Mortgage Corp. Extension fee for extending the loan period payable by $8,000 per year (6)
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 $83,000 per year (6)
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 $64,000 per year (6)(7)
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
the partnership's offering expenses. This portion shall be
determined by the ratio between the initial amount of the
formation loan and the total amount of the offering expenses
incurred by the partnership. Assuming that the maximum
formation loan is $9,000,000 and the maximum organizational
costs are $4,000,000, the ratio would be 69:31. This amount
could be higher or lower, depending upon total offering
expenses. That ratio will be determined by the actual
formation loan and offering expenses incurred. The ratio will
change as offering expenses 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 84).
(1) Assuming that all $100,000,000 of partnership units offered hereby are
sold, we estimate that the loan portfolio resulting from such sale will average
$89,158,000, which amount is the basis for the above loan servicing fee
calculation. That calculation is also based on an estimated one percent (1%)
annual loan servicing fee being paid by the partnership. 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
25
the outstanding principal amount of each loan. 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. An increase or decrease in
this fee within the limits set by the partnership agreement directly impacts the
yield to the limited partners.
(2) 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.
(3) The general partners 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 ongoing 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. The estimated
amount payable is based on a monthly asset management fee in the amount of 1/32
of 1% of the net asset value of the partnership which is estimated to be
$103,000,000.
(4) The general partners or their affiliates are reimbursed for the actual
cost of goods and materials used for or by the partnership and obtained from
unaffiliated parties. In addition, the general partners or their affiliates are
reimbursed for the cost of administrative services necessary for 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.
(5) 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 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.
(6) The amount of fees to be paid to the general partners and their
affiliates related to this offering 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 related to this offering the general partners have assumed, based
upon their historical experience the following: (i) a partnership life of twelve
(12) years assuming $50,000,000 is raised in year one (1) and $50,000,000 is
raised in year two (2); (ii) sixty five percent (65%) of the investors elect to
retain their earnings in their capital accounts and thirty five percent (35%)
elect to receive periodic cash distributions; (iii) an eight percent (8%) yield
in all twelve (12) years; (iv) withdrawal rates of 5% in year six (6) and 10%
thereafter; (v) a turnover rate on loans of 5% in year two (2), of ten percent
(10%) in year three (3), fifteen percent (15%) in year four (4) and twenty
percent (20%) thereafter; (vi) no leveraging of the portfolio has occurred (vii)
early withdrawals by limited partners over a one (1) year period of one percent
(1%) per year during years three (3) through twelve (12); (viii) syndication
costs of $4,000,000 incurred equally in years one (1) and two (2); (viii) cash
liquidity reserves of two percent (2%) of net capital. 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 retain their earnings in their capital accounts
or receive periodic cash distributions, the actual amount of fees paid will vary
from those set forth above.
(7) 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.
(8) To estimate the maximum loan brokerage commissions, we have assumed
that average partnership assets resulting from the sale of all $100,000,000 of
partnership units offered hereby will be $103,000,000, and brokerage loan
commissions at 4% of the total partnership assets.
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, 2004 and December 31, 2003 showing actual amounts and
the maximum allowable. No other compensation was paid to the general partners
during such periods. Such fees were established by the general partners and were
not determined by arms-length negotiation. Certain of these fees are based on
26
the partnership's then existing aggregate loan principal balance (in the case of
loan servicing fees) and its then existing aggregate net asset value (in the
case of asset management fees). Consequently, with respect to such fees, the
compensation payable to the general partners from this $100 million offering
will depend on the extent to which this offering increases the partnership's
aggregate loan principal balances and its aggregate net asset value.
Year Ended Year Ended
December 31, 2004 December 31, 2003
Actual Actual Maximum Maximum Actual Actual Maximum Maximum
Amount Fee Amount Fee Amount Fee Amount Fee
Form Received % Allowable % Received % Allowable %
- ---- -------- - --------- - -------- - ---------- -
PAID BY PARTNERSHIP
Loan Servicing Fee (1) $1,565,000 1.00% $2,348,000 1.5% $1,057,000 1% $1,586,000 1.5%
Asset Management Fee (2) $630,000 .375% $630,000 .375% $468,000 .375% $468,000 .375%
Reimbursement of Operating
Expenses $307,000 N/A $307,000 N/A $290,000 N/A $290,000 N/A
1% of Profits, Losses and
Disbursements $121,000 1% $121,000 1% $96,000 1% $96,000 1%
PAID BY BORROWERS
Loan Brokerage Fees (3) $2,443,000 1.22% $8,025,000 4% $2,621,000 1.61% $6,506,000 4%
Processing and Servicing
Fees $35,000 N/A $35,000 N/A $32,000 N/A $32,000 N/A
(ranges from approximately
$500 to $1,000 per loan based
upon loan size)
Reconveyance Fees $24,429 N/A $24,429 N/A $7,033 N/A $7,033 N/A
(maximum of $45 per deed of
trust or equal to fractionalized
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) $61,000 N/A $61,000 N/A $62,000 N/A $62,000 N/A
- ------------------------
(footnotes to table)
(1) Servicing fees for `actual' were generally 1% of the outstanding
principal balances. Maximum amount allowable assumes the same outstanding
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.
27
(2) The actual asset management fee for the year ended 2004 was .375% of
the monthly net asset value. The maximum amount allowable for both years 2004
and 2003 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.
(3) 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 2004 and 2003, the loan brokerage fees were 2.99% and 2.71%,
respectively, of the principal amount of the loans extended and 1.22% and 1.61%
of total partnership assets as of December 31, 2004 and 2003, respectively.
(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 21).
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 31 and "INVESTMENT OBJECTIVES AND CRITERIA" at page 40). 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.
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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-seven (27) 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. The Amount Of Loan Brokerage Commissions, Other Compensation To The
General Partners And The Quality And Types Of Loans 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. Accordingly, the partnership's
rate of return on the formation loan will be below the rate obtainable by the
partnership on its loans. With respect to this offering, the formation loan
could range from a minimum of $5,000,000 assuming all investors elected to
receive current cash distributions to a maximum of $9,000,000 assuming all
29
investors elected to compound their earnings. 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 88). The amount of 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
servicing fee and asset management 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 do 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.
7. 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, Morrison & Foerster 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, Morrison & Foerster 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.
31
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 and have
been treated as partnerships for federal income tax purposes. Six of these
partnerships were offered without registration under the Securities Act of 1933,
as amended (the "Securities Act") 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 the Securities Act. 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, 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. On the other hand, securities issued
pursuant to a registration statement under the Securities Act generally may be
sold without such registration. In general, securities issued pursuant to
registration under the Securities Act are more freely transferable than those
which are issued without registration under the Securities Act. 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 OFFERRED MORTGAGE PROGRAMS
Not including the prior offerings in this partnership, the two 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 have total net
assets under management as of December 31, 2004, of $15,558,224. As of December
31, 2004, the number of loans made by these partnerships was approximately 727
and the number of currently outstanding loans by these earlier publicly offered
programs was approximately 42, ($12,613,606) which are secured by properties
principally located in Northern California. Of these loans,
32
o approximately 25, which represents forty six percent (46%) of the other
publicly offered partnerships' portfolios ($5,810,115) are secured by single
family residences,
o 4, which represents nine percent (9%) of the other publicly offered
partnerships' portfolios ($1,068,580) are secured by multifamily units,
o 13, which represents forty five percent (45%) of the other publicly
offered partnerships' portfolios ($5,734,911) are secured by commercial
properties
Redwood Mortgage Investors VIII ("RMI VIII"). RMI VIII is a California
limited partnership of which Michael R Burwell, Gymno Corporation and Redwood
Mortgage Corp are the general partners. As of December 31, 2004, the partnership
had a total capitalization of $183,531,000 and approximately 4,857 investors.
As of December 31, 2004, this partnership had offered $200,000,000 of units
in five public prior offerings, with aggregate capital contributions of
approximately $172,223,000 from approximately 4,857 investors and had total net
assets under management of $183,531,000. The first offering closed in October,
1996. The second offering closed in August, 2000. The third offering closed in
April, 2002. The fourth offering closed in October 2003. The fifth offering will
close when this offering becomes effective. As of December 31, 2004, the
partnership had 75 outstanding loans, ($171,745,000) which are secured by
properties located principally in Northern California. Of these 75 loans:
o 33, which represents forty nine percent (49%) of the partnership's
portfolio ($84,359,000) are secured by single family residences.
o 15, which represents eighteen percent (18%) of the partnership's
portfolio ($30,981,000) are secured by multifamily units.
o 25, which represents thirty two percent (32%) of the partnership's
portfolio ($54,670,000) are secured by commercial properties.
o 2, which represents one percent (1%) of the partnership's portfolio
($1,735,000) are secured by unimproved properties.
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. As of December 31,
2004, RMI VII had a total capitalization of $9,128,416 and approximately522
investors.
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. As of December 31,
2004, RMI VI had a total capitalization of $6,429,808 and approximately 437
investors.
PRIVATELY OFFERED MORTGAGE 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), raised aggregate capital
contributions of approximately $25,866,047 from approximately 2,065 investors
and have total current net assets under management of $11,427,549 as of December
31, 2004. The number of loans made by these privately offered partnerships was
approximately 1,430 and the number of outstanding loans made by these privately
offered partnerships, as of December 31, 2004, was approximately 44,
($8,658,809) which are secured by properties principally located in Northern
California. Of these loans,
o approximately 18, which represents twenty one percent (21%) of the other
privately offered partnerships' portfolios ($1,777,514) are secured by single
family residences,
o 2, which represents twenty six percent (26%) of the other privately
offered partnerships' portfolios ($2,292,146) are secured by multifamily units,
o 24, which represents fifty three percent (53%) of the other privately
offered partnerships' portfolios ($4,589,149) are secured by commercial
properties
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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, 2004, RMI V had a total
capitalization of $2,055,213and approximately 203 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, 2004, RMI IV had a total capitalization of $5,947,732
and approximately 383 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. 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. As of December 31, 2004,
RMI III had a total capitalization of $1,318,983 and approximately 44 investors.
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. The RMI II offering terminated on June 30, 1983 at which time it had a
total capitalization of approximately $1,282,802. As of December 31, 2004, RMI
II had a total capitalization of $196,298 and approximately 29 investors.
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. The RMI
offering terminated on July 31, 1982, at which time it had a total
capitalization of approximately $1,090,916. As of December 31, 2004, RMI had a
total capitalization of $750,613 and approximately 29 investors.
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,
2004, the two portfolios had been merged and had total capital of $1,158,710 and
approximately 21 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 28).
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.
TABLE VI Descriptions of Open Loans of Prior Limited Partnerships is
contained in Part II of the Registration Statement.
34
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.
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 81).
The General Partners.
Michael R. Burwell. Michael R. Burwell, age 48, General Partner, past
member of Board of Trustees and Treasurer, Mortgage Brokers Institute
(1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage
Corp. (1979-present); President, Director, Secretary and Treasurer A & B
Financial Services, Inc. (1980-present); President, Director, Chief Financial
Officer and Secretary (since 1986) of Gymno Corporation; President, Director,
Secretary and Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell
is licensed as a real estate sales person.
Gymno Corporation. Gymno Corporation, General Partner, is a California
corporation formed in 1986 for the purpose of acting as a general partner of
this partnership and of other limited partnerships formed by the individual
general partners. The shares in Gymno Corporation are held equally by Michael R.
Burwell and the Burwell Trusts. Michael R. Burwell has a controlling interest in
Gymno Corporation through the trusts. Michael R. Burwell is a director of Gymno
and the director position held by D. Russell Burwell is currently vacant.
Michael R. Burwell is its President, Chief Financial Officer and Secretary.
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 32). Redwood Mortgage Corp. is a subsidiary of The Redwood Group, Ltd.
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.
35
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. Michael R Burwell has a controlling interest
through trusts in The Redwood Group, Ltd.
Theodore J. Fischer. Theodore J. Fischer, age 55, 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 59, Director and 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
other than 50,000 limited partnership units held by Redwood Mortgage Corp.. 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, 2004, 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 (4)
----- ---------------- -------------- ---
(3)(5)
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) Michael R. Burwell has 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.
(5) Excludes 50,000 units of limited partnership interests held by Redwood
Mortgage Corp.
36
SELECTED FINANCIAL DATA
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
For the Three Months ended March 31,
2005 2004
Loans secured by trust deeds $ 152,612,000 $ 138,220,000
Less: Allowance for loan losses (2,434,000) (2,216,000)
Real estate held for sale, net of allowance of $1,000,000 and
$500,000, respectively 20,366,000 3,979,000
Cash, cash equivalents and other assets 28,329,000 11,391,000
Total assets 198,873,000 151,374,000
Liabilities 4,529,000 4,088,000
Partners' capital
General partners 171,000 130,000
Limited partners 194,173,000 147,156,000
Total partners' capital 194,344,000 147,286,000
Total liabilities/partners' capital 198,873,000 151,374,000
Revenues $ 4,525,000 $ 3,850,000
Operating expenses
Management fee $ 184,000 $ 141 ,000
Provisions for losses on loans 91,000 282,000
Provisions for losses on real estate held for sale 0 0
Other 706,000 694,000
Net income 3,544,000 2,733,000
Net income allocated to general partners 35,000 27,000
Net income allocated to Limited Partners $ 3,509,000 $ 2,706,000
Net income per $1,000 invested by Limited
Partners for entire period:
- where income is reinvested and
compounded $17 $18
- where partner receives income in monthly
distributions $17 $18
37
SELECTED FINANCIAL DATA
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
For the Years ended December 31,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
Loans secured by trust deeds $171,745,000 $147,174,000 $83,650,000 $82,790,000 $68,571,000
Less: Allowance for loan losses ($2,343,000) ($2,649,000) ($3,021,000) ($2,247,000) ($1,345,000)
Real estate held for sale $9,793,000 $3,979,000 $9,286,000 $0 $0
Cash, cash equivalents and other assets $21,423,000 $14,150,000 $12,290,000 $5,467,000 $2,738,000
Total assets $200,618,000 $162,654,000 $102,205,000 $86,010,000 $69,964,000
Liabilities $17,087,000 $23,882,000 $6,428,000 $12,256,000 $16,737,000
Partners' capital
General partners $163,000 $123,000 $87,000 $67,000 $47,000
Limited partners $183,368,000 $138,649,000 $95,690,000 $73,687,000 $53,180,000
Total partners' capital $183,531,000 $138,772,000 $95,777,000 $73,754,000 $53,227,000
Total liabilities/partners' capital $200,618,000 $162,654,000 $102,205,000 $86,010,000 $69,964,000
Revenues $17,133,000 $12,958,000 $11,691,000 $9,088,000 $6,349,000
Operating expenses
Management fee $630,000 $468,000 $325,000 $158,000 $61,000
Provisions for losses on loans $1,146,000 $782,000 $780,000 $957,000 $376,000
Provisions for losses on real estate
held for sale $0 $0 $500,000 $0 $0
Other $3,225,000 $2,114,000 $2,600,000 $1,880,000 $1,625,000
Net income $12,132,000 $9,594,000 $7,486,000 $6,093,000 $4,287,000
Net income allocated to general partners $121,000 $96,000 $75,000 $61,000 $43,000
Net income allocated to Limited Partners $12,011,000 $9,498,000 $7,411,000 $6,032,000 $4,244,000
Net income per $1,000 invested by Limited
Partners for entire period:
- where income is reinvested and
compounded $72 $78 $87 $90 $86
- where partner receives income in monthly
distributions $70 $75 $84 $86 $83
38
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)
ownership (1)) (.33% beneficial
ownership (1))
.09% economic
ownership (2))
MICHAEL BURWELL The Burwell Trusts
50% owner Gymno 50% owner Gymno
Corporation Corporation (6)
THE REDWOOD GROUP, LTD(6)
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. As of December 31, 2004, limited partners hold economic interests of
99.87%, 99.76%, 99.85% and 99.87% and Gymno Corporation holds economic interests
of .13%, .24%, .15% and .13% in Redwood Mortgage Investors IV, Redwood Mortgage
Investors V, Redwood Mortgage Investors VI and Redwood Mortgage Investors VII
respectively
6. Michael R. Burwell has a controlling interest through trusts in The
Redwood Group, Ltd.
39
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. This partnership has been
operating for 12 years and has made loans in the aggregate in excess of
$463,473,000. The aggregate principal balance of secured loans outstanding as of
December 31, 2004 totaled $171,745,000. As of December 31, 2004, we have raised
$172,223,000 in aggregate capital contributions in four (4) prior offerings and
the then current fifth offering. As of March 31, 2005, we have raised
$57,447,000 in aggregate capital contributions relating to the fifth offering.
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, 2004, of the partnership's outstanding loan portfolio,
49.12% is secured by single family residences, 31.83% by commercial properties,
18.04% by multifamily properties and 1.01% 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 45). 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%.
40
As of December 31, 2004, of the partnership's outstanding loan portfolio:
o sixty seven percent (67%) were secured by first mortgages,
o twenty nine percent (29%) by second mortgages and
o four percent (4%) 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 76.36% 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, 2004, 8.36% of our loans consisted of construction loans. The partnership
also has undisbursed commitments for construction loans. If all of such
undisbursed commitments were to be disbursed, then the aggregate amount of the
partnership's construction loans would exceed 10% of its total loan portfolio.
The general partners anticipate, however, that as such undisbursed commitments
are disbursed, the total amount of construction loans will not exceed such 10%
level because such disbursed loans will be offset by repayments of other
outstanding construction loans and by the overall growth in the partnership's
loan portfolio.
In addition, 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 Rehabilitation Loans. The partnership also makes loans, the proceeds of
which are used to remodel, add to and/or rehabilitate an existing structure or
dwelling, whether residential, commercial or multifamily properties and which,
in the determination of management, are not construction loans. These loans are
referred to by management as "rehabilitation loans". As of December 31, 2004 the
partnership had funded $41,373,000 in rehabilitation loans and $8,880,000
remained to be disbursed for a combined total of $50,253,000. While the
partnership does not classify rehabilitation loans as construction loans,
rehabilitation loans do carry some of the same risks as construction loans.
There is no limit on the amount of rehabilitation loans the partnership may
make.
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
41
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, 2004, the loan to value ratio based upon
appraised values and prior liens at the inception date of the loans for the
partnership as a whole was 56.94%.
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.
o Terms of Loans. Most of our loans are for a period of 1 to 5 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, Other Compensation To The
General Partners And The Quality And Types Of Loans Affects Rate of Return to
You" at page 29).
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.
42
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.
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).
o Reserve Liquidity Fund. A contingency reserve liquidity fund equal to the
lesser of two percent (2%) of the gross proceeds of the offering or two percent
(2%) of the net capital of the partnership 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.
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 23). 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, 2004, we have borrowed $16,000,000
pursuant to $42,000,000 line of credit. 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
43
"RISK FACTORS - Use of Borrowed Money May Reduce Our Profitability Or Cause
Losses Through Liquidation" at page 13 and "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES - Investment by Tax-Exempt Investors" at page 76). It is our
intention to finance no more than fifty percent (50%) of the partnership's
investments with borrowed funds. (See "TAX RISKS - We Expect to Generate
Unrelated Business Taxable Income" at page 19).
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.
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
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 in real property records of the county in which the real
property is located and send a copy of the notice of default to, among other
persons, 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 (not including principal due solely as a
result of acceleration of the debt plus certain 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 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
each person to receive a copy of the notice of default at least 20 days before
the sale. The notice of sale must also be recorded in the real property records
at least 14 days prior to the sale. Following a properly conducted sale, title
to the property is conveyed by the way of a trustee's deed to the successful
bidder at the trustee's sale. Following a non-judicial foreclosure under the
power-of-sale in the deed of trust, 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 (the so-called "deficiency").
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 generally 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. Most 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 generally 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 our
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 45.
Anti-Deficiency Legislation. California has several principal statutory
prohibitions which limit the remedies of a beneficiary under a deed of trust.
Two of these statutes limit the beneficiary's right to obtain a deficiency
judgment against the trustor following foreclosure of a deed of trust. One is
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
44
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 statutory framework, commonly know as the "one form of action"
rule, provides that the beneficiary must 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 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 nature, a junior encumbrance is less secure than
more senior ones. Only the holder of a first trust deed is permitted to "credit
bid" in the amount of its debt at its foreclosure sale; junior lienholders
bidding at a senior lienholder's foreclosure sale must bid cash. If a senior
lienholder forecloses on its loan, unless the amount of the successful bid
exceeds the senior encumbrances, the junior lienholders will receive nothing.
However, in that event the junior lienholder may have the right to pursue an
action against the borrower to enforce the promissory note. In the cases of a
single-asset borrower or where the junior lienholder has agreed to limit its
recourse to the real property, this remedy may not be adequate.
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 its own 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) pay off the senior
encumbrances so that its 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 9).
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 a 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 typical 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 typical deed of
trust 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
45
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, thus limiting
the rights afforded to the lender under the deed of trust.
"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, subject to certain
exceptions, 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. Morrison & Foerster LLP,
counsel for the partnership, has advised that 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. Absent
consent by the senior lender, 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 45).
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
prepaid 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 loans that the partnership
anticipates making. 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 11).
BUSINESS
Redwood Mortgage Investors VIII, a California Limited Partnership (the
"Partnership"), was organized in 1993. Michael R. Burwell, Gymno Corporation and
Redwood Mortgage Corp., both California Corporations, are the general partners.
The partnership is organized to engage 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. Loans are arranged and serviced by Redwood
Mortgage Corp. The partnership's objectives are to make loans that will: (i)
yield a high rate of return from mortgage lending; and (ii) preserve and protect
the partnership's capital. Investors 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
46
alternative for investors seeking current income. However, unlike other
investments, which are intended to provide current income, an investment in the
partnership will be less liquid, not readily transferable, and not provide a
guaranteed return over its investment life.
Initially, the partnership offered a minimum of $250,000 and a maximum of
$15,000,000 in units, of which $14,932,000 were sold. This initial offering
closed on October 31, 1996. Subsequently, the partnership commenced a second
offering of up to $30,000,000 in units commencing on December 4, 1996. This
offering sold $29,993,000 in units and was closed on August 30, 2000. On August
31, 2000 the partnership commenced its third offering for another 30,000,000
units ($30,000,000). This offering sold $29,999,000 in units and was closed on
April 23, 2002. On October 30, 2002 the partnership commenced its fourth
offering for an additional 50,000,000 units ($50,000,000). This offering sold
$49,985,000 in units and was closed on October 6, 2003. On October 7, 2003 the
partnership commenced its fifth and current offering of 75,000,000 units
($75,000,000). As of December 31, 2004, $47,314,000 in units was sold in this
fifth offering, bringing the aggregate sale of units to $172,223,000. Units in
the fifth offering were 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,
Inc.
The partnership began selling units in February 1993, and began investing
in mortgages in April 1993. At December 31, 2004, the partnership has
investments in secured loans with principal balances totaling $171,745,000.
Interest rates ranged from 8.50% to 13.25%. Currently First Trust Deeds comprise
67.01% of the total amount of the secured loan portfolio, an increase of 9.64%
over the 2003 level of 57.37%. Junior loans (2nd and 3rd Trust Deeds) make up
32.99%, a decrease of 9.64% from the 2003 level of 42.63%. Loans secured by
owner-occupied homes, combined with loans secured by non-owner occupied homes,
total 49.12% of the secured loan portfolio. Loans secured by multi-family
properties make up 18.04% of the total secured loans. Commercial loans now
comprise 31.83% of the secured portfolio, a decrease of 3.84% from last year and
land made up 1.01% of the secured loan portfolio. Of the total secured loans,
76.36% are in six counties of the San Francisco Bay Area, and 12.33% are in
counties adjacent to the San Francisco Bay Area. The balance of secured loans,
11.31% are in other counties located in California. Average loan size increased
this year, and is now averaging $2,289,000 per loan, up $472,000 from the
average loan balance of $1,817,000 in 2003. This increase is due to the ability
of the partnership by virtue of its increasing size to invest in larger loans.
Additionally, there is less competition due to fewer lenders being capable of
funding larger loans, which allows the partnership to charge a higher rate of
interest than on smaller sized loans. The average loan as of December 31, 2004,
represents 1.25% of partner capital and 1.33% of outstanding secured loans,
compared to December 31, 2003 when average loan size represented 1.31% of
partners' capital and 1.23% of outstanding secured loans. Some of the loans are
fractionalized between affiliated partnerships with objectives similar to those
of the partnership to further reduce risk. However, as the partnership has grown
in size the number of fractionalized loans has decreased and represents 13.33%
of the loan portfolio. Average equity per loan transaction at the time the loans
were made based upon appraisals and prior liens at such time, which is our loan
plus any senior loans, divided by the property's appraised value, subtracted
from 100%, stood at 43.06%, a decrease in equity of 2.97% from the previous
year. This average equity is considered conservative. Generally, the more
equity, the more protection for the lender. The general partners believe the
partnership's loan portfolio is in good condition with six properties in
foreclosure as of the end of December 2004. The principal balances of these
foreclosed properties represent 8.55% of the secured loan portfolio. Four of
these foreclosures have entered into workout agreements. The number of
foreclosures and principal amounts are relatively low. The partnership does
expect that during 2005 additional foreclosures may need to be filed in order to
collect payment from borrowers who have become delinquent. This is typical of
our market and the partnership expects to have a level of delinquency higher
than banking institutions within its portfolio.
For the year ended December 31, 2004, the partnership acquired one property
through foreclosure and acquired three adjacent parcels of land through deeds in
lieu of foreclosure on three loans to one borrower. During 2003 no foreclosures
were completed. During 2002 the partnership took back real estate collateral on
two defaulted loans. One through a foreclosure sale and the other as a deed in
lieu of foreclosure. To assist in protecting its own assets and to reduce
liability, the partnership subsequently transferred the properties acquired in
2002 to two newly formed Limited Liability Companies, or "LLCs". One of the
LLCs, Russian Hill Property Company, is 100% owned by the partnership and in the
other, Stockton Street Property Company, the partnership owned controlling
interest with an affiliate, the other investor in the foreclosed loan. Assets of
the Stockton Street Property Company were completely sold in 2003. This LLC will
be dissolved after its final tax return for year 2004 is filed. The partnership
also intends to sell the property of Russian Hill Property Company and dissolve
this LLC in the future. The two LLCs are further discussed under Notes to
Consolidated Financial Statements (Note 5). With respect to the properties
acquired in 2004 the partnership may transfer the real estate to one or more
LLCs during 2005. One of the properties is a single-family residence, upon which
the borrower was doing substantial renovation that was not completed at the time
of foreclosure. As of December 31, 2004, the partnership's investment in this
property, net of a $500,000 reserve, totaled $1,437,000. The other three
properties acquired in 2004 were deeded to the partnership in lieu of
foreclosure. They are undeveloped parcels of land comprised of three separate
lots. The land is within the incorporated area of Stanislaus County, California.
Currently the property is on the market for sale. As of December 31, 2004 the
partnership's investment in this property totaled $4,378,000. The property is
jointly owned by two other affiliated partnerships. The partnership has provided
loss reserves of $1,000,000 against all properties owned.
The partnership's net income continued to take an upward trend. The net
income increased from $7,486,000 in 2002 to $9,594,000 in 2003 and to
$12,132,000 in 2004. This was made possible largely through investment of
additional capital derived from sales of partnership units into loans. The
secured loan portfolio increased from $83,650,000 in 2002, to $147,174,000 in
47
2003 and to $171,745,000 in 2004, an increase of 105.31% over the two-year
period. Although net income increased it did not increase in direct proportion
to the increased size of the loan portfolio mainly because newly originated
loans were placed at lower interest rates. Until the past six months, interest
rates had been declining steadily since 2001. The bank prime rate as of January
1, 2001, 2002, 2003, 2004 and 2005 was 9.50%, 4.75%, 4.25%, 4.00% and 5.25%,
respectively. The partnership has placed its loans at interest rates competitive
in the marketplace. Mortgage interest income increased from $11,416,000 in 2002
to $12,496,000 in 2003 and to $16,437,000 in 2004, an increase of 44% over the
two-year period. During the year 2004 the partnership's annualized yield on
compounding accounts was 7.22% and 6.99% on monthly distributing accounts.
Due to a calendaring oversight, the partnership did not timely renew its
permit with the California Department of Corporations ("DOC"). Upon discovery of
this oversight, the partnership applied for and received from the DOC a new
permit allowing the partnership to continue sales in California. To correct
those sales that occurred without a permit from the DOC in place, the
partnership offered to repurchase the units sold during the period of September
10, 2004 through January 18, 2005. The repurchase offer was made to an aggregate
of $16,370,000 of prior unit sales. The repurchase offer expired on
approximately March 7, 2005. The repurchase offer was accepted by three limited
partners for a total of $74,000 in unit sales and the partnership made a timely
repurchase of the units.
The following table shows the growth in total partnership capital, loans
and net income as of December 31, 2004, and for the years ended December 31,
2003, 2002, and 2001:
Capital Secured Loans Net Income
------------------ ----------------- ----------------
2004 $183,531,000 $171,745,000 $12,132,000
2003 138,772,000 147,174,000 9,594,000
2002 95,777,000 83,650,000 7,486,000
2001 73,754,000 82,790,000 6,093,000
As of December 31, 2004, the partnership had made three hundred fifty one
(351) loans, including one hundred sixty nine (169) first deeds of trust, one
hundred sixty one (161) second deeds of trust and twenty one (21) 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.
Properties
In 2004 the partnership took back the real estate collateral securing four
loans from defaulted borrowers, one through foreclosure and the others through
deeds in lieu of foreclosure. No collateral was taken back during 2003. During
2002, the partnership took back the real estate collateral security on two of
its loans. For the properties owned in 2002, in order to reduce potential
liabilities the partnership subsequently transferred at its book value the real
estate taken back to two newly formed Limited Liability Companies "LLCs". One
property was transferred to Stockton Street Property Company, LLC. This
property, taken back through foreclosure, was comprised of six condominium
units. Management of the LLC was through its managing member, Michael Burwell, a
general partner of the partnership. All six units held by the Stockton Street
Property Company, LLC were sold in 2003 at an overall loss of $127,000. The
partnership's proportionate share of this loss was $85,000. It is anticipated
that in 2005 the Stockton Street Property Company, LLC will be closed, remaining
assets transferred back to the partnership in proportion to its ownership, and
its operations will cease.
The other property taken back in 2002 was transferred at its book value to
Russian Hill Property Company, LLC. The real estate was held off the market
during 2003 and 2004, as the real estate market for this luxury view condominium
in a prestigious neighborhood of San Francisco was very slow. The management of
this LLC, in consultation with real estate professionals, will continue to
review the market activity during 2005 and will place the property for sale when
the timing is considered to be opportune. The partnership's net interest in the
LLC was $3,979,000 net of a valuation allowance of $500,000. Michael R. Burwell,
general partner of the partnership, is manager of this LLC.
In September, 2004, the partnership acquired a single family residence
through a foreclosure sale. At the time the partnership took ownership of the
property, the partnership's investment totaled $1,937,000 including accrued
interest and advances. The borrower had begun a substantial renovation of the
property, which was not completed at the time of foreclosure. The partnership
has decided to pursue development of the property by processing plans for the
creation of two condominium units on the property. These plans will incorporate
the majority of the existing improvements currently located on the property. A
reserve of $500,000 to cover potential losses has been made for this property,
based upon management's estimate of the fair value of the property.
In December, 2004, the partnership acquired an undeveloped parcel of land
in lieu of foreclosure. The land is located in Stanislaus County, California. It
is comprised of three separate lots, which total approximately 14 acres. The
parcels are currently for sale. The partnership's investment in this property
totaled $4,377,000, including accrued interest and advances, as of the date of
the acquisition. This property is jointly owned by two other affiliated
partnerships.
48
In February, 2005, the partnership acquired a multi-unit property through
foreclosure. This property is located in an upscale neighborhood in San
Francisco. At the time the partnership took ownership of the property, the
partnership's investment, together with three other affiliate partnerships,
totaled $10,555,000 including accrued interest and advances. The partnership
intends to undertake additional improvements to the property. No valuation
allowance has been established against this property as management is of the
opinion that the property will have adequate equity to recover the entire
partnership investment. Upon acquisition, the property was transferred via a
statutory warranty deed to a new entity named Larkin Property Company, LLC
("Larkin"). The partnership owns 72.50% interest in the property and the other
three affiliates collectively own the remaining 27.50%.
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell as of March 31, 2005 and December 31, 2004:
March 31, December 31,
2005 2004
---------------- ---------------
Cost of properties $21,366,000 $10,793,000
Reduction in value (1,000,000) (1,000,000)
---------------- ---------------
Real estate held for sale, net $20,366,000 $ 9,793,000
================ ===============
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the consolidated 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 consolidated balance sheet dates and
income and expenses during the reported periods. Such estimates relate
principally to the determination of (1) the allowance for loan losses (i.e. the
amount of allowance established against loans receivable as an estimate of
potential loan losses) including the accrued interest and advances that are
estimated to be unrecoverable based on estimates of amounts to be collected plus
estimates of the value of the property as collateral and (2) the valuation of
real estate owned through foreclosure. At December 31, 2004, the partnership
owned five real estate properties, which were taken back from defaulted
borrowers.
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.
If the probable ultimate recovery of the carrying amount of a loan, with
due consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the investment
shall be reduced to the present value of future cash flows discounted at the
loan's effective interest rate. If a loan is collateral dependent, it is valued
at the estimated fair value of the related collateral.
If events and/or changes in circumstances cause management to have serious
doubts about the 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.
Mortgage Brokerage Commissions. 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 2004, 2003 and 2002, loan brokerage
commissions paid by the borrowers were $2,443,000, $2,621,000 and $996,000,
respectively.
49
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. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued thereon. Additional servicing fees are recorded upon the receipt
of any subsequent payments on impaired loans. Mortgage servicing fees of
$1,565,000, $1,057,000 and $1,098,000 were incurred for the years ended December
31, 2004, 2003 and 2002, respectively.
These servicing fees were charged at 1%, on an annual basis, of the
outstanding principal balances. If the maximum mortgage servicing fee of 1.5%,
on an annual basis, had been charged to the partnership, then net income would
have been reduced by approximately $783,000, $529,000 and $550,000 for the years
2004, 2003 and 2002, respectively. Reducing net income reduces the annualized
yields. An increase or decrease in this fee within the limits set by the
partnership's agreement directly impacts the yield to the limited partners.
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 $630,000, $468,000 and $325,000 were incurred by the partnership for
years 2004, 2003 and 2002, respectively.
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.
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%.
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.
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, 2004 and 2003, a
general partner, Gymno Corporation, had contributed $174,000 and $133,000,
respectively, as capital in accordance with Section 4.1 of the partnership
agreement.
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.
The following table summarizes Formation Loan transactions through December
31, 2004 (in thousands):
Offering
------------------------------------------------------------------------
1st 2nd 3rd 4th 5th Total
----------- ----------- ------------ ----------- ----------- ------------
Limited partner contributions $ 14,932 $ 29,993 $ 29,999 $ 49,985 $ 47,314 $ 172,223
=========== =========== ============ =========== =========== ============
Formation Loans made 1,075 2,272 2,218 3,777 3,570 12,912
Repayments to date (785) (1,013) (558) (495) (45) (2,896)
Early withdrawal penalties
Applied (75) (112) (78) - - (265)
----------- ----------- ------------ ----------- ----------- ------------
Balance, December 31, 2004 $ 215 $ 1,147 $ 1,582 $ 3,282 $ 3,525 $ 9,751
=========== =========== ============ =========== =========== ============
For the current offering, the amount of the annual installments paid by
Redwood Mortgage Corp. are determined at annual installments 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. Interest has been
imputed at the market rate of interest in effect at the date the offering
closed. See footnote 1 to the consolidated financial statements included
elsewhere in this prospectus.
50
On December 31, 2004, the partnership was in the offering stage of its
fifth offering, ($75,000,000). Contributed capital equaled $14,932,000 for the
first offering, $29,993,000 for the second offering, $29,999,000 for the third
offering, $49,985,000 for the fourth offering and $47,314,000 for the fifth
offering, totaling an aggregate of $172,223,000 as of December 31, 2004. Of this
amount, $424,000, relative to the fifth offering, remained in applicant status
as of December 31, 2004.
Results of Operations - For the years ended December 31, 2004 and 2003.
Changes in the partnership's operating results for the years ended December
31, 2004 and 2003 are discussed below:
Changes for the years ended December 31,
------------------------------------------------
2004 2003
------------- -------------
Net income $ 2,538,000 $ 2,108,000
============= =============
Revenue
Interest on loans 3,941,000 1,080,000
Late fees 17,000 87,000
Other 217,000 100,000
------------- -------------
$ 4,175,000 $ 1,267,000
------------- -------------
Expenses
Mortgage servicing fees 508,000 (41,000)
Interest expense 551,000 (445,000)
Amortization of loan origination fees 33,000 11,000
Provision for losses on loans 364,000 2,000
Provision for losses on real estate held for sale - (500,000)
Clerical costs through Redwood Mortgage Corp. 17,000 24,000
Asset management fees 162,000 143,000
Professional services 100,000 45,000
Broker expense (181,000) (263,000)
Amortization of discount on imputed interest 124,000 41,000
Other (41,000) 142,000
------------- -------------
$ 1,637,000 $ (841,000)
------------- -------------
Net income increase $ 2,538,000 $ 2,108,000
============= =============
Although the average interest rate of the loan portfolio declined to 10.02%
from 10.47% for the years ended December 31, 2004 and 2003, respectively, the
interest income of the partnership continued to increase by $3,941,000 (31.54%)
to $16,437,000 in 2004 and by $1,080,000 (9.46%) to $12,496,000 in 2003. This
was primarily due to the increased size of the partnership's secured loan
portfolio, which increased by $24,571,000 (16.70%) to $171,745,000 in 2004 and
by $63,524,000 (75.94%) to $147,174,000 in 2003. Average loan portfolio balances
for the years ended December 31, 2004, 2003 and 2002, were $159,460,000,
$115,412,000 and $83,220,000, respectively. The increases in interest income
were also due to earnings of additional interest of $277,000 and $465,000 for
the years ended December 31, 2004 and 2003, respectively. The lower percentage
rate of interest increase on loans (9.46%) in 2003 was due in part to the lower
interest rate environment in 2003 versus 2002 and less additional interest
earned of $525,000 in 2003 than 2002.
Late charge income increases of $17,000 (8%) and $87,000 (76%) for the
years ended December 31, 2004 and 2003 were primarily attributable to the growth
in the loan portfolio.
The increase in other income of $217,000 (83%) and $100,000 (63%) for the
years ended December 31, 2004 and 2003, respectively, was primarily due to
increased imputed interest income from the larger Formation Loan existing of
$9,751,000, $7,550,000 and $5,258,000 for the years ended December 31, 2004,
2003 and 2002, respectively. Imputed interest income was $319,000 and $195,000
for the years ended December 31, 2004 and 2003, respectively. Additionally, the
partnership may accept unsolicited orders for units from investors who utilize
the services of a registered investment advisor. If an investor utilizes the
services of a registered investment advisor in acquiring units, Redwood Mortgage
Corp. will contribute to the partnership an amount equal to the sales
commissions otherwise attributable to a sale of units through a participating
broker dealer. This amount is based on the investor's election to retain
earnings (9%) or have their earnings distributed (5%). In 2004 $111,000 was paid
and recorded under other income.
The increase/(decrease) in mortgage servicing fees of $508,000 and
($41,000) for the years ended December 31, 2004 and 2003, respectively, was
primarily attributable to increases in the outstanding loan portfolio. The loan
portfolio increased by $24,571,000 (16.70%) in 2004 and $63,524,000 (75.94%) in
2003. The increase in servicing fees for the year ended December 31, 2004 was
51
also due to an increased average loan portfolio balance of $159,460,000, which
the partnership maintained in 2004 versus an average balance of $115,412,000 in
2003. The decrease in servicing fees in 2003 was due to additional servicing
fees were earned in 2002 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 paid as borrower payments are received.
Interest expense on the line of credit is tied to the bank's prime rate.
The decrease in interest expense of $445,000 for the year ended December 31,
2003 was primarily attributable to a substantial reduction in the prime rate.
The prime rate was 4.75% as of December 31, 2001. This rate remained static
until November, 2002 when it was reduced to 4.25%. A further reduction by 0.25%
to 4% was made in June, 2003. The decline in interest expense in 2003 was also
due to a lower average credit line usage of $10,863,000 for the year ended
December 31, 2002 versus $6,170,000 for the year ended December 31, 2003. An
increase in interest expense of $551,000 in 2004 was primarily attributable to
increased borrowing, which averaged $14,000,000 during 2004, and increases in
the prime rate from 4% in January, 2004 to 5.25% as of December 31, 2004, an
average of 4.44%.
The increase in loan origination fees was primarily attributable to the
costs involved in negotiating an extension of the maturity date and an increase
in the credit line facility.
The increase in provision for losses on loans and real estate of $364,000
for the year ended December 31, 2004 was primarily attributable to an increase
in the loan portfolio balance, the potential acquisition of two properties
totaling $6,315,000 and an increase in foreclosures to six loans totaling
$14,682,000 as of December 31, 2004, versus three loans totaling $2,931,000 as
of December 31, 2003. The decrease in the provision of $498,000 for the year
ended December 31, 2003 was primarily attributable to increased stability in
real estate market, the stabilization of the economy, a decline in foreclosures
amounts from $4,029,000 in 2002 to $2,931,000 in 2003 and management's
determination that no additional amounts were needed related to the real estate
held for sale.
The increases in clerical costs of $17,000 and $24,000 for the years ended
December 31, 2004 and 2003, respectively, was primarily attributable to an
increase in partnership size.
The increase in professional services of $100,000 and $45,000 for the years
ended December 31, 2004 and 2003, respectively, was primarily attributable to
the increased size of the partnership and increased costs associated with
various partnership regulatory filings and the annual audit.
The broker expense decline of $263,000 for the year ended December 31,
2003, was primarily 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 ended in 2003 with the full collection of the
additional interest totaling $1,250,000.
The increase in management fees of $162,000 and $143,000 for the years
ended December 31, 2004 and 2003, respectively, was due to an increase in net
asset value under management, which increased from $95,690,000 in 2002 to
$138,649,000 in 2003 and to $183,368,000 in 2004.
The increases in amortization of discount on imputed interest of $124,000
and $41,000 for the years ended December 31, 2004 and 2003, respectively, is
primarily attributable to increases in the Formation Loan from the sale of
additional limited partnership investments.
The increase/(decrease) in other expenses of ($41,000) and $142,000 for the
years ended December 31, 2004 and 2003, respectively, was primarily due to the
loss sustained on the sale of the Stockton Street Property Co., LLC real estate
of $85,000 in 2003, increased subscription interest while new funds from limited
partners awaited entry into the partnership and the expensing of the upkeep
costs of the properties owned by the partnership.
Partnership capital continued to increase as the partnership received new
limited partner capital contributions of $40,954,000, $40,030,000 and
$21,563,000 and retained the earnings of limited partners that have chosen to do
so of $7,367,000, $5,958,000 and $4,716,000 for the years 2004, 2003 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 closed on October 6,
2003. On October 7, 2003 the partnership commenced its fifth offering and funds
raised will be used to increase the partnership's capital base and provide funds
for additional mortgage loans. As of December 31, 2004 the limited partners
total units purchased was 171,799,000 units aggregating $172,223,000.
The partnership began funding loans on April 14, 1993 and as of December
31, 2004 had credited earnings to limited partners who elected to retain
earnings at an average annualized yield of 8.24% since inception through
December 31, 2004. Limited partners who elected to have their earnings
distributed monthly had an average annualized yield of 7.95% since inception
through December 31, 2004.
52
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 $42,000,000. 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, 2004 and 2003, the outstanding balance
on the line of credit was $16,000,000 and $22,000,000, respectively.
Results of Operations - For the three months ended March 31, 2005 and 2004
Changes in the partnership's operating results for the three month periods
ended March 31, 2005 versus 2004 are discussed below:
Changes during the
three months ended
March 31, 2005
versus 2004
---------------------
Net income $ 811,000
Revenue
Interest on loans 370,000
Interest - bank 31,000
Late fees (18,000)
Gain on sale of real estate held for sale 183,000
Imputed interest on Formation Loan 43,000
Other 66,000
$ 675,000
Expenses 35,000
Mortgage servicing fees (70,000)
Interest expense 8,000
Amortization of loan origination fees (191,000)
Provision for losses on loans and real estate held for sale 43,000
Asset management fees 3,000
Clerical costs through Redwood Mortgage Corp. (7,000)
Professional services 43,000
Amortization of discount on imputed interest $ (136,000)
----------------------
$ 811,000
The increase in interest on loans of $370,000 (10%) for the three month
period ended March 31, 2005 versus March 31, 2004, was due primarily to the
increased size of the partnership secured loan portfolio at March 31, 2005 of
$152,612,000, as compared to a secured loan portfolio of $138,220,000 as of
March 31, 2004. The increase in interest on loans for the three month period
ended March 31, 2005 was mitigated by a lower average portfolio interest rate of
10.11% at March 31, 2005 versus 10.52% at March 31, 2004. Average loan balances
for the three month periods ended March 31, 2005 and 2004 were $162,179,000 and
$142,697,000, respectively.
The increase in mortgage servicing fees of $35,000 (10%) for the three
month period ended March 31, 2005 versus March 31, 2004 is primarily due to an
increase in the average size of the loan portfolio for the three month period
ended March 31, 2005 from the amount as of March 31, 2004, as noted above.
The decrease in interest expense of $70,000 for the three month period
ended March 31, 2005 versus March 31, 2004 is primarily due to the lower average
outstanding balance of the line of credit during the first quarter of 2005.
During the three month period ended March 31, 2005 the partnership did not
significantly utilize the line of credit facility. Instead, loan commitments
were funded from loan pay-offs and the sale of limited partner unit proceeds.
Interest expense of $36,000 was paid on the line of credit balance of
$16,000,000 that was brought forward from December 31, 2004.
The decrease in provision for losses on loans and real estate held for sale
of $191,000 (68%) for the three month period ended March 31, 2005 versus March
31, 2004 is due to management's determination that a total provision of
$3,434,000 was adequate based on the loan and real estate held for sale balances
as of March 31, 2005. As of March 31, 2005 the loan portfolio has a
53
loan-to-value ratio of 60.16%, based on appraised values and prior liens at the
time the loans were consummated. Across virtually all of California, real estate
values are stable or rising. The partnership's real estate held for sale
properties will benefit from the strong real estate market. Consequently,
management did not believe that any material addition to the provision for
losses against real estate held for sale was warranted.
The increase in the asset management fees of $43,000 for the three month
period ended March 31, 2005 versus March 31, 2004 is due to an increase in the
limited partners' capital under management at March 31, 2005 to $194,173,000
from $147,156,000 at March 31, 2004.
The decrease in professional fees of $7,000 for the three month period
ended March 31, 2005 versus March 31, 2004 is primarily due to timing of billing
and payment of fees associated with various partnership regulatory filings and
the annual audit.
The increase in amortization of loan origination fees of $8,000 for the
three month period ended March 31, 2005 versus March 31, 2004, is due to a
revision of fee rates and an extension of the maturity date on the increased
line of credit when the credit line was increased from $32,000,000 to
$42,000,000 in November, 2004.
The increase in other income of $66,000 for the three month period ended
March 31, 2005 versus March 31, 2004 is primarily a result of an increase of
$29,000 in miscellaneous income. Additionally, the partnership may accept
unsolicited orders for units from investors who utilize the services of a
registered investment advisor. If an investor utilizes the services of a
registered investment advisor in acquiring units, Redwood Mortgage Corp. will
contribute to the partnership an amount equal to the sales commissions otherwise
attributable to a sale of units through a participating broker dealer. This
amount is based on the investor's election to retain earnings (9%) or have their
earnings distributed (5%). As of March 31, 2005 $37,000 was paid and recorded
under other income for such amount, contributed by Redwood Mortgage Corp. to the
partnership.
The increase in gain on sale of real estate held for sale of $183,000 for
the three month period ended March 31, 2005 versus March 31, 2004 was primarily
due to a gain realized upon the disposal of a real estate property.
The increase in imputed interest of $43,000 for the three month period
ended March 31, 2005 versus March 31, 2004 is primarily due to increases in the
Formation Loan due to additional limited partnership investments.
The increase in bank interest of $31,000 for the three month period ended
March 31, 2005 versus March 31, 2004 is due to larger average deposits of
$16,744,000 and $602,000 as of such dates, respectively, in the money market
accounts during the periods.
Partnership capital continued to increase during the three month period
ended March 31, 2005. The partnership received new limited partner capital
contributions of $10,133,000 and retained the earnings of limited partners that
have chosen to reinvest earnings of $2,215,000 for the three month period ended
March 31, 2005, versus $8,274,000 and $1,656,000 for such amounts for the three
month period ended March 31, 2004. The increased partnership capital resulted in
an increase in loans outstanding to $152,612,000 at March 31, 2005, versus
$138,220,000 at March 31, 2004. The limited partner contributions of $10,133,000
relate to the partnership's current offering of units, which is currently
ongoing.
At March 31, 2005, outstanding loans with filed notices of default were
four totaling $6,185,000 or 4.05% of outstanding secured loans versus the three
totaling $2,931,000 or 2.12% of outstanding secured loans that existed at March
31, 2004. Two of the foreclosures at March 31, 2005, have entered into workout
agreements. These foreclosures are a reflection of the economic times that
existed at March 31, 2005 and 2004, and yet are not unusual in the general
partners' experience.
The general partners received mortgage brokerage commissions from loan
borrowers of $598,000 for the three month period ended March 31, 2005 versus
$448,000 for the three month period ended March 31, 2004. The increase is due to
more loans being funded in the three month period ended March 31, 2005 versus
the corresponding period of 2004.
Liquidity and Capital Resources - For the years ended December 31, 2004 and
2003.
The partnership relies upon sales of partnership units, loan payoffs,
borrowers' mortgage payments, and, to a lesser degree, its line of credit for
the source of funds for loans. Over the past several years, mortgage interest
rates have decreased somewhat from those available at the inception of the
partnership. If interest rates were to increase substantially, the yield of the
partnership's loans may provide lower yields than other comparable debt-related
investments. 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
54
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. Cash is constantly being
generated from borrower interest payments, late charges, amortization of loan
principal and loan payoffs. Currently, cash flow exceeds partnership expenses,
earnings and limited partner capital payout requirements. Excess cash flow will
be invested in new loan opportunities, when available, and will be used to
reduce the partnership credit line or in other partnership business. 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 an investor
initially elects to receive monthly, quarterly or annual distributions, such
election, once made, is irrevocable. 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.
During the years 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:
2004 2003 2002
------------- -------------- -------------
Compounding $7,367,000 $5,958,000 $4,716,000
Distributing $4,452,000 $3,362,000 $2,517,000
Capital balances of limited partners electing to receive cash distributions
of earnings represented 36%, 36% and 35% of the limited partners' outstanding
capital accounts as of December 31, 2004, 2003 and 2002, respectively. 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 holding 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, 2004, 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, 2004 were:
2004 2003 2002
------------- -------------- -------------
Cash distributions $4,452,000 $3,362,000 $2,517,000
Capital liquidation* $1,988,000 $1,845,000 $1,049,000
------------- -------------- -------------
Total $6,440,000 $5,207,000 $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, 2004, capital liquidated subject to the 10%
penalty for early withdrawal was:
2004 2003 2002
------------- -------------- -------------
$794,000 $786,000 $244,000
This represents 0.43%, 0.57% and 0.26% of the limited partners' ending
capital for the years ended December 31, 2004, 2003 and 2002, respectively.
These withdrawals are within the normally anticipated range and represent a
small percentage of limited partner capital.
55
Contractual Obligations - As of December 31, 2004
A summary of the contractual obligations of the partnership as of December
31, 2004 is set forth below (in thousands):
Contractual Obligation Total Less than 1 Year 1-3 Years 3-5 Years
---------------------------- ---------------- ------------------ --------------- ----------------
Line of credit $ 16,000 $ - $ 5,333 $ 10,667
Construction loans 9,286 9,286 - -
Rehabilitation loans 8,880 8,880 - -
---------------- ------------------ --------------- ----------------
Total $ 34,166 $ 18,166 $ 5,333 $ 10,667
================ ================== =============== ================
Quantitative and Qualitative Disclosures About Market Risk - As of December
31, 2004
The following table contains information about the cash held in money
market accounts, loans held in the partnership's portfolio and our line of
credit as of December 31, 2004. The presentation, for each category of
information, aggregates the assets and liabilities by their maturity dates for
maturities occurring in each of the years 2005 through 2009 and separately
aggregates the information for all maturities arising after 2009. The carrying
values of these assets and liabilities approximate their fair market values as
of December 31, 2004 (in thousands).
2005 2006 2007 2008 2009 Thereafter Total
------------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 8,772 $ 8,772
Average interest rate 1.20% 1.20%
Loans secured by deeds of
trust $68,761 $68,829 $21,185 $ 3,629 $ 8,844 $ 497 $171,745
Average interest rate 10.79% 9.61% 9.68% 9.42% 9.28% 8.50% 10.02%
Loans; unsecured $ 34 $ 34
Average interest rate - -
Interest bearing liabilities
Line of credit $16,000 - - - - - $16,000
Average interest rate 5.00% - - - - - 5.00%
Market Risk
The partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the partnership's primary market risk exposure with
respect to its obligations is to changes in interest rates, which will affect
the interest cost of outstanding amounts on the line of credit. The partnership
may also suffer market risk tied to general trends affecting real estate values
that may impact the partnership's security for its loans.
The partnership's primary market risk in terms of its profitability is the
exposure to fluctuations in earnings resulting from fluctuations in general
interest rates. The majority of the partnership's mortgage loans earn interest
at fixed rates. Changes in interest rates may also affect the value of the
partnership's investment in mortgage loans and the rates at which the
partnership reinvests funds obtained from loan repayments and new capital
contributions from limited partners. If interest rates increase, the interest
rates the partnership obtains from reinvested funds will generally increase, but
the value of the partnership's existing loans at fixed rates will generally tend
to decrease. The risk is mitigated by the fact that the partnership does not
intend to sell its loan portfolio, rather such loans are held until they are
paid off. If interest rates decrease, the amounts becoming available to the
partnership for investment due to repayment of partnership loans may be
reinvested at lower rates than the partnership had been able to obtain in prior
investments, or than the rates on the repaid loans. In addition, interest rate
decreases may encourage borrowers to refinance their loans with the partnership
at a time where the partnership is unable to reinvest in loans of comparable
value.
The partnership does not hedge or otherwise seek to manage interest rate
risk. The partnership does not enter into risk sensitive instruments for trading
purposes.
Asset Quality - As of December 31, 2004
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
56
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the partnership is not subject to these regulations and has
not adopted certain of these practices. 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, 2004 the general partners have determined that
the allowance for loan losses and real estate held for sale of $3,343,000 (1.82%
of net assets) is adequate in amount. Because of the number of variables
involved, the magnitude of the swings possible and the general partners'
inability to control many of these factors, actual results may and do sometimes
differ significantly from estimates made by the general partners. As of December
31, 2004, eleven loans were delinquent over 90 days in interest payments and/or
past maturity with an aggregate principal outstanding of $25,013,000. Of these
delinquent loans, five loans with an aggregate principal outstanding of
$6,424,000 were subject to workout agreements.
The partnership also makes loans requiring periodic disbursements of funds.
As of December 31, 2004 there were thirteen such loans. These loans include
loans for the ground up construction of buildings and loans for rehabilitation
of existing structures. Interest on these loans is computed with the simple
interest method and only on the amounts disbursed on a daily basis.
A summary of the status of the partnership's loans, which are periodically
disbursed as of December 31, 2004, is set forth below (in thousands):
Complete Construction Rehabilitation
----------------------- -----------------
Disbursed funds $14,362 $41,373
Undisbursed funds $ 9,286 $ 8,880
"Construction Loans" are determined by the management to be those loans
made to borrowers for the construction of entirely new structures or dwellings,
whether residential, commercial or multifamily properties. For each such
Construction Loan, the partnership has approved a maximum balance for such loan;
however, disbursements are made in phases throughout the construction process.
As of December 31, 2004, the partnership had commitments for Construction Loans
totaling $23,648,000, of which $14,362,000 in Construction Loans had been
disbursed and had an additional $9,286,000 is yet to be disbursed. The
$23,648,000 of Construction Loans committed exceeds 10% of the loan portfolio
which is in excess of the partnership's limit on Construction Loan funding. The
partnership will not make any additional Construction Loan obligations until
such time as the aggregate amount of the outstanding Construction Loan
commitments is less than 10% of the loan portfolio. During February, 2005, one
of these loans with a total commitment of $8,400,000 was paid in full.
The partnership also makes loans, the proceeds of which are used to
remodel, add to and/or rehabilitate an existing structure or dwelling, whether
residential, commercial or multifamily properties and which, in the
determination of management, are not construction loans. These loans are
referred to by management as "Rehabilitation Loans". As of December 31, 2004 the
partnership had funded $41,373,000 in Rehabilitation Loans and $8,880,000
remained to be disbursed for a combined total of $50,253,000. While the
partnership does not classify Rehabilitation Loans as Construction Loans,
Rehabilitation Loans do carry some of the same risks as Construction Loans.
There is no limit on the amount of Rehabilitation Loans the partnership may
make.
No loans were restructured in 2004. During 2003, the partnership
restructured three loans by granting one new loan and modifying two other loans.
During 2003, the total amount of restructured loans was $15,599,000.
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, 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 the partnership
will on occasion take back real estate security. During 2002 and 2003 the
economy stabilized. During 2004 and continuing in 2005, the economy and the
Northern California real estate market strengthened. As of March 31, 2005, the
partnership had twelve loans past due 90 days or more on interest payments or
past maturity totaling $27,932,000. With respect to four of these twelve loans,
we have filed notices of default, beginning the process of foreclosure. The
principal amounts of the four loans with filed notices of default total
57
$6,185,000 or 4.05% of the secured loan portfolio. Of these four, two loans,
with a principal amount totaling $2,535,000, were categorized as delinquent and
past maturity, and as of March 31, 2005, we have entered into workout agreements
with respect to these two loans.
The partnership periodically enters into workout agreements with borrowers
who are past maturity or delinquent in their regular payments. In addition to
the two workout agreements with borrowers in foreclosure there were four other
borrowers in workout agreements as of March 31, 2005. The partnership has
entered into a total of six workout agreements with borrowers inclusive of
matured, foreclosed or 90-day delinquent loans. 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 generally rise during
difficult economic times and conversely fall during good economic times. The
number and amount of foreclosures existing at March 31, 2005, 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 2004, 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.
During 2002, we completed the foreclosure of two loans, which resulted in the
partnership taking back two real estate properties. These properties are more
fully discussed under Properties at page 48. The partnership's foreclosed
principal balances were $6,565,000 after excluding an affiliated partnership's
interest in one of the properties. During 2003, one of the properties owned
through foreclosure was sold at an overall loss of $127,000, with $85,000 of the
loss allocated to the partnership and the remaining $42,000 allocated to the
minority interest. During 2003 the partnership did not take back any property
through the foreclosure process. In 2004, the partnership took back four
properties through foreclosure or deeds in lieu of foreclosure. In 2005, we may
initiate foreclosure on delinquent borrowers or borrowers who become delinquent
during the balance of the year. We may take back additional real estate through
the foreclosure process in 2005. Borrower foreclosures are a normal aspect of
partnership operations and the general partners anticipate that they will not
have a material effect on liquidity. As a prudent guard against potential
losses, the general partners have made provisions for losses on loans and real
estate held for sale of $3,434,000 through March 31, 2005. These provisions for
losses were made to protect against collection losses. The total cumulative
provision for losses as of March 31, 2005 is considered by the general partners
to be adequate. Because of the number of variables involved, the magnitude of
the swings possible and the general partners' inability to control many of these
factors, actual results may and do sometimes differ significantly from estimates
made by the general partners.
The partnership may restructure loans. This is done either through the
modification of an existing loan or by re-writing a whole new loan. It could
involve, among other changes, an extension in maturity date, a reduction in
repayment amount, a reduction in interest rate or granting an additional loan.
Liquidity and Capital Resources - For the three months ended March 31, 2005
and 2004.
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 and for the undisbursed portion of Construction Loans and
Rehabilitation Loans (see ASSET QUALITY). 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
experience a surge of unit purchases by prospective limited partners, and/or
significant borrower prepayments. In such event, if the partnership can only
obtain the then existing lower rates of interest, there may be 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 and
would generally not use it to fund loans. This could 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 cash distribution requirements to limited
partners. Excess cash flow is invested in new loan opportunities, and for
funding the undisbursed portion of Construction and Rehabilitation Loans, 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 an investor
initially elects to receive monthly, quarterly or annual distributions, such
election, once made, is irrevocable. 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,
58
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.
During the three month periods ended March 31, 2005 and 2004, 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:
Three months ended
March 31,
---------------------------------
2005 2004
-------------- ---------------
Compounding $2,215,000 $ 1,656,000
Distributing $1,239,000 $ 1,005,000
As of March 31, 2005 and 2004 limited partners electing to receive cash
distributions of earnings represented 37% and 38%, 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 compounded earnings.
The partnership also allows the limited partners to withdraw their capital
account subject to certain limitations and penalties. 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. 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 many limited partners has
yet to expire, as of March 31, 2005, many limited partners may not have yet
opted for such liquidation. Earnings and capital liquidations including early
withdrawals during the three month periods ended March 31, 2005 and 2004 were:
Three months ended
March 31,
-------------------------------
2005 2004
------------- --------------
Cash distributions $ 1,239,000 $ 1,005,000
Capital liquidation* $ 514,000 $ 627,000
------------- --------------
Total $ 1,753,000 $ 1,632,000
============= ==============
* 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 three
month periods ended March 31, 2005 and 2004, capital liquidated subject to the
10% penalty for early withdrawal was:
Thee months ended
March 31,
-------------------------------
2005 2004
------------- --------------
$ 96,000 $ 328,000
This represents 0.05% and 0.21% of the limited partners' ending capital as
of March 31, 2005 and 2004, respectively. These withdrawals are within the
normally anticipated range and represent a small percentage of limited partner
capital.
59
Contractual Obligations - As of March 31, 2005
A summary of the contractual obligations of the partnership as of March 31,
2005 is set forth below (in thousands):
Contractual Obligation Total Less than 1 Year 1-3 Years 3-5 Years
---------------------------- ---------------- ------------------ --------------- --------------
Line of credit $ - $ - $ - $ -
Construction loans 2,444 2,444 - -
Rehabilitation loans 6,631 6,631 - -
---------------- ------------------ --------------- --------------
Total $ 9,075 $ 9,075 $ - $ -
================ ================== =============== ==============
Quantitative And Qualitative Disclosures About Market Risk - As of March
31, 2005
The following table contains information about the cash held in money
market accounts, loans held in the partnership's portfolio and loans to the
partnership pursuant to its line of credit as of March 31, 2005. The
presentation, for each category of information, aggregates the assets and
liabilities by their maturity dates for maturities occurring in each of the
years 2005 through 2009 and separately aggregates the information for all
maturities arising after 2009. The carrying values of these assets and
liabilities approximate their fair market values as of March 31, 2005 (in
thousands):
2005 2006 2007 2008 2009 Thereafter Total
---------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 14,557 $ 14,557
Average interest rate 1.20% 1.20%
Loans secured by deeds of
trust $ 56,804 46,984 27,803 10,956 8,828 1,237 $ 152,612
Average interest rate 10.75% 9.88% 9.43% 10.32% 9.28% 9.44% 10.11%
Loans, unsecured $ 34 $ 34
Average interest rate - -
Interest bearing liabilities:
Line of credit $ - $ -
Average interest rate 5.75% 5.75%
Asset Quality as of March 31, 2005
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 all of these practices. Rather, the general partners, in connection
with the periodic closing of the accounting records of the partnership and the
preparation of the financial statements, determine whether the allowance for
loan losses is adequate to cover potential loan losses of the partnership. As of
March 31, 2005 the general partners have determined that the allowance for loan
losses and real estate held for sale of $3,434,000 (1.77% 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 March 31, 2005, ten loans were
delinquent over 90 days on interest payments amounting to $17,098,000.
Additionally, two loans totaling $10,834,000 were past maturity 90 days or more
but current in interest payments as of March 31, 2005.
The partnership also makes loans requiring periodic disbursements of funds.
As of March 31, 2005, there were thirteen such loans. These loans include ground
up construction of buildings and loans for rehabilitation of existing
structures. Interest on these loans is computed using a simple interest method
and only on the amounts disbursed on a daily basis.
60
A summary of the status of the partnership's loans which are periodically
disbursed, as of March 31, 2005, is set forth below:
Complete Construction Rehabilitation
----------------------- ----------------------
Disbursed funds $ 13,487,000 $ 49,567,000
Undisbursed funds $ 2,444,000 $ 6,631,000
-------------- --------------
Total commitments $ 15,931,000 $ 56,198,000
============== ==============
"Construction Loans" are determined by the management to be those loans
made to borrowers for the construction of entirely new structures or dwellings,
whether residential, commercial or multifamily properties. The partnership has
approved the borrowers up to a maximum loan balance; however, disbursements are
made in phases throughout the construction process. As of March 31, 2005, the
partnership had commitments for Construction Loans totaling $15,931,000, of
which $13,487,000 had been disbursed and $2,444,000 remains to be disbursed. The
$15,931,000 of Construction Loans committed exceeds 10% of the loan portfolio,
which is in excess of the partnership's limit on Construction Loan funding. The
partnership will not make any additional Construction Loan obligations until
such time as the aggregate amount of the outstanding Construction Loan
commitments is less than 10% of the loan portfolio.
The partnership also makes loans, the proceeds of which are used to
remodel, add to and/or rehabilitate an existing structure or dwelling, whether
residential, commercial or multifamily properties and which, in the
determination of management, are not Construction Loans. These loans are
referred to by management as "Rehabilitation Loans". As of March 31, 2005 the
partnership had commitments for Rehabilitation Loans totaling $56,198,000, of
which $49,567,000 had been disbursed and $6,631,000 remains to be disbursed.
While the partnership does not classify Rehabilitation Loans as Construction
Loans, Rehabilitation Loans do carry some of the same risks as Construction
Loans. There is no limit on the amount of Rehabilitation Loans the partnership
may make. One of the loans with $5,000 in undisbursed funds as of March 31,
2005, was fully disbursed in April, 2005.
Current Economic Conditions.
Since January, 2001, and through December 31, 2003, the Federal Reserve
reduced interest rates significantly by cutting the Federal Funds Rate to 1.00%.
From July 1, 2004 through March 31, 2005, the Federal Reserve increased the
Federal Funds Rate to 2.75%. The effect of these changes has greatly reduced
short-term interest rates and to a lesser extent reduced long-term interest
rates. The recent upward movement in the Federal Funds Rate during 2004 and 2005
has raised short-term rates but has not yet raised long-term interest rates
significantly. New loans will be originated at then existing interest rates. In
the future the general partners anticipate that interest rates likely will
change from their current levels. The general partners cannot, at this time,
predict at what levels interest rates will be in the future. The general
partners anticipate that new loans will be placed during 2005 at rates slightly
above those that prevailed in 2004. The 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. At
this time, the general partners believe that the average loan portfolio interest
rate will remain relatively stable over the year 2005. Based upon the rates
payable in connection with the existing loans, and anticipated interest rates to
be charged by the partnership and the general partners' experience, the general
partners anticipate that the annualized yield will range between 6.75% and 7.25%
in 2005.
The partnership makes loans primarily in Northern California. As of March
31, 2005, approximately 76.03%, ($116,032,000) of the loans held by the
partnership were in six San Francisco Bay Area Counties. The remainder of the
loans held was secured primarily by Northern California real estate outside of
the San Francisco Bay Area.
Recently the national and Northern California economies seem to be
improving. Job creation remains a concern, as little job creation seems to be
evident. The partnership makes loans primarily in Northern California and real
estate values of residential, commercial, multi-family properties and of land
are of particular interest to the partnership. Real estate is the primary
security for the partnership's loans.
The residential real estate market in California continues to appreciate.
The San Francisco Chronicle dated March 11, 2005 reported that "Median prices
for existing homes in the Bay Area hit an all-time-high of $569,000 in February,
rocketing 19.5% from $476,000 in February 2004 and up 2.3% from $556,000 in
January. Prices are increasing at their fastest pace in four years, according to
DataQuick Information Systems, a La Jolla (San Diego County) real estate market
research firm. `It's stronger than we'd anticipated,' said John Karevoll, a
DataQuick analyst. `These numbers show there's still gas in the tank, and the
market has a way to go before it levels off. We did not anticipate a downturn
but thought we'd be coming in for a soft landing.' Instead, prices for
single-family homes continued to soar. Home buyers in the nine-county Bay Area
snapped up 4,905 resale single-family residences in February, a slight decline
form 4,925 last February. The highest median price was in Marin County, at
61
$808,000, followed by San Mateo at $711,000 and San Francisco at $701,000,
according to DataQuick. Experts said low inventory continues to fuel the frenzy.
`The bottom line is lots of buyers and very few homes,' said Joan Underwood, a
broker with Marvin Gardens who specializes in El Cerrito and Richmond Annex.
Another factor in the increase is that interest rates are inching higher.
Everyone who looks at the market says the price acceleration can't last, but
real estate agents and other experts said they expect a gradual leveling rather
than a bubble bursting. Meanwhile, there still seems to be plenty of life in the
market. The record February prices, which reflect homes that were on the market
in historically slow December and January, are likely to be exceeded once the
spring season gets in full swing."
On the commercial front the San Francisco Business Times for April 8-14,
2005 reports that "Big spenders are rolling back into San Francisco and up the
city's highrises to lease the swankiest view space. And the price is rising
fast. In the past few months a handful of firms, including hedge fund Caxton
Associates LLC and law firm McKenna Long & Aldridge, LLP have leased prime view
space. Those firms did deals for the 33rd floor of the Transamerica pyramid and
the 41st floor of 101 California Street for $60 and $53 per square foot,
respectively - a major pop from the mid-$40s range similar space commanded less
than a year ago. `Asking rental quotes in the $50s or even the $60s doesn't
elicit the broker pushback it would have in 2004,' said Jim Ousman, managing
director of leasing for Equity Office Properties. `That's an indication this
higher-end space is priced accordingly.' As the rest of the San Francisco office
market struggles with vacancy rates that remain in the high teens and average
rents stuck at around $30, the vacancy rate for view space - the upper floors of
the best highrises - is an estimated 5%, according to a recent study by Cushman
& Wakefield. Prices are being rapidly marked up to leverage that scarcity.
Leasing agents representing landlords say the rise is being largely driven by
tenant demand. Whether these high rents for high-class space will have a
trickle-down effect on the less desirable space is unclear. The average asking
rents of Class A space in the central business district last quarter increased
roughly 3% to $30 a square foot, according to averages from Grubb & Ellis Co.
and CB Richard Ellis research reports. Some pockets are a little hotter,
however, like at 50 California Street where rents have increased 20% over the
past six months to as high as the mid $40 range."
As described above, the commercial property market in the San Francisco Bay
Area has recently been improving. Increased occupancies in commercial properties
enable owners to better handle their debt payments. Improved occupancies also
stabilize commercial real estate values, which benefits the partnership.
For partnership loans outstanding as of March 31, 2005, the partnership had
an average loan-to-value ratio of 60.16%, computed based on appraised values and
senior liens as of the date the loan was made. This percentage does not account
for any increases or decreases in property values since the date the loan was
made, nor does it include any reductions in principal on senior indebtedness
through amortization of payments after the loan was made. This low loan-to-value
ratio will assist the partnership in weathering loan delinquencies and
foreclosures should they eventuate.
Unit Valuations for Broker Dealer Requirements.
In some cases in order to satisfy Broker Dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the partnership on a basis which utilizes a per unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the partnership to integrate with
certain software used by the Broker Dealers and other reporting entities. In
those cases, the partnership will report to Broker Dealers, Trust Companies and
others a "reporting" number of units based upon a $1.00 per unit calculation.
The number of reporting units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the partnership account statement
provided to investors. The reporting units are solely for Broker Dealers
requiring such information for their software programs and do not reflect actual
units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the partnership. Each investor's
capital account balance is set forth periodically on the partnership account
statement provided to investors. The amount of partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per unit estimated value
of the client's investment in the partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the partnership
units, such determination may not be representative of the ultimate price
realized by an investor for such units upon sale. No public trading market
exists for the partnership's units and none is likely to develop. Thus, there is
no certainty that the units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
partnership, which may include early withdrawal penalties (See the section of
the prospectus entitled "INVESTMENT RISKS - Lack of Liquidity of Units Increases
Their Risk").
62
PORTFOLIO REVIEW - For the years ended December 31, 2004, 2003 and 2002
Secured Loan Portfolio.
The partnership's secured loan portfolio consists primarily of short-term
(one to five years), fixed rate loans secured by real estate. As of December 31,
2004, 2003 and 2002 the partnership's loans secured by real property collateral
in the six San Francisco Bay Area counties (San Francisco, San Mateo, Santa
Clara, Alameda, Contra Costa, and Marin) represented $131,143,000 (76.36%),
$107,211,000 (72.85%) and $61,741,000 (73.81%), respectively, of the outstanding
secured 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.
The following table sets forth the distribution of loans held by the
partnership by property type for the years ended December 31, 2004, 2003 and
2002 (in thousands):
December 31,
--------------------------------------------------------------------------------------
2004 2003 2002
------------------------ ------------------------- --------------------------
Single family homes (1-4 units) $ 84,359 49.12% $ 66,631 45.27% $ 36,574 43.72%
Apartments (over 4 units) 30,981 18.04% 22,649 15.39% 6,572 7.86%
Commercial 54,670 31.83% 52,502 35.67% 32,089 38.36%
Land 1,735 1.01% 5,392 3.67% 8,415 10.06%
----------- ---------- ----------- ---------- ----------- ----------
Total $ 171,745 100.00% $ 147,174 100.00% $ 83,650 100.00%
=========== ========== =========== ========== =========== ==========
As of December 31, 2004, the partnership held 75 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, 2004.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF SECURED LOANS
As of December 31, 2004 (in thousands)
# of Loans Amount Percent
----------- ----------- ------------
1st Mortgages 43 $ 115,082 67.01%
2nd Mortgages 28 50,282 29.28%
3rd Mortgages 4 6,381 3.71%
=========== =========== ============
Total 75 $ 171,745 100.00%
Maturing in 2005 21 $ 68,761 40.04%
Maturing in 2006 24 68,829 40.07%
Maturing in 2007 11 21,185 12.34%
Maturing after 12/31/07 19 12,970 7.55%
=========== =========== ============
Total 75 $ 171,745 100.00%
Average secured loan as a % of secured loan portfolio $ 2,289 1.33%
Largest secured loan as a % of secured loan portfolio 12,045 7.01%
Smallest secured loan as a % of secured loan portfolio 50 0.03%
Average secured loan-to-value at time of loan based on
appraisals and prior liens at time of loan 56.94%
Largest secured loan as a % of partnership assets 12,045 6.00%
PORTFOLIO REVIEW - For the three months ended March 31, 2005 and 2004
- ----------------
Loan Portfolio.
The partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of March 31, 2005 and
2004 the partnership's loans secured by real property collateral in the six San
Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
63
Contra Costa, and Marin) represented $116,032,000 (76.03%) and $99,435,000
(71.94%) of the outstanding secured loan portfolio. The remainder of the
portfolio represented loans secured primarily by Northern California real estate
outside of the San Francisco Bay Area counties.
As of March 31, 2005 and 2004 the partnership held 79 and 75 secured loans,
respectively, in the following categories (in thousands):
March 31,
---------------------------------------------------------------
2005 2004
----------------------------- -----------------------------
Single family homes (1-4 units) $ 62,354 40.86% $ 58,620 42.41%
Apartments (5+ units) 21,825 14.30% 23,621 17.09%
Commercial 66,700 43.71% 50,587 36.60%
Land 1,733 1.13% 5,392 3.90%
------------- ------------ ------------- ------------
Total $ 152,612 100.00% $ 138,220 100.00%
============= ============ ============= ============
As of March 31, 2005, the partnership held 79 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 March 31, 2005.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of March 31, 2005 (in thousands)
# of
Secured
Loans Amount Percent
-------------- ------------- --------------
1st Mortgages 44 $ 109,427 71.70%
2nd Mortgages 30 34,389 22.53%
3rd Mortgages 5 8,796 5.77%
============== ============= ==============
Total 79 $ 152,612 100.00%
Maturing 12/31/05 and prior 19 $ 56,804 37.22%
Maturing prior to 12/31/06 21 46,984 30.79%
Maturing prior to 12/31/07 16 27,803 18.22%
Maturing after 12/31/07 23 21,021 13.77%
============== ============= ==============
Total 79 $ 152,612 100.00%
Average secured loan as a % of secured loan portfolio $ 1,932 1.27%
Largest secured loan as a % of secured loan portfolio 11,685 7.66%
Smallest secured loan as a % of secured loan portfolio 50 0.03%
Average secured loan-to-value at time of loan based on
appraisals and prior liens at time of loan 60.16%
Largest secured loan as a percent of partnership assets 11,685 5.96%
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. Many of these competitors are unable, due to their size, to compete with
the partnership's ability to make loans larger than $1,000,000 per transaction.
The partnership's ability to regularly entertain loan requests at or above
$1,000,000 reduces competition and can provide either higher quality loans,
higher returns, or both. The general partners have been in the business of
making or investing in mortgage loans in Northern California since 1978 and have
developed a quality reputation and recognition within the field.
Beginning in July of 2004, the Federal Reserve changed its interest rate
policy from one of three years of continuously lowered interest rates, which hit
a 40 year historic interest rate low, to one of tempered but gradual interest
rate increases. In keeping with this new policy since July 2004, the Federal
Reserve has increased the Federal Funds Rate by one quarter percentage point
(1/4 of one percent) at each of its last five meetings to 2.25% as of March 22,
2005. This deliberate upward change in the Federal Funds Rate has caused short
term interest rates to rise, and to a lesser degree, pushed longer term rates up
as well. Nationally and more specifically in Northern California, the location
of the majority of our lending activities, the economies are recovering from the
64
economic downturn from 2000 to 2003. Employment and job creation is improving
but is still lower than desirable. During 2004, the residential and commercial
real estate markets in Northern California enjoyed a solid year of price
appreciation. With the prospect of solid real estate values, low interest rates,
and an improving economy, lenders of all types are anxious to lend money to
borrowers secured by their real estate. Competition for loans is fierce.
Additionally, those borrowers that had waited hoping to find the bottom of the
interest rate cycle, have decided that the time has come to refinance their
existing higher rate loans. This has caused a significant amount of loan runoff
to lower interest rate lenders than the partnership. These two factors have made
it difficult, particularly in the final quarter of the year 2004, to stay as
fully invested as is optimum. It is anticipated that significant competition for
loans will continue. Excess cash will be invested in short-term alternative
investments, such as money market funds yielding considerably less than the
current loan investment portfolio.
TYPES AND MATURITIES OF LOANS (As of December 31, 2004) (in thousands)
Number of
Mortgage
Investments Amount Percent
---------------- ---------------- ----------------
First Mortgage 169 $283,270 61.05%
Second Mortgage 161 167,864 36.18%
Third Mortgage 21 12,829 2.77%
---------------- ---------------- ----------------
351 $463,963 100.00%
================ ================ ================
Maturing before 1/1/2005 191 $172,171 37.11%
Maturing after 1/1/2005 and before 1/1/2007 83 229,179 49.40%
Maturing after 1/1/2007 77 62,613 13.49%
---------------- ---------------- ----------------
351 $463,963 100.00%
================ ================ ================
Single Family Residences 208 $284,992 61.43%
Commercial Properties 107 149,682 32.26%
Multi-Unit Properties 20 14,664 3.16%
Land 16 14,625 3.15%
---------------- ---------------- ----------------
351 $463,963 100.00%
================ ================ ================
DELINQUENCIES
As of December 31, 2004, we had 11 loans ($25,013,000) which were
delinquent over 90 days in either interest, principal or both. As of March 31,
2005 delinquencies had increased to 12 loans ($27,932,000) which were delinquent
over 90 days in either interest, principal or both. Of these, four loans were in
foreclosure at December 31, 2004 and March 31, 2005.
1. Table of open loans for the partnership as of December 31, 2004. As of
December 31, 2004, the partnership had seventy five (75) open loans with a
principal outstanding balance totaling $171,745,000. 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.
65
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)(5)
Marin 1 2/4/99 $0 $0 $1,210,000 24 $1,860,000 65.05% C
San Francisco 2 1/25/00 $492,978 $0 $400,000 60 $1,430,000 62.45% A
Marin 1 8/29/00 $0 $0 $1,325,000 6 $1,916,000 69.15% C
Napa 1 7/5/01 $0 $0 $3,515,000 18 $7,550,000 46.56% C
San Mateo2 11/30/01 $139,911 $0 $318,229 12 $660,967 69.31% E
Santa Clara 2 7/9/02 $1,647,000 $0 $263,000 24 $2,550,000 74.90% A
Santa Clara 3 8/8/02 $632,118 $836,009 $805,000 60 $3,600,000 63.14% A
Alameda 1 8/16/02 $0 $0 $1,300,000 24 $8,130,000 15.99% A
San Mateo 2 8/22/02 $709,865 $0 $269,000 36 $1,400,000 69.92% A
San Mateo 1, 5 9/5/02 $0 $0 $1,781,000 36 $2,550,000 69.84% B
Napa 2 10/30/02 $500,000 $0 $1,320,000 36 $2,600,000 70.00% B
San Mateo 1 5/1/03 $0 $0 $7,700,000 18 $13,200,000 58.33% A
Fresno 1, 5 7/21/03 $0 $0 $6,073,600 24 $8,673,000 70.03% A
Santa Clara 2 12/5/03 $376,031 $0 $130,000 60 $775,000 65.29% A
Alameda 2, 5 12/23/03 $18,210,000 $0 $16,010,000 24 $59,600,000 57.42% A
Placer 1 12/12/03 $0 $0 $1,070,000 24 $1,400,000 76.43% A
Alameda 2 1/23/04 $189,597 $0 $500,000 80 $1,070,000 64.45% A
Alameda 3, 5 1/15/04 $15,440,356 $18,210,000 $8,245,000 24 $59,600,000 70.29% A
Santa Clara 2 4/2/04 $1,654,802 $0 $800,000 24 $3,700,000 66.35% A
San Francisco 2 4/20/04 $2,400,000 $0 $335,000 60 $4,000,000 68.38% A
San Francisco 1 4/1/04 $0 $0 $1,180,000 24 $1,480,000 79.73% A
San Mateo 2 4/30/04 $734,638 $0 $1,085,000 60 $2,800,000 64.99% A
Contra Costa 1 5/11/04 $0 $0 $403,000 60 $530,000 76.04% A
San Mateo 2 5/14/04 $312,908 $0 $50,000 60 $650,000 55.83% A
San Joaquin 1 5/18/04 $0 $0 $188,000 60 $255,000 73.73% C
San Francisco 1, 5 6/8/04 $0 $0 $8,400,000 24 $31,400,000 26.75% A
San Mateo 2 6/21/04 $716,218 $0 $690,000 60 $2,200,000 63.92% A
Alameda 1, 5 7/1/04 $0 $0 $15,615,000 18 $52,400,000 29.80% A
San Diego 1 7/2/04 $0 $0 $2,400,000 24 $3,200,000 75.00% A
San Francisco 2 9/29/04 $763,929 $0 $385,000 36 $1,500,000 76.60% A
Contra Costa 1, 5 9/1/04 $0 $0 $11,684,000 24 $26,020,000 44.90% A
Contra Costa 2, 5 9/1/04 $11,684,500 $0 $7,821,000 24 $26,020,000 74.96% A
Sacramento 2, 5 9/16/04 $1,390,876 $0 $10,540,000 24 $15,900,000 75.04% A
Marin 1 10/29/04 $0 $0 $2,000,000 48 $13,000,000 15.38% A
San Francisco 2 12/29/04 $1,180,000 $0 $425,000 14 $2,420,000 66.32% 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 at the
inception of the loan. 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.
5 Loans may be secured by multiple single family residences, including
multiple condominiums in the same building.
A. Loan current or less than 90 days delinquent
B. Loan 90 days or more delinquent
C. Loan in foreclosure
D. Loan in bankruptcy
E. Loan is less than 90 days delinquent in interest payments, but is past
maturity
66
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)
Contra Costa 2 7/14/99 $47,138 $0 $310,247 24 $477,066 74.91% E
San Francisco 1 7/7/00 $0 $0 $4,000,000 73 $5,956,000 67.16% C
Contra Costa 2 5/22/03 $2,146,575 $0 $1,950,000 24 $5,795,000 70.69% A
Santa Clara 2 6/26/03 $14,800,000 $0 $2,660,000 36 $26,650,000 65.52% A
San Joaquin 1 12/26/03 $0 $0 $413,000 60 $550,000 75.09% A
Riverside 2 10/29/03 $3,115,363 $0 $3,650,000 24 $8,990,000 75.25% A
San Francisco 1 3/4/04 $0 $0 $5,200,000 36 $8,350,000 62.28% A
San Francisco 1 5/27/04 $0 $0 $666,000 24 $1,025,000 64.98% A
San Francisco 1 5/10/04 $0 $0 $881,000 24 $1,175,000 74.98% A
San Francisco 1 5/7/04 $0 $0 $875,000 24 $1,100,000 79.55% A
Contra Costa 1 12/9/04 $0 $0 $6,900,000 24 $13,200,000 52.27% A
Contra Costa 2 12/9/04 $6,900,000 $0 $1,890,000 24 $13,200,000 66.59% A
San Francisco 2 12/10/04 $881,250 $0 $641,500 17 $2,410,000 63.18% A
San Francisco 2 12/10/04 $875,000 $0 $908,000 17 $2,560,000 69.65% 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 at the
inception of the loan. 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
E. Loan is less than 90 days delinquent in interest payments, but is past
maturity
67
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)
Yuba 1 12/18/03 $0 $0 $148,000 72 $450,000 32.89% A
Santa Clara 2 7/15/02 $2,916,000 $0 $799,000 36 $5,807,700 63.97% B
San Mateo 1 2/27/01 $0 $0 $350,000 60 $495,000 70.71% A
Santa Clara 1 3/14/02 $0 $0 $770,000 60 $750,000 102.67% A
Alameda 1 3/14/02 $0 $0 $320,000 60 $248,111 128.97% A
Santa Clara 3 5/15/02 $8,100,000 $0 $4,550,000 36 $28,528,000 44.34% B
Santa Clara 1 7/19/02 $0 $0 $3,600,000 24 $4,810,000 74.84% C
San Mateo 1 9/13/02 $0 $0 $441,000 60 $840,000 52.50% A
El Dorado 3 11/26/02 $378,450 $340,000 $900,000 60 $2,450,000 66.06% A
Riverside 1 12/20/02 $0 $0 $1,500,000 60 $2,500,000 60.00% A
San Francisco 1 2/20/03 $0 $0 $10,440,000 22 $13,050,000 80.00% A
Los Angeles 1 3/28/03 $0 $0 $7,292,000 24 $11,680,000 62.43% A
Sacramento 1 6/3/03 $0 $0 $2,500,000 36 $5,130,000 48.73% A
Alameda 1 6/20/03 $0 $0 $3,570,000 36 $5,500,000 64.91% A
San Francisco 1 11/14/03 $0 $0 $2,750,000 24 $3,960,000 69.44% A
San Joaquin 1 12/4/03 $0 $0 $3,375,000 24 $4,710,000 71.66% A
Napa 1 12/30/03 $0 $0 $1,610,000 24 $2,300,000 70.00% A
San Francisco 2 4/30/04 $241,655 $0 $375,000 60 $950,000 64.91% A
Santa Clara 2 5/27/04 $2,850,000 $0 $500,000 60 $4,750,000 70.53% A
Marin 1 5/28/04 $0 $0 $4,650,000 36 $7,690,000 60.47% A
Marin 2 7/21/04 $785,226 $0 $300,000 60 $1,450,000 74.84% A
San Francisco 1 7/9/04 $0 $0 $2,000,000 60 $2,575,000 77.67% A
Alameda 1 7/27/04 $0 $0 $1,947,000 60 $3,100,000 62.81% A
San Francisco 3 12/14/04 $236,808 $375,000 $100,000 52 $950,000 74.93% 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 at the
inception of the loan. 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
E. Loan is less than 90 days delinquent in interest payments, but is past
maturity
68
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)
Santa Clara 1 1/17/02 $0 $0 $987,000 24 $1,500,000 65.80% A
Lake 1 6/30/04 $0 $0 $750,000 60 $1,300,000 57.69% 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 at the
inception of the loan. 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
E. Loan is less than 90 days delinquent in interest payments, but is past
maturity
69
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, final
and temporary Treasury regulations (the "Regulations"), judicial decisions,
published and private rulings and procedural announcements issued by the IRS,
all as in effect as of the date of this prospectus. Future legislative or
administrative changes or court decisions could significantly change the
conclusions expressed herein, and any such changes or decisions could have a
retroactive effect with respect to the partnership and the limited partners. 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.
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 tax consequences of an investment in 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 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.
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 individual circumstances. In particular,
this summary assumes that the limited partners will be individuals who are U.S.
citizens or residents for tax purposes, or tax-exempt pension or profit-sharing
trusts or IRAs. The summary assumes that the limited partners intend to hold
units as capital assets (in other words, for investment). Except as expressly
indicated, the summary does not 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, or to taxpayers subject to specialized rules, such as
insurance or bank holding companies. The summary also does not generally
describe all tax consequences that may be material to a transferee of units from
an initial limited partner. Except as expressly indicated below in "State and
Local Taxation," the following discussion is limited to federal income tax
matters. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING
THE FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF AN INVESTMENT IN
UNITS IN LIGHT OF THE INVESTOR'S PARTICULAR CIRCUMSTANCES.
TAX CLASSIFICATION OF THE PARTNERSHIP
The partnership has received an opinion of Morrison & Foerster LLP, counsel
to the partnership, that under the provisions of the Code and the Regulations,
as in effect on the date of the opinion, as well as under the relevant authority
interpreting the Code and the Regulations, and based upon certain
representations of the general partners, the partnership will be treated as a
partnership for federal income tax purposes and not as an association taxable as
a corporation. As discussed below, counsel has also provided an opinion to the
effect that the partnership will not be taxable as a publicly traded
partnership.
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.
In addition, the opinion of counsel described above is not binding on the IRS or
the courts.
Partnership Status. As a tax partnership, the partnership is not itself
subject to federal income tax. The partnership files an annual partnership
information return with the IRS reporting the results of the partnership's
operations. Each limited partner is required to report separately on its income
70
tax return its distributive share of the partnership's ordinary income or loss,
net long-term capital gain or loss and net short-term capital gain or loss, if
any and all other items of income or loss. Each limited partner is taxable on
its distributive share of the partnership's taxable income and gain regardless
of whether the limited partner has received or will receive a distribution from
the partnership.
If instead the partnership were classified as an association or
publicly-traded partnership 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. Any excess would be treated as a
return of capital to the extent of basis, and thereafter as capital gain. If for
any reason the partnership becomes taxable as a corporation prospectively, a
constructive incorporation may be deemed to have occurred. In the event the
partnership's liabilities exceeded the tax basis of its assets at the time of
any constructive incorporation, the partners may realize gain equal to their
share of the excess of liabilities over basis.
Publicly Traded Partnerships. A "publicly traded partnership" for federal
tax purposes is generally any partnership whose interests are traded on an
established securities market or are readily tradable on a secondary market or
the substantial equivalent thereof. Applicable Treasury regulations (the
"Section 7704 regulations") provide guidance with respect to such classification
standards, and create certain safe harbor standards which, if satisfied,
generally preclude classification as a publicly traded partnership. Failure to
satisfy a safe harbor provision under the Section 7704 regulations will not
cause a partnership to be treated as a publicly traded partnership if, 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 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 the Section 7704 regulations. In
connection with the opinion of Morrison & Foerster LLP, the general partners
have represented that they will not take any affirmative action on behalf of the
partnership to intentionally establish a market for the partnership interests;
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; and that the partnership will be operated strictly in accordance
with the partnership agreement, which contains transfer restrictions intended to
avoid publicly traded partnership status. The general partners also have
represented they will limit transfers, including withdrawals, to the extent
necessary to prevent the partnership from being classified as a publicly traded
partnership.
Based upon the legislative history of Section 7704, the text of the
Regulations, the anticipated operations of the partnership as described in this
prospectus and the agreement, and the representations provided by the general
partners, counsel has concluded that the partnership will not be classified as a
publicly traded partnership under Section 7704 of the Code. The safe harbor
provisions contained in the Section 7704 regulations are complex, and counsel's
determination regarding publicly traded partnership status is necessarily based
upon future facts not yet in existence. For example, 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 be no assurance that a secondary market for the units
will not develop. Thus, no assurance can be given that the IRS will not
successfully assert that the partnership should be classified as a "publicly
traded partnership" for this purpose. Subject to the "qualifying income"
exception discussed below, classification of the partnership as a "publicly
traded partnership" would result in the partnership being taxable as a
corporation.
If the partnership were treated as a "publicly traded partnership" for tax
purposes, the partnership would nonetheless remain taxable as a partnership if
90% or more of the gross income of the partnership for each taxable year in
which it was a publicly traded partnership consisted of "qualifying income." For
this purpose, qualifying income generally includes, among other things,
interest, real property rents and gain from the sale or other disposition of
real property. However, 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. In addition, interest is not treated as "qualifying
income" if the interest either (1) is derived in the conduct of a financial
business or (2) subject to exceptions, is contingent on the income or profits of
any person. Given the nature of the partnership's lending activities, no
assurance can be given that the IRS would not successfully assert that the
partnership's interest income is not qualifying income, in which case this
exception would not be available. If the partnership were classified as a
publicly traded partnership but qualified for the qualifying income exception to
corporate taxation, the passive activity loss limitations discussed below would
be required to be applied on a segregated basis to a limited partner's
investment in the partnership.
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 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.
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The remaining summary of the federal income tax consequences assumes that
the partnership will be classified as a partnership (other than a publicly
traded partnership) for federal income tax purposes.
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 be
required to file an annual informational income tax return, but will not be
subject as an entity to the payment of federal income tax. Each limited partner
will be required to report on his personal income tax return 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 discussed below, 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.
Allocation of Net Profits and Net 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 81).
For federal income tax purposes, each partner's distributive share of
specific items of income, gain, loss, deduction and credit generally is
determined by reference to the manner in which net profits and net losses are
allocated for non-tax purposes, 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 the partners'
respective interests in the partnership, based on all the facts and
circumstances. Any resulting change in the allocation of an item could cause a
partner to recognize greater or lesser amounts of taxable income or loss than
originally reported, and/or to recognize taxable income or loss at different
times than would result under the allocation scheme set forth in the partnership
agreement. Although not free from doubt, the allocations of income and loss of
the partnership as set out in the partnership agreement should either have
"substantial economic effect" or be deemed to be in accordance with the
partners' respective interests in the partnership, 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 limited partners.
In limited circumstances, a limited partner may recognize additional
taxable income from acquiring or holding an investment in the partnership. A
limited partner who invests in units through a registered investment advisor may
recognize additional taxable income in the amount of the sales commission that
would have been payable had such partner invested through a broker-dealer, if
Redwood Mortgage Corp. pays to the partnership an amount equal to such sales
commission and such amount is specially allocated to the limited partner. In
certain circumstances, the partnership treats the amount of any early withdrawal
penalties it receives from a withdrawing partner as giving rise to additional
taxable income to the remaining partners. In addition, the partnership does not
revalue its assets for capital account maintenance purposes when partners come
into or leave the partnership. Although such revaluations are not mandatory, no
assurance can be given that the IRS will not assert that in the absence of such
revaluations, the corresponding income, gain, loss or deduction from such
properties should be shared among the partners for tax purposes in a manner that
differs from the allocations provided in the partnership agreement.
Distributions; Tax Basis.
During Operations. A partner generally will not recognize gain on the
receipt of a distribution of money from the partnership (including any
constructive distribution of money resulting from a reduction in the partner's
share of the partnership's liabilities), except to the extent such a
distribution exceeds the partner's adjusted tax basis in its units. A partner
also generally will not recognize gain or loss on the receipt of a distribution
of property from the partnership. A partner's tax basis in its units initially
will be the amount paid for such units, plus the partner's share (as determined
for federal income tax purposes) of any liabilities of the partnership, and will
thereafter be adjusted as required under the Code to give effect on an ongoing
basis to the partner's share of the partnership's tax items, distributions and
liabilities. The rules governing adjustments to the tax basis of partnership
interests and the taxation of partnership distributions are quite complex, and
limited partners are urged to consult with their own tax advisors concerning
these rules.
Upon Liquidation. A partner generally will recognize gain on the complete
liquidation of its units in the partnership. Gain will be recognized to the
extent that the amount of money received (including any constructive
distribution of money resulting from a reduction in the partner's share of the
partnership's liabilities) exceeds the partner's adjusted tax basis in its
units. A partner will recognize a loss only if the only distribution made to the
partner consists of cash or of unrealized receivables or inventory (both as
specially defined in the Code for this purpose), and then only if (and to the
extent that) the partner's adjusted tax basis in its interest exceeds the sum of
the cash distributed and the partnership's adjusted basis for the unrealized
receivables and inventory distributed to such partner. However, if substantially
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appreciated inventory or unrealized receivables (each as specially defined in
the Code for this purpose) 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.
Character. Any gain recognized by a partner on the receipt of a
distribution from the partnership, either prior to or upon the liquidation of
its units, may include both capital gain and ordinary income components.
Tax Consequences of Reinvestment Election. 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 retained
in their capital accounts and used by the partnership in conducting partnership
activities. Limited partners who avail themselves of such an option should not
be treated as having received the foregone cash distribution currently for tax
purposes. Such limited partners will, however, incur a tax liability on their
pro rata share of partnership taxable income, if any, even though they receive
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" at page 74 and "Risks of Investment
by Benefit Plan Investors and Other Tax-Exempt Investors" at page 20).
Sale of Partnership Units. Limited partners may be unable to sell their
units as there may be no public market for them. In the event that a limited
partner sells units, however, that partner will recognize gain or loss equal to
the difference between the amount realized on the sale (including the fair
market value of any property received, the amount of any cash and the partner's
share of any partnership liabilities) and the partner's adjusted tax basis in
his units. Assuming the selling partner has held the units for more than 12
months, his gain or loss generally will be long-term capital gain or loss,
except that any portion of any gain attributable to such partner's share of the
partnership's "unrealized receivables" and "inventory items" as defined in
Section 751 of the Code will be taxable as ordinary income.
Among other things, "unrealized receivables" includes any recapture of cost
recovery allowances taken previously by the partnership with respect to personal
property, and also includes accrued but untaxed market discount, if any, on
securities held by the partnership. The partnership does not expect that a
material portion of its assets will be treated as unrealized receivables and
inventory items under these rules. However, the application of these rules will
depend on the facts in existence at the time of the sale. Investors should note
in this regard that Section 6050K of the 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 seller's share of the partnership's "Section 751
property."
Tax Rates. Ordinary income for individual taxpayers is currently taxed at a
maximum marginal rate of 35%. Long-term capital gains are currently taxed at a
maximum rate of 15%. Capital losses may generally be used to offset capital
gains or, to the extent in excess of capital gains, may be deducted 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).
Tax Year. 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 are
prorated between the transferor and transferee partners pursuant to Section 706
of the Code. 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 of the
Code. Because partnership income will generally flow through to the partner for
the period prior to any sale of the partner's units or liquidation of the
partnership, a limited partner may recognize taxable income substantially in
excess of the cash, if any, he receives, in such a liquidation or sale.
TAXATION OF PARTNERSHIP INVESTMENTS
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
42). With respect to loans containing such 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 treated as a partner or a joint venturer with the mortgagor, the
income from the participation feature of the loans and/or the stated interest
may be treated as a distribution of profits of the deemed partnership or joint
venture. Depending on the nature of the income of the deemed partnership, such
treatment could result in the receipt of unrelated business taxable income for
certain tax-exempt limited partners, (Including Benefit Plan investors, such as
tax-qualified pension or 401 (k) plans or IRAs) (See "Risks of Investment by
Benefit Plan Investors and Other Tax-Exempt Investors" at page 20).
Repayment or Sale of Loans. No gain or loss will be recognized by the
partnership upon the 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" at page 74) 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.
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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 income or loss
rather than as capital gain or loss. Furthermore, such income would also
constitute unrelated business taxable income to any investors that are
tax-exempt entities (See "Risks of Investment by Benefit Plan Investors and
Other Tax-Exempt Investors" at page 20). 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 IRS will not take the contrary position.
Original Issue Discount; Imputed Income. The partnership may be subject to
the original issue discount rules with respect to interest to be received with
respect to certain loans, including, for example, if the interest rate on a loan
varies over time according to fixed increases or decreases. If the partnership
holds loans with "original issue discount," the partnership will be required to
include amounts in taxable income on a current basis even though receipt of such
amounts may not occur until a subsequent year. Original issue discount would
therefore increase the amount of income taxable to the limited partners without
a corresponding increase in cash distributable to such partners. (However, to
the extent such original issue discount constitutes "interest," tax exempt
investors may exclude such original issue discount in computing their UBTI
liability.) Original issue discount is includible in income as it accrues under
a constant yield method, resulting in the reporting of interest income in
increasing amounts each taxable year. The amount of original issue discount
recognized by the partnership with respect to a loan will increase the
partnership's basis in that loan, and will to that extent reduce the amount of
income the partnership might otherwise recognize upon the receipt of actual
payments on, or a disposition of, the loan.
The partnership also includes imputed interest income for tax purposes as a
result of the formation loan, even though the partnership does not receive
corresponding cash payments of interest. The partnership also claims a deduction
equal to the amount of the interest such that, provided that none of the
deductibility limitations described below applies, no net taxable income results
to the partners from the imputed interest.
OTHER ASPECTS OF TAXATION OF PARTNERS.
At-Risk Limitations. Individuals and closely-held corporations are subject
to the at-risk limitations contained in Code Section 465. Under these rules, a
limited partner would not be permitted to include losses allocated by a
partnership to the extent such losses exceeded the amount such limited partner
was considered to have "at risk" in such partnership. For this purpose, the
limited partner's at-risk amount would initially equal the amount of such
limited partner's cash contributions to the partnership and the adjusted tax
basis of such limited partner's contributions of property to the partnership.
However, the at-risk amount generally does not include contributions by a
limited partner to the extent the contributions are funded through nonrecourse
financing. The at-risk amount would be increased by any taxable income allocated
to such limited partner and would be decreased by any losses allocated to the
limited partner and by any distributions to the limited partner. A limited
partner's share, if any, of partnership liabilities would not increase the
limited partner's at-risk amount. Any losses disallowed by reason of the at-risk
limitation may be carried forward until such time, if ever, that sufficient
at-risk amounts exist.
Passive Activity Loss Limitations. Section 469 of the Code restricts the
deductibility of losses from a "passive activity" against certain income which
is not derived from a passive activity. A passive activity generally includes
any trade or business activity in which the taxpayer does not materially
participate. In general, losses generated by a passive activity will only be
allowed to offset income from a passive activity, as distinguished from
"portfolio" income and active income. For this purpose, portfolio income
generally includes interest, dividends, royalty or annuity income and gain from
sales of portfolio assets, for example, property held for investment. However,
interest does not constitute portfolio income if it is generated in the ordinary
course of a lending business. Instead, any such interest income will ordinarily
be treated as passive income to a limited partner who does not materially
participate in that lending business.
Under a special rule applicable to "equity financed lending activities,"
however, all or a portion of the net income, but not losses, from such lending
activities will be treated as "active" or nonpassive income. An equity-financed
lending activity is 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
amount treated as nonpassive under this rule is the lesser of the net passive
income from the lending activity or the "equity financed interest income"
(generally, the net interest income from the activity that is attributable to
the equity financed portion of the activity's interest-generating assets). The
general partners do not expect that the average outstanding balance of our
liabilities that are allocable to our mortgage investment activities will exceed
80% of the average outstanding balance of our mortgage loans. Accordingly, if we
are treated as engaged in a lending activity, our limited partners will be
subject to this "equity financed" rule.
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The application of the passive loss limitation rules to an investment in
the partnership depends upon whether the partnership is considered to be engaged
in a lending trade or business. If the partnership is deemed to be engaged in
the trade or business of lending money, all or a portion of its net 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 instead
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
income. Based upon its activities to date, the partnership has taken the
position that it is engaged in a lending trade or business, as a result of which
all or a portion of the income earned by limited partners with respect to their
investment in the partnership will be treated as nonpassive income, even though
any losses from such investment will be treated as passive.
Investment Interest Limitations. 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 interest
expense allocable to an activity in which the taxpayer does not materially
participate, if such activity is not treated as a passive activity under the
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.
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 generally does not include income taken into account in computing gain or
loss from a passive activity. However, the amount of any net passive income that
is treated as nonpassive income for purposes of the passive loss limitations
under the "equity financed" rule described above is treated as portfolio income
for purposes of the investment interest limitations. 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.
The partnership does not expect to incur any material amount of "investment
interest" that will be significantly limited by these rules. However, this
limitation also could apply to limit the deductibility of interest paid by a
limited partner on any indebtedness incurred to finance its investment in the
partnership. 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.
Deductibility of Partnership Investment Expenditures. The partnership
reports the asset management fee payable to the general partners as a deductible
expense. However, it is possible that the IRS may disallow a deduction for all
or a portion of such fee or other partnership expenses on the ground that the
expenditure is capital in nature.
Investment expenses (e.g., investment advisory fees) of an individual,
trust or estate are deductible only to the extent they exceed two percent of
adjusted gross income. In addition, the Code further restricts the ability of an
individual with an adjusted gross income in excess of specified amounts indexed
for inflation to deduct a portion of most itemized expenses, including
investment expenses. These limitations on deductibility should not apply to a
limited partner's share of partnership expenses to the extent that the
partnership is engaged, as it takes the position that it has been and expects to
continue to be, in a trade or business within the meaning of the Code. Although
the general partners intend to treat partnership expenses as not being subject
to the foregoing limitations on deductibility, there can be no assurance that
the IRS will not treat such expenses, including the asset management fee, as
investment expenses that are subject to the limitations. In addition, it is
possible the IRS may assert that all or a portion of the incentive allocation to
the general partners (that is, their allocable share of partnership profit and
loss in excess of the amount attributable to their contributed capital) should
be characterized as an expense potentially subject to the foregoing limitation.
Partnership Organization, Syndication Fees and Acquisition Fees. Under
Section 709 of the Code, all organization, syndication fees and acquisition fees
must be capitalized. Although organization fees and expenses may, at the
taxpayer's election, be amortized for tax purposes, syndication expenses paid by
the partnership cannot be amortized. Syndication expenses include commissions,
professional fees and printing costs in marketing sales of partnership
interests, brokerage fees and legal and accounting fees regarding disclosure
matters. The partnership believes that its expenses associated with this
offering of units are syndication expenses that are not amortizable for tax
purposes.
Section 754 Election. Pursuant to Section 754 of the Code, a partnership
may make an election to adjust the basis of its assets in the event of a sale by
a partner of its interest or certain other events. Depending upon the particular
facts at the time of any such event, such an election could increase or decrease
the value of the interest to the transferee, because the election would increase
or decrease the basis of the partnership's assets for the purpose of computing
the transferee's distributive share of the partnership's income, gains,
deductions and losses. The partnership agreement authorizes the general partners
to make such an election. However, because the election, once made, cannot be
75
revoked without obtaining the consent of the IRS, and because of the accounting
complexities that can result from having such an election in effect, the general
partners do not presently intend to make this election. The absence of such an
election by the partnership may make it more difficult for a limited partner to
sell its units.
Legislation enacted in late 2004 generally requires that partnerships
adjust the basis of their assets in connection with a transfer of an interest in
the partnership if the partnership has a substantial built-in loss immediately
after the transfer. A substantial built-in loss exists if the partnership's
adjusted basis in its property exceeds the fair market value of the property by
more than $250,000. If such basis adjustments are required in connection with
the transfer of an interest in the partnership, they could impose significant
accounting costs and complexities on the partnership.
Tax Returns; Audits. The partnership's tax returns will be prepared by
accountants to be selected by the general partners. 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.
Although the partnership is not being formed so as to allow investors to
avail themselves of losses or deductions generated by the partnership, the IRS
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 IRS 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 IRS
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 IRS and may enter into a settlement
with the IRS as to partnership tax issues which generally will be binding on all
of the partners, unless a partner timely files a statement with the IRS
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 an IRS 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 a one percent (1%) profits
interest in the partnership) 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.
Reportable Transaction Rules. The Treasury Department has issued
Regulations establishing rules for certain "reportable transactions." A
transaction may be reportable for any of several alternative reasons, including,
among others, that the transaction results in losses exceeding specified
thresholds. The language of the Regulations is broad, and if applicable to any
transactions undertaken by the partnership (or by a limited partner with respect
to its units), may require limited partners that are required to file U.S.
federal income tax returns (and in some cases, investors in a limited partner)
to disclose to the IRS information relating to such transactions, and to retain
certain documents and other records related thereto. There can be no assurance
that a limited partner will not be treated as participating in one or more
reportable transactions in the future as a result of its investment in the
partnership. Legislation recently was passed that would impose substantial
penalties on taxpayers who fail to comply with these Regulations. In addition,
certain persons who may be considered to be organizers, sellers or material
advisors with respect to the offering of units may be required to maintain and,
in some cases, furnish to the IRS certain identifying information concerning the
partners and their investment in the partnership. Prospective investors should
consult their tax advisors regarding the potential impact of these reportable
transaction rules on an investment in the partnership.
INVESTMENT BY TAX-EXEMPT INVESTORS.
General. Special tax considerations apply to potential investors that are
exempt organizations, including, for example, employee trusts and Benefit Plan
investors, including tax-qualified pension or 401 (k) plans or Individual
Retirement Accounts ("IRAs"). Although such organizations are generally exempt
from federal income taxation, they are taxable on their "unrelated business
taxable income," as defined in Section 512 of the Code. Unrelated business
taxable income ("UBTI") generally is defined as gross income from any trade or
business unrelated to the tax-exempt function of the organization. However, UBTI
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." In general, debt-financed property includes any
property acquired in whole or in part with indebtedness as defined in Section
514 of the Code.
Although substantially all of our income consists of interest income that
is not taxable to an exempt organization, we have historically generated, and we
expect to continue to generate, some amounts that are likely to be treated as
UBTI to such organizations. For example, we expect to borrow money from time to
time. Any partnership borrowing for the purpose of investing in loans may result
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in "debt-financed property," and therefore UBTI, under these rules.
Additionally, in the event of a loan default, we may be forced to foreclose and
hold real or other property (which secures the loan) for a short period of time.
We are permitted to borrow funds to assist in the operation of any property on
the security of which we have previously made a loan and the operations of which
we have 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 UBTI. We may
also receive payments in the nature of points or loan servicing or origination
fees 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 UBTI. Any borrowings by a limited partner for the
purpose of financing its investment in the partnership similarly can result in
"debt financed property" and, therefore, UBTI under these rules.
We intend to hold our loans for investment. Therefore, subject to the "debt
financed property" rules discussed above, no UBTI should result from our
disposition of these assets. Such may not be the case, however, if we do not act
in accordance with this intention and it is determined that we are a dealer in
the business of buying and selling loans. The general partners 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 74).
In computing UBTI, 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 UBTI. We will be required to report to each limited
partner that is an exempt organization information as to the portion of its
income and gains from the partnership for each year which will be treated as
UBTI. The calculation of such amount with respect to transactions entered into
by the partnership is complex, and there is no assurance that our calculation of
UBTI will be accepted by the IRS.
In general, if UBTI is allocated to an exempt organization such as a
qualified retirement plan or a private foundation, the portion of our income and
gains which is not treated as UBTI will continue to be exempt from tax, as will
the organization's income and gains from other investments which are not treated
as UBTI. Therefore, the possibility of realizing UBTI from its investment in us
generally should not affect the tax-exempt status of such an exempt
organization. However, a charitable remainder trust will not be exempt from
federal income tax under Section 664(c) of the Code for any year in which it has
UBTI. A title-holding company will not be exempt from tax if it has certain
types of UBTI. Moreover, the charitable contribution deduction for a trust under
Section 642(c) of the Code may be limited for any year in which the trust has
UBTI. Certain exempt organizations which realize UBTI in a taxable year may not
constitute "qualified organizations" for purposes of Section 514(c)(9)(B)(vi)(I)
of the Code, pursuant to which, in limited circumstances, income from certain
real estate partnerships in which such organizations invest might be treated as
exempt from UBTI. A prospective investor should consult its tax adviser with
respect to the tax consequences of receiving UBTI from the partnership.
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 Code. Section 401(a)(9) of the Code provides generally
that certain minimum distributions from retirement plans must be made commencing
not later than April 1 following the later of the calendar year during which the
recipient attains age 70 1/2 or retires. Accordingly, if units are held by
retirement plans and mandatory distributions are required to be made to an IRA
beneficiary or a qualified plan participant before the partnership liquidates
its loans, it is likely that a distribution of the units in kind will be
required to be made. No corresponding cash distribution will be made by the
partnership to enable said IRA beneficiary or qualified plan participant to pay
the income tax liability arising out of any such in-kind distribution of units.
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.
Investment By Charitable Remainder Trusts. In addition to the general tax
treatment of UBTI 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 and charitable remainder unitrusts) receives any UBTI
for any taxable year, the trust no longer qualifies as exempt from tax for such
taxable year, and instead is taxable on all of its income as a complex trust.
Because the partnership historically has generated, and expects to continue to
generate, some amount of UBTI, an investment in the partnership may not be
suitable for a charitable remainder trust. Prospective investors that are
charitable remainder trusts are urged to consult their tax advisors to determine
the effect of the receipt of UBTI on the trust and the suitability of an
investment in the partnership.
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 Benefit Plan Investors and Other Tax-Exempt
Investors" at page 20 and "ERISA CONSIDERATIONS" at page 78.
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FOREIGN INVESTORS
Units in the partnership may be purchased by foreign investors that is,
persons who are not U.S. citizens or residents for U.S. income tax purposes, as
determined under the Code and Regulations. A foreign investor who purchases
units and becomes a limited partner in the partnership may 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 may be required to pay United States federal income tax at regular
United States tax rates on his share of our net income, whether ordinary or
capital gains. 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 Code. 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. 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 United States federal income taxes from amounts otherwise
payable to foreign investors.
STATE AND LOCAL TAXES.
In addition to the federal income tax consequences described above,
prospective investors should consider potential state and local tax consequences
of an investment in the partnership. State and local tax laws often differ from
federal income tax laws with respect to the treatment of specific items of
income, gain, loss, deduction and credit. 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, certain states in which the
partnership holds assets or otherwise conducts activities, particularly the
State of California, may impose tax on your share of the net income from sources
within the state even if you are not a resident of such state. As a result of an
investment in the partnership, you may be required to file a tax return with
that jurisdiction to report your share of the partnership's income from sources
within the state.
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 currently requires withholding with respect to
distributions of California source income to nonresident partners in certain
circumstances. 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
state level may increase the partnership's administrative expenses which would
likely have the effect of reducing returns to the limited partners. Tax exempt
investors should be aware that a separate application for recognition of
exemption may be required in order for such an investor to avoid taxation by any
state in which we are treated as conducting a business. The requirements for
exemption differ among the states as to the classes of income and types of
entities that are eligible for exemption.
You are urged to consult your personal tax advisor regarding the impact of
state and local taxes upon an investment in the partnership.
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 assets in
plans, such as tax-qualified pension or 401(k) plans, that are subject to ERISA
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 tax-qualified plans be for
the exclusive benefit of participants and beneficiaries, issued a similar set of
investment considerations for plan fiduciaries. That IRS 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.
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Fiduciaries Under ERISA. A fiduciary of a tax-qualified plan, such as a
pension or 401(k) plan, is subject to certain requirements under ERISA,
including the duty to discharge responsibilities solely in the interest of, and
for the benefit of the tax-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
tax-qualified plan's governing documents.
Fiduciaries with respect to a tax-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 tax-qualified plan. For
example, any person who is responsible for choosing a tax-qualified plan's
investments, or who is a member of a committee that is responsible for choosing
a tax-qualified plan's investments, is a fiduciary of the tax-qualified plan.
Also, an investment professional whose advice will serve as one of the primary
basis for a tax-qualified plan's investment decisions may be a fiduciary of the
tax-qualified plan, as may any other person with special knowledge or influence
with respect to a tax-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 tax-qualified plan
exercises control over such participant's individual account in the
tax-qualified 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 tax-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 tax-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 tax-qualified
plan should consider those rules in the context of the particular circumstances
of the tax-qualified plan before authorizing an investment of a portion of the
tax-qualified plan's assets in units.
Prohibited Transactions Under ERISA and the Code. Section 4975 of the Code
(which applies to all tax-qualified plans and IRAs) and Section 406 of ERISA
(which does not apply to IRAs or to certain tax-qualified plans that, under the
rules summarized above, are not subject to ERISA's fiduciary rules) prohibit
tax-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 tax-qualified plan or IRA, officers,
directors, shareholders and other owners of the company sponsoring the
tax-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 tax-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 tax-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 tax-qualified plan or IRA in
connection with a transaction involving the assets of the tax-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 tax-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 tax-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
tax-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, tax-qualified plans and IRAs should be
alert to the potential for prohibited transactions that may occur in the context
of a particular tax-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 tax-qualified plans and/or IRAs holding units,
fiduciaries and other "parties in interest" or "disqualified persons" of such
tax-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 or ERISA with respect to such
tax-qualified plans and IRAs, even if their acquisition of units did not
originally constitute a prohibited transaction. Moreover, fiduciaries with
responsibilities to tax-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 tax-qualified
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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
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 IRS 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 they intend to prohibit transfers of units only to the extent
necessary to avoid publicly traded partnership status (See "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES - Publicly Traded Partnerships" at page 71). 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 Benefit Plan Investors, such as
tax-qualified pension or 401(k) plans or IRAs 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 Benefit Plan
Investors subject to the annual reporting requirements of ERISA or the Code 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 Benefit
Plan Investors. 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," an investment in any
units by a Benefit Plan Investor, such as a tax-qualified pension or 401(k) plan
or an IRA will cause an undivided interest in each of the underlying assets of
the partnership to be considered "plan assets" subject to the fiduciary
provisions of ERISA and to the prohibited transaction provisions of ERISA and
Section 4975 of the Code. 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 tax-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
80
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 could be personally liable for any losses to a
tax-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 tax-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 tax-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;
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 81).
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 84).
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 partner 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
81
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;
o amend the limited partnership agreement, subject to certain limitiations;
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.
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
aggregate capital contribution of the limited partners.
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 that may be
required to effect the continuation of the partnership, the admission of an
additional partner or substitute partner or the dissolution or termination of
the partnership.
Net Profits and Net Losses. Net profits and net losses of the partnership
will be allocated among the limited partners according to their respective
outstanding capital accounts. One percent (1%) of all partnership net profit and
net 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 those
limited partners who elect to retain their earnings with us (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 limited partners who elect to 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. If limited partners representing such ten percent (10%) interests
present to the general partners a request for a meeting, the general partners
shall fix a date for such meeting and shall, within twenty (20) days after
receipt of such request, notify all of the limited partners of the meeting's
date. 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.
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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 the Commissioner's rules. In addition,
you will not be permitted to make any transfer or assignment of your units 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.
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, if the business of the partnership is continued, then
the 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. If a general partner retires and the business of the
partnership is not continued, then the retiring partner shall receive from the
partnership such sums as the partner may be entitled to receive in the course of
terminating the partnership and winding up its affairs, as discussed below. 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.
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, unless earlier
terminated pursuant to the provisions of the partnership agreement or by
operation of law. 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 as of the time of the sale; 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
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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 (b)(2) of Rule 2810 to the NASD's Conduct Rules. The member
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.
The partnership agreement provides that an assignee of a limited
partnership interest shall not be substituted as a limited partner if the
general partners determine that:
o the assignee is a minor or incompetent (unless a guardian, custodian or
conservator has been appointed to handle the affairs of such person);
o the assignment is not permitted under applicable law, including, in
particular but without limitation, applicable federal and state securities laws;
or
o such assignment would jeopardize the partnership's existence or
qualification as a limited partnership under California law or the applicable
laws of any other jurisdiction in which the partnership is then conducting
business.
Restrictions Related to Tax Status. In addition to the transfer
restrictions described above, Section 7.3 of the partnership agreement provides
that any proposed sale, assignment or other transfer of a partnership interest
shall be void ab initio if either:
o the transfer or assignment would cause a termination of the partnership
for federal or California income tax purposes, when considered together with
other transfers or assignments of interests during the twelve month period that
is relevant to that determination, or
o the general partners determine that the 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 regulations or rules
promulgated thereunder.
The partnership agreement also provides that a transferee or assignee of an
interest shall not be substituted as a limited partner if the general partners
determine that the sale or transfer of the interest may jeopardize the continued
ability of the partnership to qualify as a "partnership" for federal income tax
purposes.
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, except in the event of your death
within the first year of your purchase of units. (See "Liquidation Upon Death"
at page 85.) 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.
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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 withdrawal is subject to a ten percent (10%) early
withdrawal penalty. The notice for such withdrawal must be given in writing
thirty (30) days prior to the end of the preceding quarter and must state the
amount to be withdrawn and may be addressed to any general partner. 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 87).
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
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 based on his or her the
current capital account. 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, including in the event of your death during the first year of your
ownership of partnership units, 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 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).
The general partners shall have the right to liquidate the capital account
of any investor whose capital account balance is less than $1,000. 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 to Benefit Plan Investors
withdrawing capital accounts after five (5) years, over four (4) quarterly
installments (which need such sums to pay retirement benefits), then to other
limited partners withdrawing capital accounts after five (5) years over four (4)
quarterly installments, then to executors, heirs or other administrators
withdrawing capital accounts upon the death of a limited partner and finally to
all other limited partners withdrawing capital accounts. Except as provided
above, withdrawal requests will be considered by the general partners in the
order received.
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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.
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 10.14 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 Profit and Net Loss. Net Profit and Net Loss for
accounting and tax purposes for each fiscal quarter shall be allocated to the
partners as set forth in Article V of the limited partnership agreement. Net
Profit and Net Loss will generally 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 registered public
accounting firm 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 balance sheet of the partnership, and statements
of income, changes in partners' capital and cash flow. 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.
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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 shall be sent promptly
to limited partners after such report is filed with the Securities and Exchange
Commission. If and when such reports are not required to be filed, you will be
furnished, promptly after the end of each of the first three quarters of each
partnership fiscal year, an unaudited financial report for that period including
a balance sheet, a statement of income, a cash flow statement and an audited
financial report 120 days after the calendar year including a balance sheet,
statements of income and changes in partners' capital and cash flow. 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.
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
100,000,000 units ($100,000,000) 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 retain
their earnings. The issuer pays higher commissions for such latter subscriptions
because it is advantageous for the issuer if earnings are retained in that it
provides the issuer with additional capital over time for which the issuer is
not paying an additional commission. 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,
including reimbursements for training and education meetings for associated
persons of an NASD member, payable by the partnership. In no event will the
total of all compensation payable to participating broker dealers, including
sales commissions, expense reimbursements, including reimbursements for training
and education meetings for associated persons of an NASD member, 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, including reimbursements for training and
education meetings for associated persons of an NASD member, 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 in turn may specially allocate the
amounts so paid 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
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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, including
reimbursements for training and education meetings for associated persons of an
NASD member, 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.
Payment of Sales Commissions. As of December 31, 2004, total commissions
have averaged 7.5% of limited partner units sold in all the public offerings of
partnership units 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"). 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) our
suitability standards and minimum purchase requirement and (ii) any additional
suitability standards and minimum purchase requirements, if any, imposed by the
state in which you reside (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.
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 accounts. 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. pays all
such selling commissions in return for its exclusive right to provide brokerage
services in connection with the mortgage loans made by the partnership. Redwood
Mortgage Corp. funds its payment of such selling commissions from a formation
loan that it receives 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 compound 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
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commission and then over time repays the partnership the amount of the loan,
which in the case of our example, is $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 and assuming that all $100,000,000 of
partnership units being offered hereby are sold, the formation loan could range
from a minimum of $5,000,000 assuming all investors elected to receive current
cash distributions to a maximum of $9,000,000 assuming all investors elected to
compound their earnings.
Initially, upon the commencement of this offering, approximately eighty
five percent (85%) of each dollar invested will be available for loans or held
in cash reserves assuming that all units offered hereby are purchased and no
leveraged funds are utilized. However, when Redwood Mortgage Corp. repays the
entire formation loan, approximately ninety-six percent (96%), will be available
for investment in loans or be held in cash reserves.
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. This is based
on historical experience of the general partners, who 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.
The formation loan for the third offering of units ($30,000,000) totaled
$2,218,000 which represented 7.4% of the limited partners' contributions of
$29,999,000. The first payment was due on December 31, 2001. Payments were due
on the third formation loan at 1/10 of the outstanding principal balance of the
formation loan until the offering terminated. Then after the offering terminated
in April, 2002, the remaining balance at December 31, 2002 is being paid in
equally amortized payments over 10 years, which began December 31, 2003. The
final payment will be due December 31, 2013 unless prepaid earlier.
The formation loan for the fourth offering of units ($50,000,000) totaled
$3,777,000 which represented 7.6% of the limited partners' contributions of
$49,985,000. The first payment was due on December 31, 2004. Payments were due
on the fourth formation loan of 1/10 of the outstanding principal balance of the
formation loan until the offering terminated. Then after the offering terminated
in October, 2003, the remaining balance at December 31, 2003 is being paid in
equally amortized payments over 10 years, which began December 31, 2004. The
final payment will be due December 31, 2014 unless prepaid earlier.
As of December 31, 2004, the partnership, in connection with the fifth
formation loan, had loaned $3,570,000 to Redwood Mortgage Corp. from the
offering proceeds to pay sales commissions to the participating broker dealers.
This represents 7.5% of limited partner contributions of $47,314,000. Payment on
the fifth 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 was made on or before December 31, 2004.
89
The following table summarizes the payments that have been made on the
five formation loans through December 31, 2004.
Formation Loans and Payments
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Principal Principal Principal Principal
advanced 1st advanced 2nd advanced 3rd advanced 4th advanced 5th
Year offering offering offering offering offering
- -------------------------------------------------------------------------------------------------------------------------
1993 $206,000 - - - -
1994 319,000 - - - -
1995 250,000 - - - -
1996 300,000 $15,000 - - -
1997 - 421,000 - - -
1998 - 404,000 - - -
1999 - 708,000 - - -
2000 - 724,000 $378,000 - -
2001 - - 1,462,000 - -
2002 - - 378,000 $1,300,000 -
2003 2,477,000 $453,000
2004 3,117,000
=========================================================================================================================
Total $1,075,000 $2,272,000 $2,218,000 $3,777,000 $3,570,000
Formation Loans and Payments
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Payments
received from Application
Total Redwood of early withdrawal Total
Year payments due Mortgage Corp. penalties applied Balance
- -------------------------------------------------------------------------------------------------------------------------
1993 - - $206,000
1994 - - 525,000
1995 - - 775,000
1996 $- $9,000 $7,000 $16,000 1,074,000
1997 109,000 99,000 9,000 108,000 1,387,000
1998 151,000 134,000 16,000 150,000 1,641,000
1999 186,000 165,000 25,000 190,000 2,159,000
2000 248,000 230,000 20,000 250,000 3,011,000
2001 339,000 300,000 46,000 346,000 4,127,000
2002 488,000 530,000 18,000 548,000 5,257,000
2003 636,000 575,000 62,000 637,000 7,550,000
2004 916,000 855,000 61,000 916,000 9,751,000
==========================================================================================================================
Total $3,073,000 $2,897,000 $264,000 $3,161,000
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.
90
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 offering expenses or other proper partnership
activities (See "ESTIMATED USE OF PROCEEDS" at page 21). 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.
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;
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
91
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 MATTERS
Legal matters, including certain U.S. federal income tax and ERISA matters,
in connection with the units offered hereby will be passed upon for the
partnership by Morrison & Foerster LLP, 755 Page Mill Road, Palo Alto,
California 94304, 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 consolidated financial statements of the partnership at December 31,
2004 and 2003 and for each of the years in the three year period ended December
31, 2004, the balance sheet at December 31, 2004 of Gymno Corporation, a general
partner, and the balance sheet at September 30, 2004 of Redwood Mortgage Corp, a
general partner, all included in this prospectus have been examined by Armanino
McKenna LLP, registered public accounting firm, 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.
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.
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.
92
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.
Each partner's capital account shall also be subject to the further
adjustments described in the partnership agreement.
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 Profit or Net Loss. The term "Net Profit or Net Loss" means for each
fiscal year or any other period for which allocations are made under the
partnership agreement, the "Profits" or "Losses" of the partnership as defined
in the partnership agreement. In brief, such amount equals 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), but subject
to the further adjustments set forth in the partnership agreement, a copy of
which is attached to this prospectus.
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) and any other investor that qualifies for
an exemption from federal income tax.
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.
93
INDEX TO THE FINANCIAL STATEMENTS
Redwood Mortgage Investors VIII
Report of Independent Registered Public Accounting Firm......................91
Consolidated Financial Statements, December 31, 2004 and
2003 and for each of the three years in the period ended
December 31, 2004...........................................................92
Interim Consolidated Condensed Financial Statements, as of
March 31, 2005 and 2004 and for the quarters then ended (unaudited)........111
GYMNO Corporation
Report of Independent Registered Public Accounting Firm.....................122
Balance Sheet as of December 31, 2004.......................................123
Interim Balance Sheet, as of March 31, 2005 (unaudited).....................127
Redwood Mortgage Corp.
Report of Independent Registered Public Accounting Firm.....................130
Balance Sheet as of September 30, 2004......................................131
Interim Balance Sheet, as of March 31, 2005 (unaudited).....................138
94
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2004
95
ARMANINO McKENNA LLP
CERTIFIED PUBLIC ACCOUNTANTS
12667 Alcosta Boulevard, Suite 500
San Ramon, CA 94583
(925) 790-2600
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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,
2004 and 2003 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, 2004. These consolidated financial statements are the
responsibility of Redwood Mortgage Investors VIII'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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. Redwood Mortgage
Investors VIII is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of Redwood
Mortgage Investors VIII's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Redwood Mortgage Investors VIII as of December 31, 2004 and 2003 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 in conformity with generally
accepted accounting principles 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. Schedules 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 14, 2005
(except for footnote 14,
for which the date is March 10, 2005)
96
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Balance Sheets
December 31, 2004 and 2003
(in thousands)
ASSETS
2004 2003
------------- -------------
Cash and cash equivalents $ 16,301 $ 8,921
------------- -------------
Loans
Loans secured by deeds of trust 171,745 147,174
Loans, unsecured 34 34
Allowance for loan losses (2,343) (2,649)
------------- -------------
Net loans 169,436 144,559
------------- -------------
Interest and other receivables
Accrued interest and late fees 4,895 4,735
Advances on loans 131 416
------------- -------------
Total interest and other receivables 5,026 5,151
------------- -------------
Other assets
Loan origination fees, net 62 44
Real estate held for sale, net 9,793 3,979
------------- -------------
Total other assets 9,855 4,023
------------- -------------
Total assets $ 200,618 $ 162,654
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ 16,000 $ 22,000
Accounts payable 25 224
Payable to affiliate 638 448
------------- -------------
Total liabilities 16,663 22,672
------------- -------------
Investors in applicant status 424 1,210
------------- -------------
Partners' capital
Limited partners' capital, subject to redemption, net of
unallocated syndication costs of $1,084 and $875 for
2004 And 2003, respectively; and net of formation loan
receivable of $9,751 and $7,550 for 2004 and 2003,
respectively 183,368 138,649
General partners' capital, net of unallocated syndication
costs of $11 and $9 for 2004 and 2003, respectively 163 123
------------- -------------
Total partners' capital 183,531 138,772
------------- -------------
Total liabilities and partners' capital $ 200,618 $ 162,654
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
97
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Income
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands, except for per limited partner amounts)
2004 2003 2002
------------- -------------- -------------
Revenues
Interest on loans $ 16,437 $ 12,496 $ 11,416
Late fees 218 201 114
Other 478 261 161
------------- -------------- -------------
17,133 12,958 11,691
------------- -------------- -------------
Expenses
Mortgage servicing fees 1,565 1,057 1,098
Interest expense 622 71 516
Amortization of loan origination fees 56 23 12
Provision for losses on loans 1,146 782 780
Provision for losses on real estate held for sale - - 500
Asset management fees 630 468 325
Clerical costs from Redwood Mortgage Corp. 307 290 266
Professional services 211 111 66
Broker expense - 181 444
Amortization of discount on imputed interest 319 195 154
Other 145 228 44
------------- -------------- -------------
5,001 3,406 4,205
------------- -------------- -------------
Income before minority interest 12,132 9,552 7,486
Minority interest share of subsidiary loss - 42 -
------------- -------------- -------------
Net income $ 12,132 $ 9,594 $ 7,486
============= ============== =============
Net income
General partners (1%) $ 121 $ 96 $ 75
Limited partners (99%) 12,011 9,498 7,411
------------- -------------- -------------
$ 12,132 $ 9,594 $ 7,486
============= ============== =============
Net income per $1,000 invested by
limited partners for entire period
Where income is compounded $ 72 $ 78 $ 87
Where partner receives income in monthly distributions $ 70 $ 75 $ 84
The accompanying notes are an integral part of these consolidated financial
statements.
98
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Changes in Partners' Capital
For the Years Ended December 31, 2004, 2003 and 2002
(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, 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
Contributions on application 40,954 - - - -
Formation loan increases - - - (3,117) (3,117)
Formation loan payments received - - - 855 855
Interest credited to partners in applicant
status 20 - - - -
Interest withdrawn (8) - - - -
Transfers to partners' capital (41,752) 41,752 - - 41,752
Net income - 12,011 - - 12,011
Syndication costs incurred - - (417) - (417)
Allocation of syndication costs - (192) 192 - -
Partners' withdrawals - (6,365) - - (6,365)
Early withdrawal penalties - (77) 16 61 -
------------ ------------ ------------- ------------ ------------
Balances at December 31, 2004 $ 424 $ 194,203 $ (1,084) $ (9,751) $ 183,368
============ ============ ============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
99
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Changes in Partners' Capital (continued)
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands)
General Partners
------------------------------------------------
Capital Total
Account Unallocated General Total
General Syndication Partners' Partners'
Partners Costs Capital Capital
-------------- -------------- ------------- --------------
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
Contributions on application - - - -
Formation loan increases - - - (3,117)
Formation loan payments received - - - 855
Interest credited to partners in applicant status - - - -
Interest withdrawn - - - -
Capital contributed 41 - 41 41,793
Net income 121 - 121 12,132
Syndication costs incurred - (4) (4) (421)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (118) - (118) (6,483)
Early withdrawal penalties - - - -
-------------- -------------- ------------- --------------
Balances at December 31, 2004 $ 174 $ (11) $ 163 $ 183,531
============== ============== ============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
100
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands)
2004 2003 2002
------------ ------------- ------------
Cash flows from operating activities
Net income $ 12,132 $ 9,594 $ 7,486
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization of loan fees 56 23 12
Imputed interest income (319) (195) (154)
Amortization of discount 319 195 154
Provision for loan and real estate losses 1,146 782 1,280
Realized loss on sale of real estate - 127 -
Minority interest share of subsidiary loss - (42) -
Change in operating assets and liabilities
Unsecured loans - - 4
Accrued interest and late fees (2,566) (3,448) (1,253)
Advances on loans 74 (500) (312)
Other receivables - 888 (888)
Loan origination fees (74) (45) (28)
Accounts payable (199) (225) 375
Payable to affiliate 190 154 185
Deferred interest - (112) 112
------------ ------------- ------------
Net cash provided by operating activities 10,759 7,196 6,973
------------ ------------- ------------
Cash flows from investing activities
Loans originated (81,579) (96,820) (32,601)
Principal collected on loans 52,359 35,097 26,083
Payments for development of real estate - (706) (219)
Proceeds from disposition of real estate - 6,036 -
------------ ------------- ------------
Net cash used in investing activities (29,220) (56,393) (6,737)
------------ ------------- ------------
Cash flows from financing activities
Borrowings (repayments) on line of credit, net (6,000) 22,000 (11,400)
Repayments on note payable - (1,782) (7)
Contributions by partner applicants 41,007 40,093 21,586
Partners' withdrawals (6,483) (5,223) (3,616)
Syndication costs paid (421) (483) (381)
Formation loan lending (3,117) (2,929) (1,677)
Formation loan collections 855 575 530
Distributions to minority interest - (1,321) -
------------ ------------- ------------
Net cash provided by financing activities 25,841 50,930 5,035
------------ ------------- ------------
Net increase in cash and cash equivalents 7,380 1,733 5,271
Cash and cash equivalents - beginning of year 8,921 7,188 1,917
------------ ------------- ------------
Cash and cash equivalents - end of year $ 16,301 $ 8,921 $ 7,188
============ ============= ============
Supplemental disclosures of cash flow information
Cash paid for interest $ 622 $ 71 $ 516
The accompanying notes are an integral part of these consolidated financial
statements.
101
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
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, 2004, the Partnership
was in its fifth offering stage, wherein contributed capital totaled
$172,223,000 of approved aggregate offerings of $200,000,000. As of December 31,
2004 and 2003, $424,000 and $1,210,000, respectively, remained in applicant
status, and total Partnership units sold were in the aggregate of $172,223,000
and $131,269,000, 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.
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. Payments on this loan were also made during the offering period prior to
the close of the offering.
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 being repaid, without interest, in ten annual installments of
$178,000, which commenced on January 1, 2003, following the year the third
offering closed. Payments on this loan were also made during the offering stage
prior to the close of the offering.
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 being repaid, without interest, in ten annual installments of $365,000,
which commenced on January 1, 2004, following the year the fourth offering
closed. Payments on this loan were also made during the offering stage prior to
the close of the offering.
102
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
1. Organizational and General (continued)
Sales commissions - formation loans (continued)
The formation loan relating to the fifth offering ($75,000,000) totaled
$3,570,000 as of December 31, 2004, which was 7.5% of the limited partners
contributions of $47,314,000 through December 31, 2004. An equal annual
repayment schedule on this loan, without interest, will commence in the year
subsequent to the closing of this offering. Payments on this loan are being made
during the offering stage prior to the close of the offering.
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, 2004
(in thousands):
Initial Second 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 $ 47,314 $172,223
Formation loan made $ 1,075 $ 2,272 $ 2,218 $ 3,777 $ 3,570 $ 12,912
Discount on
imputed interest (25) (303) (291) (571) (748) (1,938)
Formation loan
made, net 1,050 1,969 1,927 3,206 2,822 10,974
Repayments to date (785) (1,013) (558) (495) (45) (2,896)
Early withdrawal
penalties applied (75) (112) (78) - - (265)
------------ ------------- ------------ ------------- ------------ -----------
Formation loan, net
at December 31, 2004 190 844 1,291 2,711 2,777 7,813
Unamortized discount
on imputed interest 25 303 291 571 748 1,938
Balance,
December 31, 2004 $ 215 $ 1,147 $ 1,582 $ 3,282 $ 3,525 $ 9,751
============ ============= ============ ============= ============ ===========
Percent loaned 7.2% 7.6% 7.4% 7.6% 7.5% 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. An
estimated amount of imputed interest is recorded for offerings still
outstanding. During 2004, 2003 and 2002 amortization expense of $319,000,
$195,000 and $154,000, respectively, was recorded related to the discount on
imputed interest.
103
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
1. Organizational and General (continued)
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, 2004, syndication costs of $2,974,000 had been
incurred by the Partnership with the following distribution (in thousands):
Costs incurred $ 2,974
Early withdrawal penalties applied (104)
Allocated to date (1,775)
-----------
December 31, 2004 balance $ 1,095
===========
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 2.1% 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, 2004, the fifth offering
had incurred syndication costs of $505,000 (1.1% 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.
104
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
2. Summary of Significant Accounting Policies
Basis of presentation
The Partnership's consolidated financial statements include the accounts of
its 100%-owned subsidiaries, Russian Hill Property Company, LLC ("Russian") and
Borrette Property Company, LLC ("Borrette"), 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.
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 as earned.
If the probable ultimate recovery of the carrying amount of a loan, with
due consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement, and the shortfall in
the amounts due are not insignificant, the carrying amount of the loan is
reduced to the present value of future cash flows discounted at the loan's
effective interest rate. If a loan is collateral dependent, it is valued at the
estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances,
including accrued interest and advances. At December 31, 2004 and 2003, there
were no loans categorized as impaired by the Partnership. The average recorded
investment in impaired loans was $0 for 2004 and 2003 and $355,000 for 2002.
At December 31, 2004 and 2003, the Partnership had eleven and sixteen loans
past maturity or past due 90 days or more in interest payments totaling
$25,013,000 and $27,182,000, respectively. In addition, accrued interest, late
charges and advances on these loans totaled $3,202,000 and $3,813,000 at
December 31, 2004 and 2003, 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, 2004 and 2003 was 56.94% and 53.97%, 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.
105
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
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, 2004
and 2003 was as follows (in thousands):
2004 2003
------------ -----------
Specified loans $ 137 $ 49
General 2,206 2,600
------------ -----------
$ 2,343 $ 2,649
============ ===========
Activity in the allowance for loan losses is as follows for the years ended
December 31 (in thousands):
2004 2003 2002
----------- ----------- ----------
Beginning balance $ 2,649 $ 3,021 $ 2,247
Restructured loans - - 11
Additions charged to income 1,146 782 780
Transfers (500) - -
Write-offs (952) (1,154) (17)
----------- ----------- ----------
$ 2,343 $ 2,649 $ 3,021
=========== =========== ==========
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.
106
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
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 2004, 2003 and 2002, late fee revenue of $218,000, $201,000 and
$114,000, respectively, was recorded. The Partnership has a recorded late fee
receivable at December 31, 2004 and 2003 of $180,000 and $193,000, respectively.
Recently issued accounting pronouncements
In December 2003, the American Institute of Certified Public Accountants
(AICPA) Accounting Standards Executive Committee (AcSEC) issued Statement of
Position 03-03, "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer"(SOP 03-3). SOP 03-03 is effective for loans acquired in fiscal years
beginning after December 15, 2004, with early adoption encouraged. SOP 03-03
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt securities acquired in a transfer if those differences are attributable, at
least in part, to credit quality. It includes loans acquired in business
combinations and applies to all nongovernmental entities, including
not-for-profit organizations. The SOP does not apply to loans originated by the
entity. The implementation of SOP 03-03 is not expected to have any significant
effect on the Partnership.
3. Other Partnership Provisions
The Partnership is a California limited partnership. The rights, duties and
powers of the general and limited partners of the Partnership are governed by
the limited partnership agreement and Sections 15611 et seq. of the California
Corporations Code.
The general partners are in complete control of the Partnership business,
subject to the voting rights of the limited partners on specified matters. Any
one of the general partners acting alone has the power and authority to act for
and bind the Partnership.
107
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
3. Other Partnership Provisions (continued)
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 subscription funds are needed to fund a loan,
to fund the formation loan, create appropriate reserves, or to pay
organizational expense or other proper partnership purposes. 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 2004, 2003 and 2002, interest totaling $20,000, $37,000 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.
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.
108
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
3. Other Partnership Provisions (continued)
Liquidity, capital withdrawals and early withdrawals (continued)
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.
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 general partners may collect an amount equivalent to
12% of the loaned amount until 6 months after the termination date of the
offering. Thereafter, loan brokerage commissions (points) will be limited to an
amount not to exceed 4% of the total Partnership assets per year. The loan
brokerage commissions are paid by the borrowers and thus, are not an expense of
the Partnership. In 2004, 2003 and 2002, loan brokerage commissions paid by the
borrowers were $2,443,000, $2,621,000 and $996,000, 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
$1,565,000, $1,057,000 and $1,098,000 were incurred for 2004, 2003 and 2002,
respectively. The Partnership had a payable to Redwood Mortgage Corp. for
servicing fees of $638,000 and $448,000 at December 31, 2004 and 2003,
respectively.
Asset management fee
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations up to 1/32 of 1% of the "net asset value" (3/8 of
1% annual). Asset management fees of $630,000, $468,000 and $325,000 were
incurred for 2004, 2003 and 2002, respectively.
109
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
4. 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
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 2004, 2003 and 2002,
operating expenses totaling $307,000, $290,000 and $266,000, 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, 2004 and
2003, Gymno Corporation, a general partner, had capital in accordance with
Section 4.02(a) of the Partnership Agreement.
5. Real Estate Held for Sale
The following schedule reflects the cost of the properties and recorded
reductions to estimated fair values, including estimated costs to sell, at
December 31 (in thousands):
2004 2003
------------ -----------
Costs of properties $ 10,793 $ 4,479
Reduction in value (1,000) (500)
------------ -----------
Real estate held for sale, net $ 9,793 $ 3,979
============ ===========
In December, 2004, the Partnership acquired land through a deed in lieu of
foreclosure. At this date the Partnership's investment totaled $4,377,000
including accrued interest and advances. Management believes that the full value
of this investment will be recovered from eventual sale of the property based
upon its current estimate of the property's fair value.
In September, 2004, the Partnership acquired a single family residence
through a foreclosure sale. At the time the Partnership took ownership of the
property, the Partnership's investment totaled $1,937,000 including accrued
interest and advances. The borrower had begun a substantial renovation of the
property, which was not completed at the time of foreclosure. The Partnership
has decided to pursue development of the property by processing plans for the
creation of two condominium units on the property. These plans will incorporate
the majority of the existing improvements currently located on the property.
Management has transferred $500,000 from the allowance for loan losses as a
reserve to cover potential losses for this property, based upon .management's
estimate of the fair value of the property.
110
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
5. Real Estate Held for Sale (continued)
During 2002, the Partnership contributed its interests in two foreclosed
real properties into two limited liability companies ("LLCs").
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 and
development of this property were capitalized during 2003. Commencing January
2004, costs related to sales and maintenance of the property are being expensed.
At December 31, 2004 and 2003, the Partnership's total investment in Russian was
$3,979,000, 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 a portion of 2003. As of December 31, 2003,
advances of approximately $132,000 were made for construction and other related
development costs and $48,000 of interest expense was capitalized, respectively.
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 $42,000,000 bank line of credit through November 25,
2005, with borrowings at prime and secured by its loan portfolio. The
outstanding balances were $16,000,000 and $22,000,000 at December 31, 2004 and
2003, respectively. The interest rate was 5.00% at December 31, 2004 and 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, 2004 and 2003.
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.
111
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
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):
2004 2003
------------- -------------
Partners' capital per consolidated
financial statements $ 183,531 $ 138,772
Non-allocated syndication costs 1,095 884
Allowance for loan losses and
real estate held for sale 3,343 3,149
Formation loans receivable 9,751 7,550
------------- -------------
Partners' capital - tax basis $ 197,720 $ 150,355
============= =============
In 2004 and 2003, approximately 48% and 47%, respectively, of taxable
income was allocated to tax-exempt organizations (i.e., retirement plans).
9. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
(a) Cash and cash equivalents. The carrying amount equals fair value. All
amounts, including interest bearing, are subject to immediate withdrawal.
(b) Secured loans carrying value was $171,745,000 and $147,174,000 at
December 31, 2004 and 2003, respectively. The fair value of these loans of
$173,067,000 and $148,552,000, 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 2004, the Partnership foreclosed on, or acquired property through
deeds in lieu of foreclosure, four properties (see Note 5), which resulted in an
increase in real estate held for sale and allowance for real estate held for
sale of $6,315,000 and $500,000, respectively and a decrease in loans
receivable, accrued interest, advances and allowance for loan losses of
$4,422,000, $1,840,000, $53,000 and $500,000, respectively.
During 2003, the Partnership restructured three loans that resulted in an
increase to secured 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 secured loans receivable of $34,000 and an increase to unsecured
loans of $34,000.
112
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
11. Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At December 31, 2004 and
2003, there were 75 and 81 secured loans outstanding, respectively, with the
following characteristics (dollars in thousands):
2004 2003
------------- ------------
Number of secured loans outstanding 75 81
Total secured loans outstanding $ 171,745 $ 147,174
Average secured loan outstanding $ 2,289 $ 1,817
Average secured loan as percent of total secured loans 1.33% 1.23%
Average secured loan as percent of partners' capital 1.25% 1.31%
Largest secured loan outstanding $ 12,045 $ 16,010
Largest secured loan as percent of total secured loans 7.01% 10.88%
Largest secured loan as percent of partners' capital 6.56% 11.54%
Largest secured loan as a percent of total assets 6.00% 9.84%
Number of counties where security
is located (all California) 17 20
Largest percentage of secured loans
in one county 20.48% 26.47%
Average secured loan to appraised value
of security based on appraised values and
prior liens at time loan was consummated 56.94% 53.97%
Number of secured loans in foreclosure status 6 3
Amount of secured loans in foreclosure $ 14,682 $ 2,931
113
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
11. Asset Concentrations and Characteristics (continued)
The following secured loan categories were held at December 31, 2004 and
2003 (in thousands):
2004 2003
-------------- -------------
First trust deeds $ 115,082 $ 84,437
Second trust deeds 50,282 61,247
Third trust deeds 6,381 1,490
-------------- -------------
Total loans 171,745 147,174
Prior liens due other lenders at time of loan 99,140 116,870
-------------- -------------
Total debt $ 270,885 $ 264,044
============== =============
Appraised property value at time of loan $ 475,710 $ 489,219
Total secured loans as a percent of appraisals 56.94% 53.97%
Secured loans by type of property
Owner occupied homes $ 9,234 $ 13,656
Non-owner occupied homes 75,125 52,975
Apartments 30,981 22,649
Commercial 54,670 52,502
Land 1,735 5,392
-------------- -------------
$ 171,745 $ 147,174
============== =============
The interest rates on the loans range from 8.50% to 13.25% at December 31,
2004 and 7.50% to 18.00% at December 31, 2003.
Scheduled maturity dates of secured loans as of December 31, 2004 are as
follows (in thousands):
Year Ending December 31,
-----------------------------------
2005 $ 68,761
2006 68,829
2007 21,185
2008 3,629
2009 8,844
Thereafter 497
-------------
$ 171,745
=============
114
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
11. Asset Concentrations and Characteristics (continued)
The scheduled maturities for 2005 include six loans totaling $8,047,000,
and representing 4.69% of the portfolio, which are past maturity at December 31,
2004. Interest payments on three of these loans were delinquent and are included
in the total of loans 90 days or more delinquent presented in Note 2. Several
borrowers are in process of selling the properties or refinancing their loans
through other institutions, to take advantage of lower interest rates.
Occasionally, the Partnership allows borrowers to continue to make the payments
on debt past maturity for periods of time. Of these six past maturity loans, the
Partnership has begun foreclosure proceedings by filing a notice of default, on
four with aggregate principal balances totaling $7,439,000.
Cash deposits at December 31, 2004 exceeded FDIC insurance limits (up to
$100,000 per bank) by approximately $10,744,000.
12. Commitments and Contingencies
Construction / rehabilitation loans
The Partnership makes construction and rehabilitation loans which are not
fully disbursed at loan inception. The Partnership has approved the borrowers up
to a maximum loan balance; however, disbursements are made periodically during
completion phases of the construction or rehabilitation or at such other times
as required under the loan documents. At December 31, 2004, there were
$18,166,000 of undisbursed loan funds which will be funded by a combination of
borrower monthly mortgage payments, line of credit draws, retirements of
principal on current loans, cash and capital contributions from investors. The
Partnership does not maintain a separate cash reserve to hold the undisbursed
obligations, which are intended to be funded.
Workout agreements
The Partnership has negotiated various workout agreements with borrowers
whose loans are past maturity or who are delinquent in making payments. The
Partnership is not obligated to fund additional money as of December 31, 2004.
There are eight loans totaling $8,415,000 in workout agreements as of December
31, 2004.
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.
115
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
13. Selected Financial Information (Unaudited)
Calendar Quarter
(in thousands, except for per limited partner amounts)
-------------------------------------------------------
First Second Third Fourth Annual
---------- ---------- ---------- ---------- ----------
Revenues
2004 $ 3,850 $ 3,785 $ 4,504 $ 4,994 $17,133
2003 $ 2,789 $ 3,072 $ 3,225 $ 3,872 $12,958
Expenses
2004 $ 1,117 $ 907 $ 1,418 $ 1,559 $ 5,001
2003 $ 659 $ 711 $ 722 $ 1,272 $ 3,364
Net income allocated to general partners
2004 $ 27 $ 29 $ 31 $ 34 $ 121
2003 $ 21 $ 24 $ 25 $ 26 $ 96
Net income allocated to limited partners
2004 $ 2,706 $ 2,849 $ 3,055 $ 3,401 $12,011
2003 $ 2,109 $ 2,337 $ 2,478 $ 2,574 $ 9,498
Net income per $1,000 invested
where income is
Reinvested and compounded
2004 $ 18 $ 18 $ 18 $ 18 $ 72
2003 $ 20 $ 19 $ 18 $ 21 $ 78
Withdrawn
2004 $ 18 $ 17 $ 17 $ 18 $ 70
2003 $ 20 $ 19 $ 18 $ 18 $ 75
14. Subsequent Events
Subsequent to December 31, 2004 and through February 11, 2005, the
Partnership had received $5,091,000 of new investor money for the current
offering and had admitted $3,668,000 of partners in applicant status into the
Partnership. The admitted amount includes $424,000 that awaited admission at
December 31, 2004.
Subsequent to December 31, 2004 and through February 11, 2005, the
Partnership had foreclosed and acquired one property. As of December 31, 2004,
the Partnership's investment in the loan totaled $1,336,000.
Due to a calendaring oversight, the Partnership did not timely renew its
permit with the California Department of Corporations ("DOC"). Upon discovery of
this oversight, the Partnership applied for and received from the DOC a new
permit allowing the Partnership to continue sales in California. To correct the
$16,370,000 in sales that occurred without a permit from the DOC in place, the
Partnership offered to repurchase the Units sold during this period. Upon
expiration of the offer in March 2005, $74,000 was repurchased by the
Partnership.
116
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Schedule II - Valuation and Qualifying Accounts
December 31, 2004
(in thousands)
Col B. Col. C - Additions Col E.
--------------------------------
Col A. Balance at Charged to Charged Balance
Beginning Costs and to Other Col. D at End
Description of Period Expenses Accounts Deductions of Period
- ---------------------------------------- -------------- -------------- -------------- --------------- ------------
Year Ended December 31, 2002
Deducted from asset accounts
Allowance for loan losses $ 2,247 $ 780 $ 11 (a) $ (17) (b) $ 3,021
Cumulative write-down of
real estate held for sale (REO) - 500 - - 500
-------------- -------------- -------------- --------------- ------------
$ 2,247 $ 1,280 $ 11 $ (17) (b) $ 3,521
============== ============== ============== =============== ============
Year Ended December 31, 2003
Deducted from asset accounts
Allowance for loan losses $ 3,021 $ 782 $ - $ (1,154) (b) $ 2,649
Cumulative write-down of
real estate held for sale (REO) 500 - - - 500
-------------- -------------- -------------- --------------- ------------
$ 3,521 $ 782 $ - $ (1,154) (b) $ 3,149
============== ============== ============== =============== ============
Year Ended December 31, 2004
Deducted from asset accounts
Allowance for loan losses $ 2,649 $ 1,146 $ (500) $ (952) (b) $ 2,343
Cumulative write-down of
real estate held for sale (REO) 500 - 500 - 1,000
-------------- -------------- -------------- --------------- ------------
$ 3,149 $ 1,146 $ - $ (952) (b) $ 3,343
============== ============== ============== =============== ============
(a) - Represents restructuring of loans.
(b) - Represents write-offs of loans.
117
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Schedule IV - Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
(in thousands)
Col.H
Principal
Col. F Amount
Face Col. G of Loans
Col. C Col. D Amount of Carrying Subject to Col. I Col. J
Col. B Final Periodic Col. E Mortgage Amount of Delinquent Type California
Col. A Interest Maturity Payment Prior Original Mortgage Principal of Geographic
Descrip. Rate Date Terms Liens Amount Investment Or Interest Lien Location
- --------------------------------------------------------------------------------------------------------------------------------
Comm. 11.75% 12/01/09 $ 3 $ - $ 148 $ 128 $ - 1st Yuba
Res. 12.00% 05/01/03 12 - 1,210 1,210 1,210 1st Marin
Apts. 12.50% 11/15/02 4 47 39 292 292 2nd Contra Costa
Comm. 11.50% 02/01/05 4 493 400 395 - 2nd San Francisco
Apts. 12.00% 07/01/06 40 - 4,000 7,057 7,057 1st San Francisco
Comm. 12.00% 05/01/07 8 2,916 799 788 788 2nd Santa Clara
Res. 12.00% 05/01/03 13 - 1,325 1,325 1,325 1st Marin
Res. 13.25% 01/01/04 20 - 3,515 1,304 1,304 1st Napa
Comm. 11.50% 08/01/06 3 - 350 271 - 1st San Mateo
Land 9.50% 07/01/05 8 - 987 987 - 1st Santa Clara
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
Comm. 13.00% 06/01/05 41 10,000 4,550 6,020 6,020 2nd Santa Clara
Comm. 10.50% 08/01/04 31 - 3,600 3,600 3,600 1st Santa Clara
Res. 10.25% 06/01/06 4 1,647 263 215 - 2nd Santa Clara
Res. 10.50% 09/01/07 2 1,468 805 520 - 3rd Santa Clara
Res. 11.50% 09/01/05 12 - 1,300 1,299 - 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 - 441 435 - 1st San Mateo
Comm. 11.25% 12/01/07 9 718 900 892 - 1st & 3rd El Dorado
Res. 10.00% 11/01/05 11 500 1,320 1,320 1,320 2nd Napa
Comm. 10.00% 01/01/08 13 - 1,500 1,500 - 1st River Side
Comm. 10.00% 12/31/04 87 - 10,440 10,440 - 1st San Francisco
Res. 11.50% 12/01/05 41 - 7,700 8,364 - 1st San Mateo
Comm. 10.00% 04/01/05 47 - 5,293 6,236 - 1st Los Angeles
Apts. 10.00% 06/01/05 16 2,147 1,950 1,549 - 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
Res. 11.00% 07/01/05 9 - 6,074 3,610 - 1st Fresno
Comm. 11.00% 07/01/06 33 - 3,570 3,570 - 1st Alameda
Apts. 9.50% 01/01/09 4 - 413 409 - 1st San Joaquin
Comm. 9.50% 12/01/05 22 - 2,750 2,750 - 1st San Francisco
Res. 9.25% 12/01/08 1 376 130 129 - 2nd Santa Clara
Apts. 9.50% 11/01/05 29 3,115 3,650 3,650 - 2nd River Side
Comm. 9.00% 01/01/06 25 - 3,375 3,375 - 1st San Joaquin
Res. 10.00% 12/25/05 133 5,577 16,010 12,045 - 2nd Alameda
Res. 8.50% 01/01/06 8 - 1,070 1,062 - 1st Placer
Comm. 9.50% 01/01/06 13 - 1,610 1,610 - 1st Alameda
118
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Schedule IV - Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
(in thousands)
Col.H
Principal
Col. F Amount
Face Col. G of Loans
Col. C Col. D Amount of Carrying Subject to Col. I Col. J
Col. B Final Periodic Col. E Mortgage Amount of Delinquent Type California
Col. A Interest Maturity Payment Prior Original Mortgage Principal of Geographic
Descrip. Rate Date Terms Liens Amount Investment Or Interest Lien Location
- --------------------------------------------------------------------------------------------------------------------------------
Res. 8.50% 10/01/10 4 190 500 497 - 2nd Alameda
Res. 10.00% 01/25/06 6 22,354 8,245 4,868 - 3rd San Mateo
Apts. 10.00% 03/10/07 43 - 5,200 5,200 - 1st Santa Clara
Res. 8.50% 04/01/06 6 1,655 800 800 - 2nd San Francisco
Res. 9.00% 05/01/09 3 2,400 335 335 - 2nd San Francisco
Res. 9.25% 04/01/06 9 - 1,180 1,180 - 1st San Francisco
Apts. 9.25% 06/01/06 5 - 666 666 - 1st San Francisco
Res. 9.25% 05/01/09 9 735 1,085 1,081 - 2nd San Mateo
Comm. 9.50% 05/01/09 3 242 375 374 - 2nd San Francisco
Res. 9.25% 06/01/09 3 - 403 403 - 1st Contra Costa
Apts. 9.25% 06/01/06 7 - 881 881 - 1st San Francisco
Res. 8.50% 06/01/09 - 313 50 50 - 2nd San Mateo
Apts. 9.25% 06/01/06 7 - 875 875 - 1st San Francisco
Res. 9.25% 06/01/09 2 - 188 187 - 1st San Joaquin
Res. 10.75% 07/01/06 20 - 8,400 2,172 - 1st San Francisco
Comm. 9.00% 06/01/09 4 2,850 500 498 - 2nd Santa Clara
Comm. 10.00% 06/01/07 39 - 4,650 4,650 - 1st Marin
Land 9.00% 07/01/09 6 - 750 748 - 1st Lake
Res. 9.25% 07/01/09 6 716 690 689 - 2nd San Mateo
Res. 8.75% 01/01/06 78 - 15,615 6,344 - 1st Alameda
Res. 10.50% 07/01/06 14 - 2,400 1,600 - 1st San Diego
Comm. 9.00% 08/01/09 2 785 300 299 - 2nd Marin
Comm. 9.00% 08/01/09 15 - 2,000 1,600 - 1st San Francisco
Comm. 9.50% 08/01/09 16 - 1,947 1,943 - 1st Alameda
Res. 9.25% 10/01/07 3 764 385 385 - 2nd San Francisco
Res. 8.75% 09/01/06 86 - 11,684 11,506 - 1st Contra Costa
Res. 10.00% 09/01/06 37 11,685 7,821 4,382 - 2nd Contra Costa
Res. 9.25% 10/01/06 83 1,400 10,540 10,471 - 2nd Sacramento
Res. 9.00% 11/01/08 15 - 2,000 2,000 - 1st Marin
Apts. 8.75% 01/01/07 50 - 6,900 6,900 - 1st Contra Costa
Apts. 10.00% 01/01/07 2 6,900 1,890 324 - 2nd Contra Costa
Comm. 11.00% 05/01/09 1 612 100 100 - 3rd San Francisco
Apts. 11.00% 06/01/06 1 881 641 143 - 2nd San Francisco
Apts. 11.00% 06/01/06 2 875 908 375 - 2nd San Francisco
Res. 11.00% 04/01/06 - 1,180 425 246 - 2nd San Francisco
---------------------------------------------------------------
Total $ 1,379 $ 99,140 $201,434 $171,745 $25,013
===============================================================
Note: Most loans have balloon payments due at maturity
119
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,
------------------------------------------------
2004 2003 2002
-------------- -------------- -------------
Balance at beginning of year $ 147,174 $ 83,650 $ 82,790
Additions during period
New loans 81,579 96,820 32,601
Other - 2,989 1,060
-------------- -------------- -------------
Total additions 81,579 99,809 33,661
-------------- -------------- -------------
Deductions during period
Collections of principal 52,359 35,097 26,083
Foreclosures 4,422 - 5,986
Cost of loans sold - - -
Amortization of premium - - -
Other 227 1,188 732
-------------- -------------- -------------
Total deductions 57,008 36,285 32,801
-------------- -------------- -------------
Balance at close of year $ 171,745 $ 147,174 $ 83,650
============== ============== =============
120
REDWOOD MORTGAGE INVESTORS VIII
INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
In the opinion of the general partners of Redwood Mortgage Investors VIII,
all adjustments necessary for a fair presentation of the consolidated financial
position and consolidated results of operations and cash flows for the interim
periods presented herein have been made. All such adjustments are of a normal,
recurring nature. Certain information and footnote disclosures normally included
in the consolidated condensed 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 consolidated condensed
financial statements be read in conjunction with the corresponding audited
consolidated financial statements and the notes thereto included elsewhere in
this prospectus.
121
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2005 and DECEMBER 31, 2004 (unaudited)
(in thousands)
ASSETS
March 31, December 31,
2005 2004
----------------- -----------------
Cash and cash equivalents $ 21,448 $ 16,301
----------------- -----------------
Loans
Loans, secured by deeds of trust 152,612 171,745
Loans, unsecured 34 34
Allowance for loan losses (2,434) (2,343)
----------------- -----------------
Net loans 150,212 169,436
----------------- -----------------
Interest and other receivables
Accrued interest and late fees 4,699 4,895
Advances on loans 78 131
----------------- -----------------
4,777 5,026
----------------- -----------------
Loan origination fees, net 45 62
Real estate held for sale, net of allowance of $1,000 20,366 9,793
Prepaid expenses 18 -
Due from affiliates 2,007 -
----------------- -----------------
Total assets $ 198,873 $ 200,618
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ - $ 16,000
Accounts payable 9 25
Payable to affiliate 653 638
----------------- -----------------
Total liabilities 662 16,663
----------------- -----------------
Minority interest 2,901 -
----------------- -----------------
Investors in applicant status 966 424
----------------- -----------------
Partners' capital
Limited partners' capital, subject to redemption net of unallocated
syndication costs of $1,143 and $1,084 for March 31, 2005 and December
31, 2004, respectively; and formation loan receivable of $10,192 and
$9,751 for March 31, 2005 and December 31, 2004, respectively 194,173 183,368
General partners' capital, net of unallocated syndication costs of
$12 and $11 for March 31, 2005 and December 31, 2004, respectively 171 163
----------------- -----------------
Total partners' capital 194,344 183,531
----------------- -----------------
Total liabilities and partners' capital $ 198,873 $ 200,618
================= =================
The accompanying notes are an integral part of the consolidated financial
statements.
122
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (unaudited)
(in thousands, except for per limited partner amounts)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2005 2004
------------- ------------
Revenues
Interest on loans $ 4,103 $ 3,733
Interest-bank 35 4
Late fees 35 53
Gain on sale of real estate held for sale 183 -
Imputed interest on Formation Loan 100 57
Other 69 3
------------- ------------
4,525 3,850
------------- ------------
Expenses
Mortgage servicing fees 388 353
Interest expense 36 106
Amortization of loan origination fees 20 12
Provisions for losses on loans and real estate 91 282
Asset management fees 184 141
Clerical costs through Redwood Mortgage Corp. 78 75
Professional services 48 55
Amortization of discount on imputed interest 100 57
Other 36 36
------------- ------------
981 1,117
------------- ------------
Net income $ 3,544 $ 2,733
============= ============
Net income: general partners (1%) $ 35 $ 27
limited partners (99%) 3,509 2,706
------------- ------------
$ 3,544 $ 2,733
============= ============
Net income per $1,000 invested by limited
partners for entire period
-where income is compounded and retained $ 17 $ 18
============= ============
-where partner receives income in monthly
distributions $ 17 $ 18
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
123
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (unaudited)
(in thousands)
THREE MONTHS
ENDED MARCH 31,
--------------------------------
2005 2004
--------------- ---------------
Cash flows from operating activities
Net income $ 3,544 $ 2,733
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Imputed interest income (100) (57)
Amortization of discount 100 57
Amortization of loan origination fees 20 12
Provision for loan and real estate losses 91 282
Gain on sale of real estate (183) -
Change in operating assets and liabilities
Accrued interest and late fees (286) (653)
Advances on loans (9) (32)
Loan origination fees 3 -
Due from affiliates (2,007) -
Accounts payable (16) (214)
Payable to affiliate 15 36
Prepaid expenses (18) -
--------------- ---------------
Net cash provided by (used in) operating activities 1,154 2,164
--------------- ---------------
Cash flows from investing activities
Loans originated (23,831) (12,859)
Principal collected on loans 34,603 21,695
Payments for development of real estate (36) -
Proceeds from disposition of real estate 1,448 -
--------------- ---------------
Net cash provided by investing activities 12,184 8,836
--------------- ---------------
Cash flows from financing activities
Repayments on line of credit, net (16,000) (20,000)
Contributions by partner applicants 10,155 8,283
Partners' withdrawals (1,779) (1,627)
Syndication costs paid (118) (124)
Formation loan lending (748) (570)
Formation loan collections 299 204
--------------- ---------------
Net cash used in financing activities (8,191) (13,834)
--------------- ---------------
Net increase/(decrease) in cash and cash equivalents 5,147 (2,834)
Cash and cash equivalents - beginning of year 16,301 8,921
--------------- ---------------
Cash and cash equivalents - end of period 21,448 6,087
=============== ===============
Supplemental disclosures of cash flow information
Cash paid for interest $ 36 $ 106
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
124
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2005 (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,
2004 filed with the Securities and Exchange Commission. The results of
operations for the three month period ended March 31, 2005 are not necessarily
indicative of the operating results to be expected for the full year.
Formation Loans
The following summarizes Formation Loan transactions to March 31, 2005 (in
thousands):
1st 2nd 3rd 4th 5th Total
----------- ----------- ----------- ----------- ----------- -----------
Limited partner
contributions $ 14,932 $ 29,993 $ 29,999 $ 49,985 $ 57,447 $182,356
=========== =========== =========== =========== =========== ===========
Formation loan made $ 1,075 $ 2,272 $ 2,218 $ 3,777 $ 4,318 $ 13,660
Discount on imputed
interest (19) (270) (272) (524) (716) (1,801)
----------- ----------- ----------- ----------- ----------- -----------
Formation loan made, net 1,056 2,002 1,946 3,253 3,602 11,859
Repayments to date (811) (1,061) (606) (583) (134) (3,195)
Early withdrawal
penalties applied (76) (114) (80) (3) - (273)
----------- ----------- ----------- ----------- ----------- -----------
Formation loan, net
at March 31, 2005 169 827 1,260 2,667 3,468 8,391
Unamortized discount
on imputed interest 19 270 272 524 716 1,801
----------- ----------- ----------- ----------- ----------- -----------
Balance
March 31, 2005 $ 188 $ 1,097 $ 1,532 $ 3,191 $ 4,184 $ 10,192
=========== =========== =========== =========== =========== ===========
Percent loaned 7.2% 7.6% 7.4% 7.6% 7.5% 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 of the offerings' close. An
estimated amount of imputed interest is recorded for the offerings still
outstanding. During the three month periods ended March 31, 2005 and 2004,
amortization expense of $100,000 and $57,000, respectively, was recorded related
to the discount on the 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 the individual partners consistent with the
partnership agreement.
125
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 1 - GENERAL (continued)
Syndication costs (continued)
Through March 31, 2005, syndication costs of $3,092,000 had been incurred
by the partnership with the following distribution (in thousands):
Costs incurred $ 3,092
Early withdrawal penalties applied (106)
Allocated to date (1,831)
-------------
March 31, 2005 balance $ 1,155
=============
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 March 31, 2005, the fifth offering had
incurred syndication costs of $623,000 (1.08% of contributions).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The partnership's consolidated financial statements include the accounts of
its 100%-owned subsidiaries, Russian Hill Property Company, LLC ("Russian") and
Borrette Property Company, LLC ("Borrette"), its 72%-owned subsidiary, Larkin
Property Company, LLC ("Larkin") 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 presentation.
Loans secured by deeds of trust
At March 31, 2005 and December 31, 2004, the partnership had ten and eight
loans, past due 90 days or more in interest payments ("90 day Past Due Loans")
totaling $17,098,000 and $23,101,000, respectively. Included in the 90 day Past
Due Loans are four loans and three loans totaling $6,451,000 and $6,135,000 at
March 31, 2005 and December 31, 2004, respectively, which are past maturity (see
Note 8). A past maturity loan is a loan in which the principal and/or any
accrued interest is due and payable, but the borrower has failed to make such
payment of principal and/or accrued interest. Additionally, at March 31, 2005
and December 31, 2004, the Partnership had two loans and three loans past
maturity with outstanding principal balances of $10,834,000 and $1,912,000, for
a combined total of twelve loans and eleven loans during each period past due 90
days or more in interest payments, and/or past maturity totaling $27,932,000 and
$25,013,000. These delinquent and/or past maturity loans also had accrued
interest, advances and late charges due as of March 31, 2005 and December 31,
2004 of $3,019,000 and $3,202,000, respectively. The partnership does not
consider the six past maturity loans to be impaired because, in the opinion of
management, there is sufficient collateral to cover the amount outstanding to
the partnership and the partnership is still accruing interest on these loans.
At March 31, 2005 and December 31, 2004, loans categorized as impaired by the
partnership were $0.
126
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for loan losses
The composition of the allowance for loan losses as of March 31, 2005 and
December 31, 2004 was as follows (in thousands):
March 31, December 31,
2005 2004
--------------- --------------
Impaired loans $ - $ -
Specified loans 137 137
General 2,297 2,206
Unsecured loans - -
--------------- --------------
$ 2,434 $ 2,343
=============== ==============
Activity in the allowance for loan losses is as follows for the three
months through March 31, 2005 and for the year ended December 31, 2004 (in
thousands):
March 31, December 31,
2005 2004
--------------- --------------
Beginning balance $ 2,343 $ 2,649
Additions charged to income 91 1,146
Write-offs - (952)
Transferred to real estate held for
sale reserve - (500)
--------------- --------------
$ 2,434 $ 2,343
=============== ==============
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 consolidated 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.
127
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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.
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, Redwood Mortgage Corp. may collect an amount equivalent
to 12% of the loaned amount until six months after the termination date of the
offering. Thereafter, loan brokerage commissions (points) will be limited to an
amount not to exceed 4% of the total partnership assets per year. The loan
brokerage commissions are paid by the borrowers and thus, are not an expense of
the partnership.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued 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), which is the partnership's total assets less its total liabilities.
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 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.
128
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 4 - REAL ESTATE HELD FOR SALE
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 is wholly owned by the partnership. 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 and development of this property were
capitalized during 2003. Commencing January 2004, costs related to sales and
maintenance of the property are being expensed. As of March 31, 2005 and
December 31, 2004, the partnership had advanced approximately $150,000 and
$150,000, respectively, to Russian for sales and maintenance costs. At March 31,
2005 and December 31, 2004, the partnership's total investment in Russian was
$3,979,000, net of a valuation allowance of $500,000.
In September, 2004, the partnership acquired a single family residence
through a foreclosure sale. At the time the partnership took ownership of the
property, the partnership's investment totaled $1,937,000 including accrued
interest and advances. The borrower began a substantial renovation of the
property, which was not completed at the time of foreclosure. The partnership
has decided to pursue development of the property by processing plans for the
creation of two condominium units on the property. These plans will incorporate
the majority of the existing improvements currently located on the property. As
of March 31, 2005, the partnership has capitalized approximately $9,000 in costs
related to this property. Management has established a reserve of $500,000 to
cover potential losses for this property, based upon management's estimate of
the fair value of the property.
In December, 2004, the partnership acquired an undeveloped parcel of land
through a deed in lieu of foreclosure. The land is located in Stanislaus County,
California. It is comprised of three separate lots, which total approximately 14
acres. The parcels are currently for sale. As of March 31, 2005 the
partnership's investment in this property totaled $4,386,000, including accrued
interest and advances, as of the date of the acquisition. Management believes
that the full value of this investment will be recovered from the eventual sale
of the property based upon its current estimate of the fair value of the
property. This property is jointly owned by two other affiliated partnerships.
In February, 2005, the partnership acquired a multi-unit property through
foreclosure. This property is located in an upscale neighborhood in San
Francisco. At the time the partnership took ownership of the property, the
partnership's investment, together with three other affiliate partnerships,
totaled $10,555,000 including accrued interest and advances. The partnership
intends to undertake additional improvements to the property. No valuation
allowance has been established against this property as management is of the
opinion that the property will have adequate equity to recover the entire
partnership investment. Upon acquisition, the property was transferred via a
statutory warranty deed to a new entity named Larkin Property Company, LLC
("Larkin"). The partnership owns 72.50% interest in the property and the other
three affiliates collectively own the remaining 27.50%.
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell as of March 31, 2005 and December 31, 2004:
March 31, December 31,
2005 2004
---------------- ---------------
Cost of properties $ 21,366,000 $ 10,793,000
Reduction in value (1,000,000) (1,000,000)
---------------- ---------------
Real estate held for sale, net $ 20,366,000 $ 9,793,000
================ ===============
129
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 5 - BANK LINE OF CREDIT
The partnership has a bank line of credit expiring November 25, 2005, of up
to $42,000,000 at prime, secured by its loan portfolio. The outstanding balances
were $0 and $16,000,000 at March 31, 2005 and December 31, 2004, respectively.
The interest rate was 5.75% (prime) at March 31, 2005. The line of credit calls
for certain financial covenants. To the best of its knowledge, the partnership
was in compliance with these covenants for the three month period ended March
31, 2005 and for the year ended December 31, 2004.
NOTE 6 - NON-CASH TRANSACTIONS
During the quarter ended March 31, 2005 the partnership acquired a real
estate property through foreclosure and in order to reduce potential
liabilities, subsequently transferred the property at its book value to a newly
formed limited liability company ("LLC"). This transaction resulted in an
increase in real estate held for sale of $10,536,000, a decrease in loans
receivable, accrued interest, advances, and late charge receivable of
$7,635,000, and an increase in liability of $2,901,000, which was the affiliate
partnerships' interest in the property.
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 $152,612,000 and $171,745,000 at March 31,
2005 and December 31, 2004, respectively. The fair value of these loans of
$156,301,000 and $173,067,000, 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 considered
in evaluating the fair value versus the carrying value.
130
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands)
Most loans are secured by recorded deeds of trust. At March 31, 2005 and
December 31, 2004 there were 79 and 75 secured loans outstanding, respectively,
with the following characteristics:
March 31, December 31,
2005 2004
--------------- ---------------
Number of secured loans outstanding 79 75
Total secured loans outstanding $ 152,612 $ 171,745
Average secured loan outstanding $ 1,932 $ 2,289
Average secured loan as percent of total secured loans 1.27% 1.33%
Average secured loan as percent of partners' capital 0.99% 1.25%
Largest secured loan outstanding $ 11,685 $ 12,045
Largest secured loan as percent of total secured loans 7.66% 7.01%
Largest secured loan as percent of partners' capital 6.01% 6.56%
Largest secured loan as percent of total assets 5.96% 6.00%
Number of counties where security is located (all California) 19 17
Largest percentage of secured loans in one county 18.28% 20.48%
Average secured loan to appraised value of security based on
appraised values and prior liens at time loan was consummated 60.16% 56.94%
Number of secured loans in foreclosure status 4 6
Amount of secured loans in foreclosure $ 6,185 $ 14,682
131
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands) (continued)
The following secured loan categories were held at March 31, 2005, and
December 31, 2004:
March 31, December 31,
2005 2004
--------------- ---------------
First Trust Deeds $ 109,427 $ 115,082
Second Trust Deeds 34,389 50,282
Third Trust Deeds 8,796 6,381
--------------- ---------------
Total loans 152,612 171,745
Prior liens due other lenders at time of loan 80,864 99,140
--------------- ---------------
Total debt $ 233,476 $ 270,885
=============== ===============
Appraised property value at time of loan $ 388,098 $ 475,710
--------------- ---------------
Total secured loans as a percent of appraisals 60.16% 56.94%
--------------- ---------------
Secured loans by type of property
Owner occupied homes $ 11,224 $ 9,234
Non-owner occupied homes 51,130 75,125
Apartments 21,825 30,981
Commercial 66,700 54,670
Land 1,733 1,735
--------------- ---------------
$ 152,612 $ 171,745
=============== ===============
The interest rates on the loans range from 8.50% to 13.00% at March 31,
2005. This range of interest rates is typical of our portfolio.
Scheduled maturity dates of loans as of March 31, 2005 are as follows:
Year Ending
December 31, Amount
------------------------- --------------
2005 $ 56,804
2006 46,984
2007 27,803
2008 10,956
2009 8,828
Thereafter 1,237
--------------
$ 152,612
==============
The scheduled maturities for 2005 include six past maturity loans totaling
$17,285,000, and representing 11.33% of the portfolio at March 31, 2005.
Interest payments on four of these loans with an aggregate principal balance of
$6,451,000 were categorized as 90 days or more delinquent. Several borrowers are
in process of selling the properties or refinancing their loans through other
institutions, as this is an opportune time for them to do so and/or take
advantage of lower interest rates. Occasionally the partnership allows borrowers
to continue to make the payments on debt past maturity for periods of time. Of
these six past maturity loans, the partnership has begun foreclosure proceedings
by filing a notice of default on three with aggregate principal balances
totaling $6,135,000.
132
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands) (continued)
Cash deposits at March 31, 2005 of $14,705,000, 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 $14,605,000. This bank is the same
financial institution that has provided the partnership with the $42,000,000
limit line of credit (LOC).
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Construction/Rehabilitation Loans
The partnership makes construction and rehabilitation loans which are not
fully disbursed at loan inception. The partnership has approved the borrowers up
to a maximum loan balance; however, disbursements are made periodically during
completion phases of the construction or rehabilitation or at such other times
as required under the loan documents. At March 31, 2005 there were $9,075,000 of
undisbursed loan funds which will be funded by a combination of borrower monthly
mortgage payments, line of credit draws, retirements of principal on current
loans, cash and capital contributions from investors. The partnership does not
maintain a separate cash reserve to hold the undisbursed obligations, which are
intended to be funded.
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 March 31, 2005. There are six loans totaling $6,611,000 in workout
agreements as of March 31, 2005.
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.
133
GYMNO CORPORATION
(A California Corporation)
BALANCE SHEET
DECEMBER 31, 2004
134
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Gymno Corporation
Redwood City, California
We have audited the accompanying balance sheet of Gymno Corporation as of
December 31, 2004. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement 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 financial
statement is free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, 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, 2004 in conformity with accounting principles generally accepted in the
United States of America.
ARMANINO McKENNA LLP
/s/ Thomas E. Gard
San Ramon, California
February 11, 2005
135
GYMNO CORPORATION
Balance Sheet
December 31, 2004
ASSETS
2004
-------------
Cash and cash equivalents $ 117,626
Other current assets 869
-------------
Total current assets 118,495
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 172,322
-------------
206,593
-------------
$ 325,088
=============
Liabilities
Accounts payable - related party $ 5,846
-------------
Total current liabilities 5,846
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 306,742
-------------
Total stockholders' equity 319,242
-------------
$ 325,088
=============
136
GYMNO CORPORATION
Notes to Balance Sheet
December 31, 2004
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.
The bank cash balance at December 31, 2004, was in one bank. Deposits in
this bank exceeded the FDIC insurance limits (up to $100,000 per bank) by
approximately $13,000 at December 31, 2004.
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.
137
GYMNO CORPORATION
Notes to Balance Sheet
December 31, 2004
3. Investment in Partnerships
The following is a summary of the Company's investments in the RMI
partnerships as of December 31, 2004:
2004
Gymno
Gymno Corporation
Corporation Investment
Partnership Partnership Partnership Percent of
Net Assets Net Income Investment Net Assets
-------------- --------------- --------------- --------------
RMI I $ 750,613 $ 44,580 $ - -
RMI II 196,298 10,583 - -
RMI III 1,318,983 79,536 - -
RMI IV 5,947,732 350,718 7,500 0.13%
RMI V 2,055,213 94,187 5,000 0.24%
RMI VI 6,429,808 347,152 9,773 0.15%
RMI VII 9,128,416 578,646 11,998 0.13%
RMI VIII 183,530,744 12,131,514 172,322 0.09%
-------------- --------------- --------------
$209,357,807 $ 13,636,916 $ 206,593
============== =============== ==============
4. Related Party Payable
The Company has a payable to an affiliate, Redwood Mortgage Corp. ("RMC"),
in the amount of $5,846 at December 31, 2004. The Company incurs 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 for
RMI VII and RMI VIII. RMI VII has a $2,500,000 line of credit agreement secured
by its loan portfolio and expiring on December 2, 2007. There was no outstanding
balance on the line of credit at December 31, 2004. RMI VIII has a $42,000,000
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, 2004 was
$16,000,000.
138
GYMNO CORPORATION
INTERIM FINANCIAL STATEMENTS
In the opinion of the management of Gymno Corporation, a California
Corporation, all adjustments necessary for a fair presentation of the financial
position as of 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 believes that the
disclosures contained herein are adequate to make the information presented not
misleading. It is suggested that this unaudited financial statement be read in
conjunction with the corresponding audited financial statement and the notes
thereto included elsewhere in this prospectus.
139
GYMNO CORPORATION
BALANCE SHEET
March 31,2005
(UNAUDITED)
ASSETS
Cash $ 136,692
Other assets 869
---------------
Total current assets 137,561
---------------
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 182,455
---------------
216,726
---------------
$ 354,287
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable - related party $436
---------------
Total current liabilities 436
---------------
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 341,351
---------------
Total stockholders' equity 353,851
---------------
$ 354,287
===============
The accompanying notes are an integral part of this financial statement
140
GYMNO CORPORATION
Notes to Balance Sheet
March 31, 2005 (Unaudited)
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/or 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 equivalents
Cash represents cash and short-term, highly liquid investments with
maturities of three months or less at the time of purchase.
The bank cash balance at March 31, 2005 was with one bank. Deposits in this
bank exceeded the FDIC insurance limits (up to $100,000 per bank) by
approximately $24,377 at March 31, 2005.
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.
3. Investment in Partnerships
The following is a summary of the Company's investments in the Redwood
Mortgage Investors ("RMI") partnerships as of March 31, 2005:
Gymno
Gymno Corporation
Corporation Investment
Partnership Partnership Partnership Percent of
Net Assets Net Income Investment Net Assets
----------------------- -------------------- -------------- --------------
RMI I $ 755,881 $ 10,565 $ 0 -
RMI II 180,115 2,170 0 -
RMI III 1,318,546 17,920 0 -
RMI IV 5,951,390 86,303 7,500 0.13%
RMI V 2,036,564 22,806 5,000 0.25%
RMI VI 6,425,547 98,955 9,773 0.15%
RMI VII 9,146,632 139,096 11,998 0.13%
RMI VIII 194,344,000 3,544,132 182,455 0.09%
$220,158,675 $3,921,947 $ 216,726
======================= ==================== ==============
141
4. Related Party Transactions
The Company incurs a management fee to Redwood Mortgage Corp. of $11,000
per month for usage of space, utilities, personnel and management expertise.
5. Guarantees
The Company is a guarantor on two separate lines of credit agreements for
RMI VII and RMI VIII. RMI VII has a $2,500,000 line of credit agreement secured
by its loan portfolio and expiring on December 2, 2007. RMI VIII has a
$42,000,000 line of credit agreement secured by its loan portfolio and expiring
on November 25, 2005. There were no outstanding balances on the lines of credit
at March 31, 2005.
142
REDWOOD MORTGAGE CORPORATION
(A California Corporation)
BALANCE SHEET
SEPTEMBER 30, 2004
143
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004. The 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, 2004, in conformity with accounting principles generally accepted
in the United States of America.
ARMANINO McKENNA LLP
/s/ Thomas E. Gard
San Ramon, California
November 29, 2004
144
REDWOOD MORTGAGE CORP.
Balance Sheet
September 30, 2004
ASSETS
Cash and equivalents $ 4,895,642
Investment in partnership 50,000
Due from related parties 789,623
Prepaid expenses 23,639
Investment in mortgage loans 187,303
Income-producing property, net 1,124,695
Fixed assets, net 195,459
Deferred costs of brokerage related rights, net 6,772,004
-----------------
Total assets $ 14,038,365
=================
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 33,630
Accrued compensated absences 79,560
Accrued profit-sharing 74,256
Deferred compensation 624,928
Notes payable 812,566
Advances from partnerships, net 7,115,177
Deferred income taxes 2,021,000
-----------------
Total liabilities 10,761,117
-----------------
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 3,273,248
-----------------
Total stockholder's equity 3,277,248
-----------------
Total liabilities and stockholder's equity $ 14,038,365
=================
The accompanying notes are an integral part of the financial statement.
145
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2004
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 seven 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,
2004, the Company was servicing a portfolio approximating $213,000,000 owned
primarily by the aforementioned partnerships.
2. Summary of Significant Accounting Policies
Accrual basis
The accompanying financial statement was prepared on the accrual basis of
accounting wherein revenue is recognized when earned and expenses are recognized
when incurred. Loan commissions are recognized as revenue when the related loan
closes escrow and loan service fees are recognized over the period services are
provided.
Cash and equivalents
Cash represents cash and short-term, highly liquid investments with
maturities of three months or less. Cash deposits at September 30, 2004, that
exceeded federal insurance limits (up to $100,000), were $4,464,142.
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, 2004, management had an allowance for accrued interest of $74,128.
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.
146
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2004
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 where the property securing the mortgage is
located. As of September 30, 2004, the Company was owed $674,470 in loan
servicing fees, which is included in due from related parties in the
accompanying balance sheet.
147
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2004
3. Partnership Services (continued)
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.
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.
4. Investment in Mortgage Loans
At September 30, 2004, the Company had investments in mortgage loans
maturing as follows:
Year ending
September 30,
--------------------------
2005 $ 101,511
2006 1,113
2007 1,256
2008 1,415
2009 1,595
Thereafter 80,413
---------------
$ 187,303
===============
The average interest rate of the mortgage loans was 11.47% as of September
30, 2004. Loans are due in either lump sum balloon payments or monthly
installments of interest and principal. At September 30, 2004, the Company had
one loan past due 90 days or more totaling $87,587. The Company does not
consider this loan to be impaired because there is sufficient collateral to
cover the amount outstanding to the Company. 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.
148
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2004
5. Income-Producing Property
Income-producing property consists of the following at September 30,
2004:
Building and improvements $ 602,832
Land 547,168
---------------
1,150,000
Less accumulated depreciation and amortization (25,305)
---------------
Income-producing property, net $ 1,124,695
===============
The property is pledged as security for a note payable (see note 10).
6. Fixed Assets
Fixed assets consist of the following at September 30, 2004:
Furniture and equipment $ 364,065
Computer software 56,218
---------------
420,283
Less accumulated depreciation and amortization (224,824)
---------------
Fixed assets, net $ 195,459
===============
7. Deferred Costs of Brokerage Related Rights
Deferred costs of brokerage related rights consist of the following at
September 30, 2004:
Deferred costs of brokerage related rights $ 8,500,803
Less accumulated amortization (1,728,799)
---------------
Deferred costs of brokerage related rights, net $ 6,772,004
===============
Estimated amortization expense for each of the next five years is as
follows:
Year Ending September 30:
----------------------------------------
2005 $689,970
2006 $635,748
2007 $592,850
2008 $529,360
2009 $533,739
149
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2004
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") carry forwards available of
approximately $3,670,000 for Federal tax purposes and approximately $1,794,000
for California tax purposes. The NOLs were generated in fiscal years ended
September 30, 1998, 1999, 2001, 2003 and 2004 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, 2004:
Cash to accrual differences $ (26,000)
Deferred costs of brokerage related rights 3,681,000
State deferred taxes (201,000)
Net operating loss carryforwards (1,406,000)
Other (27,000)
--------------
Net deferred tax liability $ 2,021,000
==============
9. 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:
2005 $ 1,120,002
2006 1,120,002
2007 1,012,631
2008 1,012,631
2009 1,012,631
Thereafter 3,590,941
-----------------
8,868,838
Less discount on imputed interest (1,753,661)
-----------------
Advances from partnerships, net $ 7,115,177
=================
150
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2004
10. Notes Payable
During 2003, the Company entered into 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, 2004 totaled $747,500.
During 2004, the Company entered into a financing agreement for office
equipment. The note accrues interest at 5.85% and requires monthly payments in
the amount of $1,373 through March 2009.
Future minimum payments at September 30, 2004 are as follows:
2005 $ 760,520
2006 13,802
2007 14,632
2008 15,511
2009 8,101
--------------
Total $ 812,566
==============
11. Commitments and Guarantees
The Company has contracted with an independent service bureau for computer
processing services for the partnership accounting function at approximately
$4,620 per month. The contract is subject to renewal at the end of its term
which is January 2007. 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 $32,000,000 at prime. The
balance on the line of credit at September 30, 2004 was $32,000,000. 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, 2004, 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 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 expired in June 2004. The leases required monthly rent of
$4,950 with stated annual rent increases.
Noncancelable future minimum lease payments under these leases as of
September 30, 2004, are as follows:
2005 $ 183,772
2006 189,288
2007 194,972
2008 200,814
2009 117,712
--------------
$ 886,558
==============
151
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2004
12. 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.
13. 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.
Due from related parties
Advances are periodically made to one of the related entities. In addition,
as described in Note 3, amounts are periodically due from affiliated
partnerships for services provided by the Company. As of September 30, 2004,
amounts due from related parties were:
Related party advances $ 115,153
Partnership services 674,470
---------------
$ 789,623
===============
Investment in partnership
During 2003, the Company purchased an investment in Redwood Mortgage
Investor's VIII from a former investor at that investor's cost. The investment
balance was $50,000 at September 30, 2004.
14. Deferred Compensation Agreement
The Company entered into a compensation agreement with its 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, 2004, the
Company had accrued $624,928, which represents the net present value of the
future payments.
15. Subsequent Events
Subsequent to year end, the Company paid off the $747,500 note payable.
Subsequent to year end, the maximum borrowings on a partnership's line of
credit, for which the Company is a guarantor, was increased from $32,000,000 to
$42,000,000.
152
REDWOOD MORTGAGE CORP
INTERIM FINANCIAL STATEMENTS
In the opinion of the management of Redwood Mortgage Corp., a California
Corporation, all adjustments necessary for a fair presentation of the financial
position as of 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 believes that the
disclosures contained herein are adequate to make the information presented not
misleading. It is suggested that this unaudited financial statement be read in
conjunction with the corresponding audited financial statement and the notes
thereto included elsewhere in this prospectus.
153
REDWOOD MORTGAGE CORP.
BALANCE SHEET
March 31,2005
(UNAUDITED)
ASSETS
Cash and equivalents $ 4,463,449
Investment in partnership 50,000
Due from related parties 891,418
Prepaid expenses 22,889
Investment in mortgage loans 187,523
Income-producing property, net 1,112,195
Fixed assets, net 177,836
Deferred costs of brokerage related rights, net 7,883,214
--------------
Total assets $ 14,788,524
==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 838
Accrued compensated absences 116,028
Deferred compensation 570,928
Notes payable 58,651
Advances from partnerships, net 8,248,503
Deferred income taxes 2,478,000
--------------
Total liabilities 11,472,948
--------------
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 3,311,576
--------------
Total stockholder's equity 3,315,576
--------------
Total liabilities and stockholder's equity $ 14,788,524
==============
The accompanying notes are an integral part of this financial statement
154
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
March 31, 2005
(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 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 seven 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 March 31,
2005, the Company was servicing a portfolio approximating $170,633,323 owned
primarily by the aforementioned partnerships.
2. Summary of Significant Accounting Policies
Accrual basis
The accompanying financial statement was prepared on the accrual basis of
accounting wherein revenue is recognized when earned and expenses are recognized
when incurred. Loan commissions are recognized as revenue when the related loan
closes escrow and loan service fees are recognized over the period services are
provided.
Cash and equivalents
Cash represents cash and short-term, highly liquid investments with
maturities of three months or less. Cash deposits at March 31,2004, that
exceeded federal insurance limits (up to $100,000), were $3,016,930.
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 March 31,
2005, management had an allowance for accrued interest of $74,128.
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.
155
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
March 31, 2005
(Unaudited)
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 where the property securing the mortgage is
located. As of March 31, 2005, the Company was owed $741,265 in loan servicing
fees, which is included in due from related parties in the accompanying balance
sheet.
156
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
March 31, 2005
(Unaudited)
3. Partnership Services (continued)
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.
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.
4. Investment in Mortgage Loans
At March 31, 2005, the Company had investments in mortgage loans maturing
as follows:
Year ending
September 30,
-----------------------------
2005 $ 101,511
2006 1,113
2007 1,256
2008 1,415
2009 1,595
Thereafter 80,633
---------------
$ 187,523
===============
The average interest rate of the mortgage loans was 11.50% as of March 31,
2005. Loans are due in either lump sum balloon payments or monthly installments
of interest and principal. At March 31, 2005, the Company had one loan past due
90 days or more totaling $87,587. The Company does not consider this loan to be
impaired because there is sufficient collateral to cover the amount outstanding
to the Company. 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.
157
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
March 31, 2005
(Unaudited)
5. Income-Producing Property
Income-producing property consists of the following at March 31, 2005:
Building and improvements $ 602,832
Land 547,168
----------------
1,150,000
Less accumulated depreciation and amortization (37,805)
----------------
Income-producing property, net $ 1,112,195
================
The property was pledged as security for a note payable (see note 10).
6. Fixed Assets
Fixed assets consist of the following at March 31, 2005:
Furniture and equipment $ 311,754
Computer software 127,491
----------------
439,245
Less accumulated depreciation and amortization (261,409)
----------------
Fixed assets, net $ 177,836
================
7. Deferred Costs of Brokerage Related Rights
Deferred costs of brokerage related rights consist of the following at
March 31, 2005:
Deferred costs of brokerage related rights $ 10,216,623
Less accumulated amortization (2,333,409)
----------------
Deferred costs of brokerage related rights, net $ 7,883,214
================
Estimated amortization expense for each of the next five years is as
follows:
Year Ending September 30:
-------------------------------------
2005 $395,948
2006 $731,875
2007 $683,507
2008 $614,859
2009 $614,373
158
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
March 31, 2005
(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") carry forwards available of
approximately $3,986,000 for Federal tax purposes and approximately $1,844,000
for California tax purposes. The NOLs were generated in fiscal years ended
September 30, 1998, 1999, 2001, 2003, 2004 and 2005 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 March 31, 2005:
Cash to accrual differences $ 55,000
Deferred costs of brokerage related rights 4,210,000
State deferred taxes (242,000)
Net operating loss carryforwards (1,518,000)
Other (27,000)
----------------
Net deferred tax liability $ 2,478,000
================
9. 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:
----------------------------------
2005 $ 611,621
2006 1,213,956
2007 1,208,546
2008 1,181,665
2009 1,181,665
Thereafter 4,795,702
----------------
10,193,155
Less discount on imputed interest (1,944,652)
----------------
Advances from partnerships, net $ 8,248,503
=================
159
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
March 31, 2005
(Unaudited)
10. Notes Payable
During 2003, the Company entered into an interest-only note payable to a
bank for the purchase of a property. The note matured in December, 2004 at an
interest rate of 5.25%, and was fully paid at its maturity in December, 2004.
During 2004, the Company entered into a financing agreement for office
equipment. The note accrues interest at 5.85% and requires monthly payments in
the amount of $1,373 through March 2009.
Future minimum payments at September 30, 2005 are as follows:
2005 $ 6,605
2006 13,802
2007 14,632
2008 15,511
2009 8,101
--------------
Total $ 58,651
==============
11. Commitments and Guarantees
The Company has contracted with an independent service bureau for computer
processing services for the partnership accounting function at approximately
$4,620 per month. The contract is subject to renewal at the end of its term
which is January 2007. 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 $42,000,000 at prime. The
balance on the line of credit at March 31, 2005 was $0. 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 March 31, 2005, 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 has the option to renew this lease for an additional five
years.
Noncancelable future minimum lease payments under these leases as of March
31, 2005, are as follows:
2005 $ 9,886
2006 189,288
2007 194,972
2008 200,814
2009 117,712
--------------
$ 712,672
==============
160
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
March 31, 2005
(Unaudited)
12. 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.
13. 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.
Due from related parties
Advances are periodically made to one of the related entities. In addition,
as described in Note 3, amounts are periodically due from affiliated
partnerships for services provided by the Company. As of March 31, 2005, amounts
due from related parties were:
Related party advances $ 150,153
Partnership services 741,265
---------------
$ 891,418
===============
Investment in partnership
During 2003, the Company purchased an investment in Redwood Mortgage
Investor's VIII from a former investor at that investor's cost. The investment
balance was $50,000 at March 31, 2005.
14. Deferred Compensation Agreement
The Company entered into a compensation agreement with its 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 March 31, 2005, the
Company had accrued $570,928, which represents the net present value of the
future payments.
161
APPENDIX I
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, 2004, 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, 2004 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, 2004.
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, 2004, less than fifteen percent (15%) 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.
162
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.
163
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
REDWOOD MORTGAGE INVESTORS VIII
(AS OF DECEMBER 31, 2004)
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
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, 2004. 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, 2004, the general partners did not have any public or private
programs which have closed in the past three years other than the fourth
offering in Redwood Mortgage Investors VIII. For consistency, the general
partners have included information for the first, second, and third 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 $47,314
Percentage of Amount Raised 99.55% 99.98% 100% 99.97% 63.09%
Less Offering Expenses:
Organization Expense 3.90% 2.00% 2.05% 1.30% 1.10%
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% 98.90%
Loans Funded from Offering Proceeds
Secured by Deeds of Trust 87.90% 89.40% 89.55% 90.10% 90.40%
Formation Loan 7.20% 7.60% 7.40% 7.60% 7.50%
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% 1.00%
-------------- -------------- -------------- -------------- --------------
Total 96.10% 98.00% 97.95% 98.70% 98.90%
============== ============== ============== ============== ==============
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 88 of the Prospectus).
164
TABLE II
COMPENSATION TO GENERAL PARTNERS AND AFFILIATES
(AS OF DECEMBER 31, 2004)
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
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, 2004. 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) $172,223
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) 12,164
Processing Fees (3) 193
Other (3) 56
Dollar Amount of Cash Generated from
Operations Before Deducting
Payments to General Partners and Affiliates: 71,075
Amount Paid to General Partners and Affiliates
from Operations:
Partnership Management Fees 1,776
Earnings Fee 490
Mortgage Servicing Fee 5,898
Reimbursement of Expenses, at Cost 1,499
Early Withdrawal 265
(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, 2004.
(3) These sums were paid by borrowers of partnership funds, and were not
expenses of the partnership.
165
TABLE III
OPERATING RESULTS OF REDWOOD MORTGAGE INVESTORS VIII
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2004)
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
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
distributable to limited partners $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
166
TABLE III (continued)
OPERATING RESULTS OF REDWOOD MORTGAGE INVESTORS VIII
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2004)
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
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
167
TABLE III (continued)
OPERATING RESULTS OF REDWOOD MORTGAGE INVESTORS VIII
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2004)
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
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
distributable to limited partners $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
168
TABLE III (continued)
OPERATING RESULTS OF REDWOOD MORTGAGE INVESTORS VIII
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2004)
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
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
169
TABLE III (continued)
OPERATING RESULTS OF REDWOOD MORTGAGE INVESTORS VIII
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2004)
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
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 2004
---------------- ----------------- ---------------- ----------------
Gross Revenues $9,088 $11,691 $12,958 $17,133
Less: General Partners' Mgmt Fee 158 325 468 630
Loan Servicing Fee 552 1,098 1,057 1,565
Administrative Expenses 416 1,060 1,045 1,139
Provision for Uncollected Accts 957 1,280 782 1,146
Amortization of Organization Costs 0 0 0 0
Offering Period Interest Expense to
Limited Partners 1 1 37 20
Interest Expense 972 516 71 622
---------------- ----------------- ---------------- ----------------
Net Income (GAAP Basis) dist. to
Limited Partners $6,032 $7,411 $9,498 $12,011
---------------- ----------------- ---------------- ----------------
Federal Taxable Income $6,926 $8,719 $9,072 $12,212
---------------- ----------------- ---------------- ----------------
Sources of Funds - Net Income
distributable to limited partners $6,032 $7,411 $9,498 $12,011
Reduction in Assets 0 0 0 0
Increase in Liabilities 0 0 18,822 0
Early Withdrawal Penalties Applied to
Syndication Costs 24 7 17 16
Increase in Applicant's Deposit 448 1,905 0 0
Increase in Partners' Capital
Collection on Formation Loan 346 546 637 916
Admittance of New Partners $19,266 $19,681 41,461 41,793
---------------- ----------------- ---------------- ----------------
Cash generated from Operations
and Financing 26,116 29,550 70,435 54,736
Use of Funds-Increase in Assets (15,480) (10,923) (58,715) (30,583)
Reduction in Liabilities (5,038) (7,733) (0) (6,009)
Decrease in Applicant's Deposit (0) (0) (1,368) (786)
Decrease in Partner's Capital
Formation Loan (1,462) (1,677) (2,929) (3,117)
Syndication Costs (291) (381) (483) (421)
Offering Period Interest Expense to
Limited Partners (0) (0) (0) (0)
Investment Income Paid to LP's (1,962) (2,516) (3,362) (4,452)
Return of Capital to LP's (1,426) (1,049) (1,845) (1,988)
---------------- ----------------- ---------------- ----------------
Net Increase (Decrease) in Cash $457 $5,271 1,733 7,380
Cash at the beginning of the year 1,460 1,917 7,188 8,921
---------------- ----------------- ---------------- ----------------
Cash at the end of the year $1,917 $7,188 $8,921 $16,301
Table III continued on following page
170
TABLE III (continued)
OPERATING RESULTS OF REDWOOD MORTGAGE INVESTORS VIII
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2004)
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
2001 2002 2003 2004
-------------- ------------- ------------- -------------
Cash Distribution Credited on
$1,000 Invested for a Compounding
Limited Partner (GAAP Basis) $90 $87 $78 $72
Cash Distribution Paid for
$1,000 Invested for a Limited
Partner Receiving Monthly Earnings
Distribution (GAAP Basis) $87 $84 $75 $70
Cash Distribution to All Investors for
$1,000 Invested (2)
Income (1) $37 $34 $35 $32
Capital (1) $27 $19 $19 $14
Federal Income Tax Results for
$1,000 Invested Capital for a
Compounding Limited Partner $106 $105 $76 $75
Federal Income Tax Results for $1,000
Invested for a Limited Partner Receiving
Monthly Earnings Distributions $103 $101 $73 $72
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.
171
TABLE V
PAYMENT OF LOANS
CORPORATE MORTGAGE INVESTORS I & II
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
SINGLE FAMILY 1-4 UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
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 12/05/02 10/03/03 161,883.95 14,932.40 176,816.35
Contra Costa 10/11/96 11/05/03 40,000.00 18,577.55 58,577.55
Contra Costa 01/18/01 07/09/04 77,500.00 33,182.90 110,682.90
Marin 11/12/02 07/15/04 105,000.00 18,067.33 123,067.33
- -------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
Stanislaus 07/24/98 03/13/02 150,000.00 42,295.62 192,295.62
San Joaquin 05/10/02 06/30/03 50,000.00 5,993.88 55,993.88
Alameda 08/28/03 04/18/04 196,221.25 6,420.08 202,641.33
- -------------------------------------------------------------------------------------------------------------
COMMERCIAL (county)
- -------------------------------------------------------------------------------------------------------------
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
San Francisco 10/28/92 12/01/04 152,000.00 104,757.32 256,757.32
- -------------------------------------------------------------------------------------------------------------
172
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS I
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
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
Alameda 02/04/03 12/10/04 100,000.00 18,169.37 118,169.37
- --------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL (county)
- --------------------------------------------------------------------------------------------------------------
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
San Francisco 04/24/03 07/14/04 80,000.00 9,589.48 89,589.48
- --------------------------------------------------------------------------------------------------------------
173
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS II
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
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 81,375.88
- --------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL (county)
- --------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------
174
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS III
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
SINGLE FAMILY 1-4 UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
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
Alameda 06/20/02 10/21/03 70,000.00 9,879.60 79,879.60
Contra Costa 03/25/03 09/24/03 80,000.00 4,086.86 84,086.86
Sonoma 10/30/96 09/02/03 7,731.83 4,141.37 11,873.20
San Mateo 01/29/99 06/09/03 67,000.00 27,738.38 94,738.38
Contra Costa 03/25/03 01/09/04 68,000.00 5,515.56 73,515.56
San Mateo 07/09/87 06/30/04 5,500.00 6,292.58 11,792.58
San Mateo 07/09/87 06/30/04 82,500.00 90,700.75 173,200.75
Marin 11/12/02 07/15/04 105,000.00 18,067.33 123,067.33
San Francisco 08/25/03 07/19/04 125,000.00 9,761.03 134,761.03
San Francisco 07/12/02 10/07/04 100,000.00 23,524.06 123,524.06
Alameda 02/04/03 12/10/04 105,000.00 19,077.67 124,077.67
- -------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
------------------------------------------------------------------------------------------------------------
Alameda 11/30/02 02/11/03 149,999.50 3,281.24 153,280.74
San Francisco 10/12/88 11/04/03 60,000.00 76,042.84 136,042.84
San Joaquin 05/10/02 06/30/03 100,000.00 11,987.38 111,987.38
Alameda 08/28/03 04/18/04 147,165.94 4,815.01 151,980.95
------------------------------------------------------------------------------------------------------------
COMMERCIAL (county)
------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------------
175
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS III
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
COMMERCIAL (county)(continued)
------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
------------------------------------------------------------------------------------------------------------
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
Alameda 01/31/96 06/26/03 147,000.00 115,617.40 262,617.40
Tuolumne 08/25/00 04/07/03 59,500.00 17,883.29 77,383.29
------------------------------------------------------------------------------------------------------------
176
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS IV
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
SINGLE FAMILY 1-4 UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
Sonoma 11/18/87 12/26/02 70,000.00 86,359.95 156,359.95
San Francisco 04/08/86 09/19/03 75,000.00 144,878.32 219,878.32
San Mateo 08/07/98 07/22/03 27,000.00 15,313.22 42,313.22
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
Sacramento 07/16/98 04/04/03 4,570.00 1,305.69 5,875.69
San Mateo 01/20/98 05/10/04 48,500.00 29,083.54 77,583.54
San Mateo 07/09/87 06/30/04 5,500.00 6,292.58 11,792.58
San Mateo 07/09/87 06/30/04 82,500.00 90,700.75 173,200.75
- -------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
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
Sacramento 12/24/98 03/18/04 243,000.00 91,819.20 334,819.20
Sacramento 12/24/98 03/18/04 27,000.00 6,608.85 33,608.85
Alameda 08/28/03 04/18/04 44,153.41 1,444.62 45,598.03
San Francisco 01/31/95 10/18/04 26,750.00 18,193.27 44,943.27
- -------------------------------------------------------------------------------------------------------------
COMMERCIAL (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
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
Contra Costa 06/19/97 06/28/04 91,664.42 56,434.53 148,098.95
- -------------------------------------------------------------------------------------------------------------
177
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS V
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
SINGLE FAMILY 1-4 UNITS (county)
- ------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ------------------------------------------------------------------------------------------------------------
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
San Mateo 09/13/02 07/21/04 5,300.00 1,030.17 6,330.17
Stanislaus 08/26/92 09/15/04 49,000.00 71,293.83 120,293.83
- ------------------------------------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------------------------------------
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
Contra Costa 06/19/97 06/28/04 91,664.42 56,434.53 148,098.95
Shasta 05/10/95 07/14/04 58,333.16 49,690.13 108,023.29
- -------------------------------------------------------------------------------------------------------------
178
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VI
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
SINGLE FAMILY 1-4 UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
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
Santa Clara 07/08/03 12/11/03 210,000.00 7,556.38 217,556.38
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
San Mateo 07/16/03 09/29/03 137,500.00 2,523.03 140,023.03
Sonoma 10/30/96 09/02/03 23,259.30 12,458.28 35,717.58
Marin 11/12/02 07/15/04 105,000.00 18,067.33 123,067.33
San Mateo 09/13/02 07/21/04 53,000.00 10,301.68 63,301.68
San Francisco 07/12/02 10/07/04 250,000.00 58,809.75 308,809.75
- -------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
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 Joaquin 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
Alameda 08/28/03 04/18/04 294,319.77 9,629.63 303,949.40
San Francisco 01/31/95 10/18/04 40,125.00 27,289.91 67,414.91
- -------------------------------------------------------------------------------------------------------------
179
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VI
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
COMMERCIAL (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
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
Contra Costa 04/25/03 11/21/03 175,000.00 10,325.19 185,325.19
Alameda 01/31/96 06/26/03 63,000.00 49,550.32 112,550.32
San Mateo 08/13/90 06/16/03 185,000.00 304,202.46 489,202.46
San Mateo 02/12/03 04/13/04 46,578.00 5,378.35 51,956.35
San Mateo 02/12/03 04/13/04 116,922.00 13,500.94 130,422.94
Shasta 05/10/95 07/14/04 83,333.42 70,986.19 154,319.61
- -------------------------------------------------------------------------------------------------------------
180
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VII
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
SINGLE FAMILY 1-4 UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
Sonoma 09/18/96 04/30/02 11,932.63 5,350.83 17,283.46
Los Angeles 08/28/01 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
Contra Costa 01/22/03 12/24/03 100,000.00 9,525.27 109,525.27
Santa Clara 07/08/03 12/11/03 210,000.00 7,556.38 217,556.38
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
San Mateo 07/31/02 01/14/04 300,000.00 26,852.75 326,852.75
Santa Clara 08/13/02 02/04/04 275,000.00 47,002.23 322,002.23
San Francisco 04/16/04 07/23/04 156,000.00 3,488.48 159,488.48
Stanislaus 04/14/04 08/20/04 153,750.00 5,114.83 158,864.83
Contra Costa 04/23/04 09/20/04 250,000.00 9,304.97 259,304.97
- --------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
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 Joaquin 05/10/02 06/30/03 100,000.00 11,987.38 111,987.38
Alameda 08/28/03 04/18/04 882,983.51 28,889.69 911,873.20
Alameda 03/12/03 06/03/04 900,000.00 94,454.58 994,454.58
San Francisco 01/31/95 10/18/04 40,125.00 27,289.91 67,414.91
- --------------------------------------------------------------------------------------------------------------
181
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VII
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
COMMERCIAL (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
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
Contra Costa 06/19/97 06/28/04 146,667.16 90,295.80 236,962.96
Shasta 05/10/95 07/14/04 83,333.42 70,986.19 154,319.61
Alameda 12/16/03 11/18/04 675,000.00 59,636.26 734,636.26
- --------------------------------------------------------------------------------------------------------------
Land (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
Sacramento 11/28/01 12/03/04 135,000.00 29,490.66 164,490.66
- --------------------------------------------------------------------------------------------------------------
182
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VIII
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
SINGLE FAMILY 1-4 UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
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 08/2/01 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
Alameda 08/21/02 07/14/03 346,000.00 33,980.16 379,980.16
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
San Mateo 10/31/01 12/09/03 1,500,000.00 325,351.65 1,825,351.65
Santa Clara 07/08/03 12/11/03 500,000.00 7,556.38 507,556.38
Santa Clara 09/23/03 12/19/03 300,000.00 6,601.71 306,601.71
San Joaquin 08/18/03 01/26/04 229,750.00 10,893.07 240,643.07
Santa Clara 05/30/01 02/25/04 2,070,000.00 290,995.60 2,360,995.60
El Dorado 02/28/03 03/03/04 1,450,000.00 145,265.03 1,595,265.03
Contra Costa 11/12/03 03/03/04 400,000.00 10,324.19 410,324.19
- -------------------------------------------------------------------------------------------------------------
183
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VIII
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
SINGLE FAMILY 1-4 UNITS (county)(continued)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
San Francisco 11/21/01 03/11/04 300,000.00 70,906.84 370,906.84
Sonoma 07/24/03 04/01/04 500,000.00 31,273.58 531,273.58
Alameda 06/30/03 04/20/04 3,706,819.38 84,082.51 3,790,901.89
Santa Clara 11/13/03 04/22/04 40,000.00 1,496.21 41,496.21
San Mateo 04/30/03 05/20/04 414,886.55 31,479.29 446,365.84
Contra Costa 09/16/03 06/04/04 180,000.00 11,019.43 191,019.43
Lake 01/17/02 06/30/04 708,000.00 195,716.82 903,716.82
San Mateo 09/13/02 07/21/04 206,700.00 40,176.53 246,876.53
Santa Clara 12/11/02 08/06/04 629,676.47 63,534.36 693,210.83
Stanislaus 10/16/03 09/08/04 300,000.00 24,185.26 324,185.26
Marin 07/31/03 10/19/04 2,535,000.00 253,306.74 2,788,306.74
San Francisco 10/17/03 10/25/04 800,000.00 72,424.39 872,424.39
San Francisco 01/23/04 10/25/04 326,077.18 20,851.20 346,928.38
Mariposa 11/08/01 11/02/04 70,000.00 23,990.68 93,990.68
King 06/15/04 11/29/04 80,000.00 3,315.06 83,315.06
San Francisco 01/29/04 12/08/04 920,000.00 78,861.30 998,861.30
San Francisco 07/15/02 12/20/04 2,000,000.00 507,735.68 2,507,735.68
Napa 03/22/02 12/27/04 2,300,000.00 497,526.69 2,797,526.69
- -------------------------------------------------------------------------------------------------------------
184
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VIII
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
MULTIPLE 5+ UNITS (county)
- ---------------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ---------------------------------------------------------------------------------------------------------------------
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
Merced 05/08/01 03/12/04 182,000.00 59,032.16 241,032.16
Alameda 08/28/03 04/18/04 15,702,286.98 513,751.54 16,216,038.52
San Mateo 06/18/03 05/07/04 2,250,000.00 200,000.00 2,450,000.00
Alameda 03/12/03 06/03/04 9,420,000.00 988,623.03 10,408,623.03
Santa Clara 04/09/01 06/10/04 3,681,943.00 436,599.46 4,118,542.46
Sonoma 11/20/02 07/23/04 250,000.00 41,695.92 291,695.92
Santa Clara 12/12/03 11/22/04 2,204,437.00 277,962.25 2,482,399.25
El Dorado 07/30/04 12/15/04 682,500.00 22,560.41 705,060.41
Alameda 04/18/03 12/30/04 395,500.00 67,909.25 463,409.25
- ---------------------------------------------------------------------------------------------------------------------
185
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VIII
FOR THE THREE YEARS ENDED
DECEMBER 31, 2004
(NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
COMMERCIAL (county)(continued)
- ---------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ---------------------------------------------------------------------------------------------------------------
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
San Mateo 05/24/00 01/16/04 775,000.00 294,197.11 1,069,197.11
Santa Clara 01/22/03 01/30/04 1,387,500.00 139,501.62 1,527,001.62
Santa Clara 08/27/03 02/17/04 2,000,000.00 93,205.57 2,093,205.57
San Mateo 02/12/03 04/13/04 136,500.00 15,716.61 152,216.61
Alameda 02/22/02 04/26/04 1,714,419.42 388,319.22 2,102,738.64
San Francisco 04/24/03 07/14/04 420,000.00 50,344.74 470,344.74
Calaveras 01/17/03 07/26/04 1,500,000.00 178,495.42 1,678,495.42
San Francisco 09/19/97 09/22/04 650,000.00 490,485.46 1,140,485.46
Napa 05/23/03 10/29/04 1,625,000.00 233,368.11 1,858,368.11
San Francisco 03/28/97 11/24/04 644,912.24 560,446.15 1,205,358.39
Alameda 05/13/04 12/17/04 2,625,000.00 132,813.89 2,757,813.89
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186
SIXTH AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OF
REDWOOD MORTGAGE INVESTORS VIII
A CALIFORNIA LIMITED PARTNERSHIP
THIS SIXTH AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT was made and
entered into as of the 28th day of July, 2005, 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 and
$49,985,000 were acquired by investors. The fourth offering closed on 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 and
$57,447,382 were acquired by investors as of March 31, 2005. The fifth offering
closed on _______, 2005
G. In order to further increase the Partnership's capital base and permit
the Partnership to further diversify its portfolio, on July 28, 2005, the
General Partners elected to offer an additional $100,000,000 of Units.
H. In connection with the additional offering of $100,000,000 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 1 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.
187
1.3 "Benefit Plan Investor" means a Limited Partner who is subject to ERISA
or to the prohibited transaction provisions of Section 4975 of the Code.
1.4 "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 if any, paid by Redwood Mortgage Corp. that are specifically
allocated to such partner, 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.
(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 1.16, 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).
1.5 "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 10.14 through 10.16.
1.6 "Code" means the Internal Revenue Code of 1986 and corresponding
provisions of subsequent revenue laws.
1.7 "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.
1.8 "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.
1.9 "Earnings" means all revenues earned by the Partnership less all
expenses incurred by the Partnership.
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 "Fiscal Year" means a year ending December 31st.
188
1.12 "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.
1.13 "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.
1.14 "Formation Loans" means collectively the First, Second, Third, Fourth,
Fifth and Sixth Formation Loans.
1.15 "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.
1.16 "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.
1.17 "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.
1.18 "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.
1.19 "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.
1.20 "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.1.21 "Net Asset Value" means the
Partnership's total assets less its total liabilities.
1.22 "Partners" means the General Partners and the Limited Partners,
collectively. "Partner" means any one of the Partners.
1.23 "Partnership" means Redwood Mortgage Investors VIII, a California
limited partnership, the limited partnership created pursuant to this Agreement.
1.24 "Partnership Interest" means the percentage ownership interest of each
Partner in the partnership as defined in Section 5.1.
189
1.25 "Person" means any natural person, partnership, corporation,
unincorporated association or other legal entity.
1.26 "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 1.26 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 1.26, 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 1.26, 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.
1.27 "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.
1.28 "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.
1.29 "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.
1.30 "Sixth Formation Loan" means the loan to Redwood Mortgage Corp., an
affiliate of the General Partner, in connection with the offering of
$100,000,000 Units pursuant to the Prospectus dated July 28, 2005 equal to the
amount of the sales commissions and the amounts payable with unsolicited sales.
Redwood Mortgage Corp. will pay all sales commissions and amounts due in
connection with unsolicited sales from the Sixth Formation Loan. The Sixth
Formation Loan will be unsecured, will not bear interest, and will be repaid in
annual installments.
1.31 "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, October 7, 2003 and July 28, 2005 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").
190
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
Sections 7.2 and 7.3.
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:
191
(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 to 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.
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
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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.
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.
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(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 $172,223,000 as of December 31, 2004.
(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 $100,000,000.
(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.
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
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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 at the end of 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.
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
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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 have earnings
retained in his or her Capital Account 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 1.704-2. 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 5.4(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.
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(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.
(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.
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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.
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.
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(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).
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 (i) may jeopardize the continued ability of the Partnership to qualify
as a "partnership" for federal income tax purposes or (ii) that such sale or
transfer may violate any applicable laws, including, without limitation,
applicable securities laws (including any investment suitability standards) or
(iii) would jeopardize the partnership's existence or qualification as a limited
partnership under California law and or under the applicable laws of any other
jurisdiction in which the Partnership is then conducting business. In the case
of a Limited Partner who is a Benefit Plan Investor, the consent of the General
partners to any substitution of all or part of such Benefit Plan Investor's
Units shall not be withheld unless such General Partners believe in good faith
that (i) 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), or (ii) one of the other conditions in
Sections 7.2 or 7.3 hereof would not be met;
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(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 and except in the event of the Limited Partner's death within the first
year of his or her purchase of units. 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 whose capital
account balance is less than $1,000. 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 last day of 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.
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(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 last day of 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 last day 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.
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 1.4 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. The General Partners also have the
discretion to adjust the timing of withdrawals that would otherwise be made
during a taxable year, including deferring withdrawals indefinitely, if the
scheduled withdrawals could result in the Partnership being classified as a
"publicly traded partnership" within the meaning of Section 7704(b) of the Code
or any regulations of rules promulgated thereunder. 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 Benefit Plan Investors 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 or the investment will become subject to the liquidation
provisions set forth in Section 8.1 (a) through (f) above. 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
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one year shall be made in four equal quarterly installments beginning the last
day of 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 3.10 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
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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.
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.
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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, 2004, the total aggregate amount of the First Formation
Loan equaled $1,074,840 of which $785,000 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, 2004, the Partnership had
loaned $2,271,916 to Redwood Mortgage Corp. of which $1,013,000 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, 2004, the Partnership had loaned $2,217,952 to
Redwood Mortgage Corp. of which $558,000 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. As of
December 31, 2004, the Partnership had loaned $3,777,000 to Redwood Mortgage
Corp. of which $495,000 had been repaid.
The Fifth Formation Loan will be repaid as follows: Upon the commencement
of the offering in October, 2003, 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, Redwood Mortgage
Corp. will commence paying ten equal annual installments of principal only on
December 31 of each year. As of December 31, 2004, the Partnership had loaned
$3,570,000 to Redwood Mortgage Corp. of which $45,000 had been repaid.
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 Sixth Formation Loan on December 31 of each year. The Sixth Formation Loan
will be repaid under the same terms and conditions as the Second, Third, Fourth
and Fifth Formation Loans. With respect to this offering, the formation loan
could range from a minimum of $5,000,000 assuming all investors elected to
receive current cash distributions to a maximum of $9,000,000 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
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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) 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, including reimbursements for training
and education meetings for associated persons of an NASD member, 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, including reimbursements for training and
education meetings for associated persons of an NASD member, 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 may 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
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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. may 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 monthly
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 Offering 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 $4,000,000. 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 10.14, 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
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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.
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.
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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 Partners, 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
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(k) To modify provisions of this Agreement as noted in Sections 1.2 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. 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.
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 28, 2005 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.
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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
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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 28, 2005.
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 28,
2005, 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 "RISK
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.
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.
212
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. The
general partners also reserve the right to revoke its acceptance within such
thirty (30) day period. 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.
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.
- --------------------------------------------------------------------------------
213
REDWOOD MORTGAGE INVESTORS VIII
SUBSCRIPTION AGREEMENT
PLEASE READ THIS AGREEMENT BEFORE SIGNING
Type of Ownership: (check one)
[ ] INDIVIDUAL [ ] PENSION PLAN
(Trustee signature required)
[ ] TRUST (Trustee signature required) [ ] PROFIT SHARING PLAN
(Title page, Successor Trustee page (Trustee signature required)
and signature pages of the Trust
Agreement MUST be enclosed) [ ] KEOGH (H.R.10)
(Custodian signature required)
*[ ] JOINT TENANTS WITH RIGHTS
OF SURVIVORSHIP [ ] CUSTODIAL/UGMA (circle one)
(All parties must sign) (Custodian signature required)
*[ ] COMMUNITY PROPERTY [ ] TOD - Transfer On Death
(must be titled as an
*[ ] TENANTS IN COMMON Individual or as Joint Tenants
(All parties must sign) only - special form required)
*[ ] IRA [ ] 401(k)
(Individual Retirement Account) (Trustee signature required)
(Investor and Custodian must sign)
[ ] OTHER (Please describe)
*[ ] ROTH IRA
(Investor and Custodian must sign) -----------------------------
*[ ] SEP/IRA -----------------------------
(Investor and Custodian must sign)
-----------------------------
-----------------------------
-----------------------------
-----------------------------
* Two or more signatures required. Complete Sections 1 through 6 where
applicable
- --------------------------------------------------------------------------------
214
1. INVESTOR NAME Type or print your name(s) exactly as the title should
AND ADDRESS 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.
[ ] Mr. [ ] Mrs. [ ] Ms. [ ] Dr.
-------------------------------------------------------------
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 #/ Taxpayer ID#
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 Name of Custodian/Trust Company:
REGISTRATION
-----------------------------------------------
Please print here the exact name of Custodian/
Trust Company
-------------------------------------------------------------
Address
-------------------------------------------------------------
City State Zip Code
---------------------------- ------------------------
Taxpayer ID# Client Account Number
SIGNATURE:
-------------------------------------------
(X) (Custodian/Trust Company)
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"
----------------------------------------------------------------
215
If the investor has elected to compound their 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
The election to compound income may be changed after
three (3)years.
The election to distribute income is irrevocable.
If income is to be distributed:
Check One: [ ] Monthly [ ] Quarterly [ ] **Annually
(**payable only on 12/31)
5. SPECIAL ADDRESS
FOR CASH
DISTRIBUTIONS -------------------------------------------------------
(If the same as in Name Client Account #
Sections 1 or 2,
please disregard) -------------------------------------------------------
Address
-------------------------------------------------------
City State Zip Code
If cash distributions are to be sent to an address other than that listed,
in Sections 1 or 2, please enter the information here. All other communications
will be mailed to the investor's registered address of record under Sections 1
or 2. 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 , 200 ,
------- --------------- ----
at (City)
--------------------------------------
Investor's primary residence is in (State)
---------------------
(X)
-------------------------------------------------------
(Investor Signature and Title)
(X)
-------------------------------------------------------
(Investor Signature and Title)
216
7. BROKER-DEALER The undersigned broker-dealer hereby certifies that
DATA (i) a copy of the (To be completed by selling
prospectus, as amended and/or supplemented to date, has
been delivered to the broker-dealer) 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
Applications)
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
situation 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 marketability of
the units.
Registered Representative's Signature:
(X)
-------------------------------------------------------
8. ACCEPTANCE This subscription accepted
This subscription
will not be an REDWOOD MORTGAGE INVESTORS VIII,
effective agreement A California Limited Partnership
until it or a 900 Veterans Blvd., Suite 500
facsimile is signed Redwood City CA 94063
by a general partner
of Redwood Mortgage (650) 365-5341
Investors VIII, a
California limited
partnership
By:
---------------------------------------------------
(Office Use Only)
Partner #: Date Entered:
------------- ------------
Check Amount: $ Check Date:
------------- ------------
Check Number:
-------------
217
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."
218
- --------------------------------------------------------------------------------
REDWOOD MORTGAGE INVESTORS VIII
-------------------------------------------------------
$100,000,000 Units of Limited Partnership Interest
-------------------------------------------------------
General Partners:
Michael R. Burwell
Gymno Corporation
Redwood Mortgage Corp.
Dated: July 28, 2005
- --------------------------------------------------------------------------------
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 _________________, 2005 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.
219
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
$100,000,000 to be as follows:
Maximum of
$100,000,00
--------------
SEC Registration Fee $ 11,770
NASD Registration Fee 10,500
California Registration Fee 2,500
Printing and Engraving Expenses 335,000
Accounting Fees and Expenses 265,000
Legal Fees and Expenses 525,000
Other Blue Sky Filing Fees and Expenses 225,000
Postage 200,000
Advertising and Sales 420,000
Sales Literature 365,000
Due Diligence 400,000
Sales Seminars 1,000,000
Miscellaneous 240,230
--------------
Total $4,000,000
==============
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, 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.
220
ITEM 36. Financial Statements and Exhibits.
(a) Financial Statements Included in the Prospectus:
1. Redwood Mortgage Investors VIII:
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements, December 31, 2004 and
2003 and for each of the years in the three year period
ending December 31, 2004 Interim Consolidated Condensed
Financial Statements, as of March 31, 2005 (unaudited)
2. Gymno Corporation:
Report of Independent Registered Public Accounting Firm
Balance Sheet, as of December 31, 2004
Interim Balance Sheet, as of March 31, 2005 (unaudited)
3. Redwood Mortgage Corp.:
Report of Independent Registered Public Accounting Firm
Balance Sheet, as of September 30, 2004
Interim Balance Sheet, as of March 31, 2005 (unaudited)
(b) Exhibits:
Exhibit Number
1.1 Form of Participating Dealer Agreement
1.2 Form of Advisory Agreement
3.1 Sixth Amended and Restated Limited Partnership Agreement and
Subscription Agreements
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)
and 10.3(e)
221
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 Morrison and Foerster LLP
(included in Exhibit 5.1, Exhibit 5.2 and Exhibit 8.1)
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
following this offering.
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.
222
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 Pre-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
July 28, 2005.
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
223
Pursuant to the requirements of the Securities Act of 1933, this
Pre-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 -----------------------
Michael R. Burwell Gymno Corporation; Director July 28, 2005
of Gymno Corporation;
President of Redwood
Mortgage Corp.
/s/ Michael R. Burwell General Partner
- ---------------------- ------------------------
Michael R. Burwell July 28, 2005
224
Exhibit 1-1
100,000,000 Limited Partnership Units
($1 per Unit)
REDWOOD MORTGAGE INVESTORS VIII
PARTICIPATING BROKER DEALER AGREEMENT
- ------------------------
- ------------------------
- ------------------------
- ------------------------
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 28, 2005 (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 100,000,000 Units
($100,000,000).
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.
225
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 (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:
226
(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.
227
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.
228
(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: (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 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.
229
REDWOOD MORTGAGE CORP.
By:
----------------------------------
Michael R. Burwell, President
BROKER-DEALER ACCEPTANCE
ACCEPTED this day of , 200
------ ----------- --
By:
----------------------------------
(Print Name)
- -------------------------------------
(Signature)
- -------------------------------------
Title
- -------------------------------------
Taxpayer 1. D. No.
- -------------------------------------
(Telephone Number)
- -------------------------------------
Type of Entity:
(corporation, partnership or proprietorship)
230
Exhibit 1.2
100,000,000 Limited Partnership Units
($1 per Unit)
REDWOOD MORTGAGE INVESTORS VIII
ADVISORY AGREEMENT
- ---------------------------
- ---------------------------
- ---------------------------
- ---------------------------
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 28, 2005 (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 100,000,000 Units ($100,000,000).
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.
231
(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.
232
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.
233
(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.
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Michael Burwell, General Partner
BROKER-DEALER ACCEPTANCE
ACCEPTED this day of , 20
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By:
--------------------------------
(Print Name)
- -----------------------------------
(Signature)
- -----------------------------------
Title
- -----------------------------------
Taxpayer 1. D. No.
- -----------------------------------
(Telephone Number)
- -----------------------------------
Type of Entity:
(corporation, partnership or proprietorship)
234
SIXTH AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OF
REDWOOD MORTGAGE INVESTORS VIII
A CALIFORNIA LIMITED PARTNERSHIP
THIS SIXTH AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT was made and
entered into as of the 28th day of July, 2005, 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 and
$49,985,000 were acquired by investors. The fourth offering closed on 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 and
$57,447,382 were acquired by investors as of March 31, 2005. The fifth offering
closed on _______, 2005
G. In order to further increase the Partnership's capital base and permit
the Partnership to further diversify its portfolio, on July 28, 2005, the
General Partners elected to offer an additional $100,000,000 of Units.
H. In connection with the additional offering of $100,000,000 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 1 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 "Benefit Plan Investor" means a Limited Partner who is subject to ERISA
or to the prohibited transaction provisions of Section 4975 of the Code.
235
1.4 "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 if any, paid by Redwood Mortgage Corp. that are specifically
allocated to such partner, 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.
(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 1.16, 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).
1.5 "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 10.14 through 10.16.
1.6 "Code" means the Internal Revenue Code of 1986 and corresponding
provisions of subsequent revenue laws.
1.7 "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.
1.8 "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.
1.9 "Earnings" means all revenues earned by the Partnership less all
expenses incurred by the Partnership.
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 "Fiscal Year" means a year ending December 31st.
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1.12 "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.
1.13 "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.
1.14 "Formation Loans" means collectively the First, Second, Third, Fourth,
Fifth and Sixth Formation Loans.
1.15 "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.
1.16 "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.
1.17 "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.
1.18 "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.
1.19 "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.
1.20 "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.1.21 "Net Asset Value" means the
Partnership's total assets less its total liabilities.
1.22 "Partners" means the General Partners and the Limited Partners,
collectively. "Partner" means any one of the Partners.
1.23 "Partnership" means Redwood Mortgage Investors VIII, a California
limited partnership, the limited partnership created pursuant to this Agreement.
237
1.24 "Partnership Interest" means the percentage ownership interest of each
Partner in the partnership as defined in Section 5.1.
1.25 "Person" means any natural person, partnership, corporation,
unincorporated association or other legal entity.
1.26 "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 1.26 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 1.26, 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 1.26, 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.
1.27 "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.
1.28 "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.
1.29 "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.
1.30 "Sixth Formation Loan" means the loan to Redwood Mortgage Corp., an
affiliate of the General Partner, in connection with the offering of
$100,000,000 Units pursuant to the Prospectus dated July 28, 2005 equal to the
amount of the sales commissions and the amounts payable with unsolicited sales.
Redwood Mortgage Corp. will pay all sales commissions and amounts due in
connection with unsolicited sales from the Sixth Formation Loan. The Sixth
Formation Loan will be unsecured, will not bear interest, and will be repaid in
annual installments.
1.31 "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, October 7, 2003 and July 28, 2005 and any supplements or
amendments thereto (the "Prospectus").
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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
Sections 7.2 and 7.3.
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.
239
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;
(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
240
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 to 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
241
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
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).
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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 $172,223,000 as of December 31, 2004.
(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 $100,000,000.
(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
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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 at the end of 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
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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.
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 have earnings
retained in his or her Capital Account 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 1.704-2. 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
245
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 5.4(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.
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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.
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
247
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.
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.
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(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 (i) may jeopardize the continued ability of the Partnership to qualify
as a "partnership" for federal income tax purposes or (ii) that such sale or
transfer may violate any applicable laws, including, without limitation,
applicable securities laws (including any investment suitability standards) or
(iii) would jeopardize the partnership's existence or qualification as a limited
partnership under California law and or under the applicable laws of any other
jurisdiction in which the Partnership is then conducting business. In the case
of a Limited Partner who is a Benefit Plan Investor, the consent of the General
partners to any substitution of all or part of such Benefit Plan Investor's
Units shall not be withheld unless such General Partners believe in good faith
that (i) 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), or (ii) one of the other conditions in
Sections 7.2 or 7.3 hereof would not be met;
(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
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"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 and except in the event of the Limited Partner's death within the first
year of his or her purchase of units. 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 whose capital
account balance is less than $1,000. 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 last day of 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 last day of 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 last day 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.
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.
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(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 1.4 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. The General Partners also have the
discretion to adjust the timing of withdrawals that would otherwise be made
during a taxable year, including deferring withdrawals indefinitely, if the
scheduled withdrawals could result in the Partnership being classified as a
"publicly traded partnership" within the meaning of Section 7704(b) of the Code
or any regulations of rules promulgated thereunder. 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 Benefit Plan Investors 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 or the investment will become subject to the liquidation
provisions set forth in Section 8.1 (a) through (f) above. 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 last
day of 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.
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(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 3.10 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
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).
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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.
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
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annual installments of principal without interest, commencing on December 31,
1996. As of December 31, 2004, the total aggregate amount of the First Formation
Loan equaled $1,074,840 of which $785,000 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, 2004, the Partnership had
loaned $2,271,916 to Redwood Mortgage Corp. of which $1,013,000 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, 2004, the Partnership had loaned $2,217,952 to
Redwood Mortgage Corp. of which $558,000 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. As of
December 31, 2004, the Partnership had loaned $3,777,000 to Redwood Mortgage
Corp. of which $495,000 had been repaid.
The Fifth Formation Loan will be repaid as follows: Upon the commencement
of the offering in October, 2003, 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, Redwood Mortgage
Corp. will commence paying ten equal annual installments of principal only on
December 31 of each year. As of December 31, 2004, the Partnership had loaned
$3,570,000 to Redwood Mortgage Corp. of which $45,000 had been repaid.
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 Sixth Formation Loan on December 31 of each year. The Sixth Formation Loan
will be repaid under the same terms and conditions as the Second, Third, Fourth
and Fifth Formation Loans. With respect to this offering, the formation loan
could range from a minimum of $5,000,000 assuming all investors elected to
receive current cash distributions to a maximum of $9,000,000 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.
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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) 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, including reimbursements for
education meetings for associated persons of an NASD member, 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, including reimbursements for education
meetings for associated persons of an NASD member, 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 may 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. may 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 monthly
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.
255
10.14 Reimbursement of Offering 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 $4,000,000. 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 10.14, 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.
256
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
257
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 Partners, 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 1.2 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. 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.
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.
258
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 28, 2005 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.
259
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
260
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 28, 2005.
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 28,
2005, 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 "RISK
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.
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.
261
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. The
general partners also reserve the right to revoke its acceptance within such
thirty (30) day period. 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.
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.
- --------------------------------------------------------------------------------
262
REDWOOD MORTGAGE INVESTORS VIII
SUBSCRIPTION AGREEMENT
PLEASE READ THIS AGREEMENT BEFORE SIGNING
Type of Ownership: (check one)
[ ] INDIVIDUAL [ ] PENSION PLAN
(Trustee signature required)
[ ] TRUST (Trustee signature required) [ ] PROFIT SHARING PLAN
(Title page, Successor Trustee page (Trustee signature required)
and signature pages of the Trust
Agreement MUST be enclosed) [ ] KEOGH (H.R.10)
(Custodian signature required)
*[ ] JOINT TENANTS WITH RIGHTS
OF SURVIVORSHIP [ ] CUSTODIAL/UGMA (circle one)
(All parties must sign) (Custodian signature required)
*[ ] COMMUNITY PROPERTY [ ] TOD - Transfer On Death
(must be titled as an
*[ ] TENANTS IN COMMON Individual or as Joint Tenants
(All parties must sign) only - special form required)
*[ ] IRA [ ] 401(k)
(Individual Retirement Account) (Trustee signature required)
(Investor and Custodian must sign)
[ ] OTHER (Please describe)
*[ ] ROTH IRA
(Investor and Custodian must sign) -----------------------------
*[ ] SEP/IRA -----------------------------
(Investor and Custodian must sign)
-----------------------------
-----------------------------
-----------------------------
-----------------------------
* Two or more signatures required. Complete Sections 1 through 6 where
applicable
- --------------------------------------------------------------------------------
263
1. INVESTOR NAME Type or print your name(s) exactly as the title should
AND ADDRESS 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.
[ ] Mr. [ ] Mrs. [ ] Ms. [ ] Dr.
-------------------------------------------------------------
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 #/ Taxpayer ID#
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 Name of Custodian/Trust Company:
REGISTRATION
-----------------------------------------------
Please print here the exact name of Custodian/
Trust Company
-------------------------------------------------------------
Address
-------------------------------------------------------------
City State Zip Code
---------------------------- ------------------------
Taxpayer ID# Client Account Number
SIGNATURE:
-------------------------------------------
(X) (Custodian/Trust Company)
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"
----------------------------------------------------------------
264
If the investor has elected to compound their 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
The election to compound income may be changed after
three (3)years.
The election to distribute income is irrevocable.
If income is to be distributed:
Check One: [ ] Monthly [ ] Quarterly [ ] **Annually
(**payable only on 12/31)
5. SPECIAL ADDRESS
FOR CASH
DISTRIBUTIONS -------------------------------------------------------
(If the same as in Name Client Account #
Sections 1 or 2,
please disregard) -------------------------------------------------------
Address
-------------------------------------------------------
City State Zip Code
If cash distributions are to be sent to an address other than that listed,
in Sections 1 or 2, please enter the information here. All other communications
will be mailed to the investor's registered address of record under Sections 1
or 2. 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 , 200 ,
------- --------------- ----
at (City)
--------------------------------------
Investor's primary residence is in (State)
---------------------
(X)
-------------------------------------------------------
(Investor Signature and Title)
(X)
-------------------------------------------------------
(Investor Signature and Title)
265
7. BROKER-DEALER The undersigned broker-dealer hereby certifies that
DATA (i) a copy of the (To be completed by selling
prospectus, as amended and/or supplemented to date, has
been delivered to the broker-dealer) 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
Applications)
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
situation 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 marketability of
the units.
Registered Representative's Signature:
(X)
-------------------------------------------------------
8. ACCEPTANCE This subscription accepted
This subscription
will not be an REDWOOD MORTGAGE INVESTORS VIII,
effective agreement A California Limited Partnership
until it or a 900 Veterans Blvd., Suite 500
facsimile is signed Redwood City CA 94063
by a general partner
of Redwood Mortgage (650) 365-5341
Investors VIII, a
California limited
partnership
By:
---------------------------------------------------
(Office Use Only)
Partner #: Date Entered:
------------- ------------
Check Amount: $ Check Date:
------------- ------------
Check Number:
-------------
266
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."
267
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 28, 2005.
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 28,
2005, 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 "RISK
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.
268
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. The
general partners also reserve the right to revoke its acceptance within such
thirty (30) day period. 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.
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.
- --------------------------------------------------------------------------------
269
REDWOOD MORTGAGE INVESTORS VIII
SUBSCRIPTION AGREEMENT
PLEASE READ THIS AGREEMENT BEFORE SIGNING
Type of Ownership: (check one)
[ ] INDIVIDUAL [ ] PENSION PLAN
(Trustee signature required)
[ ] TRUST (Trustee signature required) [ ] PROFIT SHARING PLAN
(Title page, Successor Trustee page (Trustee signature required)
and signature pages of the Trust
Agreement MUST be enclosed) [ ] KEOGH (H.R.10)
(Custodian signature required)
*[ ] JOINT TENANTS WITH RIGHTS
OF SURVIVORSHIP [ ] CUSTODIAL/UGMA (circle one)
(All parties must sign) (Custodian signature required)
*[ ] COMMUNITY PROPERTY [ ] TOD - Transfer On Death
(must be titled as an
*[ ] TENANTS IN COMMON Individual or as Joint Tenants
(All parties must sign) only - special form required)
*[ ] IRA [ ] 401(k)
(Individual Retirement Account) (Trustee signature required)
(Investor and Custodian must sign)
[ ] OTHER (Please describe)
*[ ] ROTH IRA
(Investor and Custodian must sign) -----------------------------
*[ ] SEP/IRA -----------------------------
(Investor and Custodian must sign)
-----------------------------
-----------------------------
-----------------------------
-----------------------------
* Two or more signatures required. Complete Sections 1 through 6 where
applicable
- --------------------------------------------------------------------------------
270
1. INVESTOR NAME Type or print your name(s) exactly as the title should
AND ADDRESS 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.
[ ] Mr. [ ] Mrs. [ ] Ms. [ ] Dr.
-------------------------------------------------------------
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 #/ Taxpayer ID#
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 Name of Custodian/Trust Company:
REGISTRATION
-----------------------------------------------
Please print here the exact name of Custodian/
Trust Company
-------------------------------------------------------------
Address
-------------------------------------------------------------
City State Zip Code
---------------------------- ------------------------
Taxpayer ID# Client Account Number
SIGNATURE:
-------------------------------------------
(X) (Custodian/Trust Company)
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"
----------------------------------------------------------------
271
If the investor has elected to compound their 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
The election to compound income may be changed after
three (3)years.
The election to distribute income is irrevocable.
If income is to be distributed:
Check One: [ ] Monthly [ ] Quarterly [ ] **Annually
(**payable only on 12/31)
5. SPECIAL ADDRESS
FOR CASH
DISTRIBUTIONS -------------------------------------------------------
(If the same as in Name Client Account #
Sections 1 or 2,
please disregard) -------------------------------------------------------
Address
-------------------------------------------------------
City State Zip Code
If cash distributions are to be sent to an address other than that listed,
in Sections 1 or 2, please enter the information here. All other communications
will be mailed to the investor's registered address of record under Sections 1
or 2. 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 , 200 ,
------- --------------- ----
at (City)
--------------------------------------
Investor's primary residence is in (State)
---------------------
(X)
-------------------------------------------------------
(Investor Signature and Title)
(X)
-------------------------------------------------------
(Investor Signature and Title)
272
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:
----------------------------------------
Telephone Number
----------------------------------------
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
273
8. ACCEPTANCE This subscription accepted
This subscription
will not be an REDWOOD MORTGAGE INVESTORS VIII,
effective agreement A California Limited Partnership
until it or a 900 Veterans Blvd., Suite 500
facsimile is signed Redwood City CA 94063
by a general partner
of Redwood Mortgage (650) 365-5341
Investors VIII, a
California limited
partnership
By:
---------------------------------------------------
(Office Use Only)
Partner #: Date Entered:
------------- ------------
Check Amount: $ Check Date:
------------- ------------
Check Number:
-------------
274
- --------------------------------------------------------------------------------
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 Broker/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
275
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."
276
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."
277
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
==================================================================================================================================
278
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
- -----------------------------------------------------------------------------------------------------------------------------------
279
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
280
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
- -----------------------------------------------------------------------------------------------------------------------------------
281
Exhibit 5.1
(Letterhead of Morrison & Foerster LLP)
July 28, 2005
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 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 100,000,000 units of limited partnership
interests of the Partnership, at $1.00 per Unit, as described more fully in the
registration statement ("Registration Statement") and prospectus contained in
the registration statement (the "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 Sixth Amended and
Restated Limited Partnership Agreement (the "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 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:
(i) 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.
(ii) 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 upon the execution of the Limited Partnership Agreement
by the Limited Partners, the Units will be legally and validly issued, fully
282
paid and non-assessable, to the extent described in the Prospectus under the
heading "SUMMARY OF PARTNERSHIP AGREEMENT".
(iii) The Partnership will have all authority necessary to own and manage
its Mortgage Investments as defined in the Limited Partnership Agreement as and
when required, and to conduct the business which it proposes to conduct as
described in the Limited Partnership Agreement.
We undertake no obligation to update this opinion, or to ascertain after
the date hereof whether circumstances occurring after such date may affect the
conclusions set forth herein.
This opinion is furnished to you solely for use in connection with the
Prospectus. We hereby consent to the filing of this opinion as an exhibit to the
Partnership's filings with the SEC in connection with the offering of the Units.
We also consent to the reference to our firm name in the Prospectus under the
caption "Legal Matters." In giving this consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the SEC thereunder, nor do we
thereby admit that we are experts with respect to any part of the Registration
Statement within the meaning of the term "experts" as used in the Securities Act
or the rules and regulations of the SEC promulgated thereunder.
Sincerely yours,
/s/ Morrison & Foerster LLP
283
Exhibit 5.2
[Letterhead of Morrison & Foerster, LLP]
July 28, 2005
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;
Ladies and Gentlemen:
We are acting as counsel for Redwood Mortgage Investors VIII, a limited
partnership formed under the California Revised Limited Partnership Act (the
"Partnership"), with respect to its Registration Statement on Form S-11, as may
be amended (the "Registration Statement") and the 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 100,000,000 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, the Internal Revenue Code of 1986, as amended
(the "Code") and the applicable final or proposed Treasury Regulations
promulgated thereunder (the "Regulations"), and 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 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.
You have requested our opinion that (i) the Partnership will not hold any
"plan assets" within the meaning of U.S. Department of Labor ("DOL") regulation
29 C.F.R. ss. 2510.3-101 (the "Plan Assets Regulation") that are subject to
ERISA as the result of the purchase or holding of Units by an employee benefit
plan subject to ERISA, or as defined under Code Section 4975(e)(1) (a "Plan"),
and (ii) none of the transactions contemplated by the Sixth Amended and Restated
Limited Partnership Agreement of the Partnership (the "Partnership Agreement"),
will constitute nonexempt "prohibited transactions" within the meaning of
Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code") (hereinafter, all references to ERISA shall be deemed to
include the analogous provisions of the Code). In rendering the opinions
expressed below, we have examined the following:
1. The Partnership Agreement
2. The Registration Statement;
3. The Prospectus;
4. The form of Subscription Agreement;
284
5. Information and representations that have been provided to us by the
General Partner; and
6. ERISA, the Code, regulations and interpretations issued by the DOL, and
available case law.
We are relying without investigation on the information and representations
that have been provided to us by the General Partner. We express no assurance
that these representations are accurate. Any material change in any fact,
representation or assumption from those relied on herein may affect our analysis
of the opinions expressed herein.
I. Whether the Underlying Assets of the Partnership Are ERISA Plan Assets.
A Plan's equity investment in an entity will cause the Plan's assets to
include both the equity interest and an undivided interest in each of the
underlying assets of the entity, unless (i) the entity is an operating company,
(ii) equity participation in the entity by benefit plan investors is not
significant, or (iii) the equity interest is either a "publicly-offered
security" or a security issued by an investment company registered under the
Investment Company Act of 1940. If, as a result of a Plan's equity investment in
an entity the underlying assets of such entity are considered "plan assets"
under ERISA, subsequent transaction between the entity and a "party in interest"
to the Plan could constitute a prohibited transaction under Section 406 of ERISA
or Section 4975 of the Code in the absence of an applicable exemption.
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 would
most likely be considered "equity interests" for purposes of the Plan Assets
Regulation. For the reasons stated below, however, we are of the opinion that
the underlying assets of the Partnership will not constitute ERISA plan assets
as a result of the investment by a Plan in any of the Units, because such Units
meet the requirements in the Plan Assets Regulation for a "publicly offered
security".
The Units will be considered a "publicly offered security" if they are: (A)
"freely transferable," (B) part of a class of securities that is "widely held,"
and (C) part of a class of securities registered under Section 12(b) or 12(g) of
the Securities Exchange Act of 1934 or sold pursuant to an effective
registration statement under the Securities Act of 1933 and later registered
under the Securities Exchange Act of 1934. 29 CFR 2510.3-101(b)(2).
(A) "Freely Transferable".
The first requirement under the Plan Assets Regulation for the Units to be
considered "publicly offered securities" is that the Units must be "freely
transferable." The determination of whether the Partnership Units are "freely
transferable" is a factual one. 29 CFR 2510.3-101(b)(4).
The Plan Assets Regulation provides that where the minimum required
investment is $10,000 or less, the presence of certain restrictions governing
the transferability of securities ordinarily will not, alone or in combination,
affect a finding that such securities are freely transferable. The minimum
required investment amount under the Partnership Agreement is $2,000, which is
below the $10,000 threshold established under the Plan Assets Regulation. The
Prospectus and Section 7.2 of the Partnership Agreement contain certain
restrictions on transfer of Units. Such restrictions, however, in our opinion,
do not prevent the Units from being considered "freely transferable" under the
Plan Assets Regulation. For example:
1. Under Section 4.2(f) of the Partnership Agreement and Section 1(b) of
the Subscription Agreement, the assignment or other transfer of units is subject
to compliance with the minimum investment and suitability standards imposed by
the Partnership Agreement, in compliance with federal and state securities laws,
except in the case of a transfer by gift or inheritance or upon family
dissolution or an intra-family transfer. In addition, the Prospectus provides
that unless the General Partners shall give their express written approval, no
Units may be assigned or otherwise transferred to a minor or incompetent (unless
a guardian, custodian or conservator has been appointed to handle the affairs of
such person). We believe that both of these restrictions are permitted under the
Plan Assets Regulation, which permits at 29 CFR 2510.3-101(b)(4)(ii) any
restriction on transfer or assignment of a security to an ineligible to
unsuitable investor, and by 29 CFR 2510.3-101(b)(4)(iii), which permits any
restriction on transfer in compliance with securities or other laws.
2. Sections 7.2(b)(i), 7.3(a) and 7.3(c) of the Partnership Agreement
prohibit transfers that may (i) affect the partnership's existence or
qualification as a limited partnership under the California Revised Limited
Partnership Act or the applicable laws of any other jurisdiction in which the
partnership is then conducting business, (ii) jeopardize the continued ability
of the partnership to qualify as a "partnership" for federal income tax
purposes, (iii) cause a termination of the partnership for federal or California
income tax purposes, (iv) result in the Partnership being classified as a
"publicly traded partnership" within the meaning of Section 7704(b) of the Code
or any regulations or rules promulgated thereunder, or (v) violate the
restrictions on transfer imposed under the California Commissioner of
Corporations Rule 260.141.11. We believe that these restrictions are permitted
under 29 CFR 2510.3-101(b)(4)(iii), which permits any restriction on, or
prohibition against, any transfer or assignment which would either result in a
termination or reclassification of an 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.
285
3. Section 7.2(e) of the Partnership Agreement requires any assignee of a
Unit to pay all reasonable expenses connected with such assignment, including
but not limited to reasonable attorneys' fees associated with the transfer. We
think this restriction is permissible under 29 CFR 2510.3-101(b)(4)(iv), which
permits any requirement that reasonable transfer or administrative fees be paid
in connection with a transfer or assignment.
4. Section 7.2(d) of the Partnership Agreement provides that any assignee
of a Unit shall accept, adopt and approve in writing all of the terms and
provisions of this Agreement as the same may have been amended. In addition, the
final sentence of Section 7.2 provides that the transfer of a Unit is not
effective unless the Partnership has received, if required by the General
Partners, a legal opinion satisfactory to the General Partners that the transfer
of the Unit 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. We think these restrictions are permitted by 29 CFR
2510.3-101(b)(4)(v), which permits any requirement that advance notice of a
transfer or assignment of an interest 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 permitted under 29 CFR 2510.3-101(b)(4)) requiring compliance with
the entity's governing instruments.
5. Section 7.2(a) of the Partnership Agreement provides that the assignor
of a Unit shall designate any intention to transfer a Unit in a written
instrument of assignment, which must be in a form and substance reasonably
satisfactory to the General Partners. Likewise, Section 7.2(c) of the
Partnership Agreement provides that the assignor and assignee of a Unit shall
execute and acknowledge such instruments as the General Partners may deem
necessary to effectuate such substitution, including, but not limited to, a
power of attorney. Finally, Section 4.2(f) of the Partnership Agreement provides
that admission to the Partnership shall be subject to the receipt of
subscription funds, to create appropriate reserves or to pay organizational
expenses, as described in the Prospectus. We believe that these restrictions on
transfer are permitted under 29 CFR 2510.3-101(b)(4)(v), discussed above, and
under 29 CFR 2510.3-101(b)(4)(vii), which permits any administrative procedure
that establishes an effective date, or an event, such as the completion of the
offering, prior to which a transfer or assignment will not be effective.
6. The Prospectus contains transfer restrictions that are imposed by member
firms of the National Association of Securities Dealers, Inc. ("NASD"),
regarding suitability of the transferee of a Unit as to financial position and
net worth under Section 3(b) of Rule 2810 to the NASD's Conduct Rules. We
believe these restrictions are permitted under 29 CFR 2510.3-101(b)(4)(viii),
which permits 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.
(B) "Widely Held".
The second requirement under the Plan Assets Regulation for the Units to be
considered "publicly offered securities" is that the Units must be "widely
held." The Partnership Units are considered "widely held" for this purpose only
if they are owned by 100 or more investors independent of the issuer and of one
another. A class of securities will not fail to be considered "widely held"
under the Plan Assets Regulation solely because subsequent to the initial
offering, the number of independent investors falls below 100 as the result of
events beyond the control of the issuer. 29 CFR 2510.3-101(b)(3). For purposes
of rendering our opinion hereunder, we have relied on the statement of the
General Partner that the Units are "widely held" within the meaning of the Plan
Assets Regulation.
(C) Registered under the Securities Exchange Act of 1934.
The third requirement under the Plan Assets Regulation for the Units to be
considered "publicly offered securities" is that the Units must be part of a
class of securities registered under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934 or sold pursuant to an effective registration statement
under the Securities Act of 1933 and later registered under the Securities
Exchange Act of 1934. 29 CFR 2510.3-101(b)(2). For purposes of rendering our
opinion hereunder, we have relied on the statement of the General Partner that
the Units are part of a class of securities registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934.
Based on the foregoing, and subject to the qualifications set forth below,
it is our opinion that, under the law and regulations and the terms of the
Partnership in effect on the date of this letter, the Units are "publicly
offered securities" under the Plan Assets Regulation, and the underlying assets
of the Partnership will not consist of "plan assets", as that term is defined in
the Plan Assets Regulation, as the result of the purchase or holding of any
Units by Plans.
II. Whether Transactions Contemplated under the Partnership Agreement
Constitute Prohibited Transactions.
If a transaction between the Partnership and a party were deemed to involve
a direct or indirect transaction between any Plan investing in Units and a
"party in interest", as defined in ERISA Section 3(14) or a "disqualified
person", as defined in Code Section 4975 of the Code with respect to such Plan,
the Limited Partnership Agreement would involve a prohibited transaction under
ERISA or the Code. However, to the extent the Units qualify as "publicly offered
securities" under 29 CFR 2510.3-101(b)(2), the underlying assets of the
Partnership would not be deemed to be "plan assets" under ERISA and transactions
between the Partnership and a Plan or between the Partnership and any third
286
party would not be deemed to involve a direct or indirect prohibited transaction
for purposes of the prohibited transaction rules of ERISA and the Code.
Accordingly, based on the foregoing, and subject to the qualifications set
forth below, for as long as the Units qualify as "publicly offered securities"
under the Plan Assets Regulation, it is our opinion that, under the law and
regulations and the terms of the Partnership in effect on the date of this
letter, none of the transactions contemplated by the Limited Partnership
Agreement will constitute a nonexempt prohibited transaction within the meaning
of ERISA Section 406 or Code Section 4975 (including transactions prohibited
between Plans and parties in interest under ERISA Section 406(a) or self-dealing
fiduciary transactions prohibited under ERISA Section 406(b)) as the result of
the purchase or holding of any Units by Plans.
The Prospectus provides that the General Partner will not permit an
investor to purchase Units with assets of any Plan (i) if any of the General
Partners or 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, and that each fiduciary of a Plan investing in Units has acted and
will act consistent with its fiduciary duties under ERISA.
We also assume for the purpose of rendering the opinions in this letter
that no transaction contemplated under the Partnership Agreement, including the
decision by a fiduciary to a Plan to invest in the Partnership, is a part of an
arrangement, agreement or understanding to engage in a transaction with or for
the benefit of a party in interest or disqualified person to any Plan for the
purpose of avoiding any restriction imposed by ERISA.
For purposes of rendering the opinions expressed above, we have with your
permission assumed (i) the due formation, organization, valid existence, good
standing and qualification to do business under applicable state laws of each of
the parties to the various documents identified above (the "Transaction
Documents"), (ii) that each of the parties thereto has the necessary corporate,
limited liability company or partnership power and authority and has been duly
authorized by all necessary action to execute and deliver such documents and to
perform its or their obligations thereunder, (iii) that each of the Transaction
Documents constitutes the valid and legally binding agreement of each of the
parties thereto enforceable against each of them in accordance with its terms,
and (iv) that any certificate or other document on which we have relied that was
given or dated earlier than the date of this letter has continued to remain
accurate, insofar as relevant to our opinion, from such earlier dates through
and including the date of this letter.
This opinion is limited to a discussion of whether the Partnership
Agreement or the transactions contemplated thereunder will constitute prohibited
transactions under ERISA or Section 4975 of the Code and whether the Borrower
holds "plan assets" for purposes of ERISA and the Code. This letter should not
be construed to express any other opinion or to address any other issue arising
under ERISA, the Code or any other law.
We undertake no obligation to update this opinion, or to ascertain after
the date hereof whether circumstances occurring after such date may affect the
conclusions set forth herein. We express no opinion as to matters governed by
any laws other than ERISA, the Code, the Regulations, published administrative
announcements and rulings of the DOL, and court decisions.
This opinion is furnished to you solely for use in connection with the
Prospectus. We hereby consent to the filing of this opinion as an exhibit to the
Partnership's filings with the SEC in connection with the offering of Units. We
also consent to the reference to our firm name in the Prospectus under the
caption "Legal Matters." In giving this consent, we do not admit that we come
under the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the SEC thereunder, nor do we
thereby admit that we are experts with respect to any part of the Registration
Statement within the meaning of the term "experts" as used in the Securities Act
or the rules and regulations of the SEC promulgated thereunder.
Very truly yours,
By: /s/ MORRISON FOERSTER LLP
287
Exhibit 8.1
[Letterhead of Morrison & Foerster, LLP]
July 28, 2005
Michael R. Burwell
Gymno Corporation
Redwood Mortgage Corp.
Redwood Mortgage Investors VIII
900 Veterans Blvd., Suite 500
Redwood City, CA 94063
Re: Classification of Redwood Mortgage Investors VIII
Ladies and Gentlemen:
We have acted as counsel to Redwood Mortgage Investors VIII, a California
limited partnership (the "Partnership") and its general partners, Michael R.
Burwell, Gymno Corporation and Redwood Mortgage Corp. in connection with its
offering for sale of $100,000,000 of units of limited partnership interest, $1
per unit (the "Units"). The Units are the subject of a registration statement
(the "Registration Statement") on Form S-11 filed by the Partnership with the
Securities Exchange Commission ("SEC") under the Securities Act of 1933 (the
"Securities Act"), and a prospectus (the "Prospectus") contained in the
Registration Statement. This opinion is being filed as Exhibit 8.1 to such
Registration Statement. Capitalized terms not defined herein shall have the
meanings ascribed to them in the certificate (or incorporated therein by
reference), dated of even date herewith (the "Certificate"), delivered to
Morrison & Foerster LLP by Michael R. Burwell, Gymno Corporation and Redwood
Mortgage Corporation, each as general partner of the Partnership, which provides
certain representations by them relevant to this opinion.
You have requested our opinion as to the classification of the Partnership
for U.S. federal income tax purposes and certain other U.S. federal income tax
matters. In our capacity as counsel to the Partnership and for purposes of
rendering this opinion, we have examined and relied upon the following, with
your consent: (i) the Certificate, (ii) the Prospectus, (iii) the Sixth Amended
and Restated Limited Partnership Agreement of Redwood Mortgage Investors VIII,
by and between Michael R. Burwell, Gymno Corporation and Redwood Mortgage
Corporation, each as general partner, and the limited partners signatory thereto
(the "Agreement") and (iv) such other documents as we have considered relevant
to our analysis. In our examination of such documents, we have assumed the
authenticity of original documents, the accuracy of copies, the genuineness of
signatures, and the legal capacity of signatories. We have also assumed that all
parties to such documents have acted, and will act, in accordance with the terms
of such documents.
Furthermore, our opinion is based on (a) our understanding of the facts as
represented to us in the Certificate and (b) the assumption that (i) the
Partnership has a valid legal existence under the laws of the state in which it
was formed and has operated in accordance with the laws of such state, (ii) the
Partnership is operated, and will continue to be operated, in the manner
described in the Certificate, (iii) the Partnership is operated, and will
continue to be operated, in accordance with the Agreement, (iv) the Agreement
will not be materially modified or amended, (v) the facts contained in the
Registration Statement and the Prospectus are true and complete in all material
respects, (vi) all representations of fact contained in the Certificate are true
and complete in all material respects, and (vii) any representation of fact in
the Certificate that is made "to the knowledge" or similarly qualified is
correct without such qualification. We have not undertaken any independent
inquiry into or verification of these facts either in the course of our
representation of the Partnership or for the purpose of rendering this opinion.
We can provide no assurance that the assumptions on which our opinion is
based will ultimately prove to be accurate. We also note that the tax
consequences addressed herein depend upon the actual occurrence of events in the
future, which events may or may not be consistent with any representations made
to us for purposes of this opinion. To the extent that the facts differ from
those represented to or assumed by us herein, our opinion should not be relied
upon.
Our opinion herein is based on existing law as contained in the Internal
Revenue Code of 1986, as amended (the "Code"), final and temporary Treasury
Regulations promulgated thereunder, administrative pronouncements of Internal
Revenue Service (the "IRS") and court decisions as of the date hereof. The
provisions of the Code and the Treasury Regulations, IRS administrative
pronouncements and case law upon which this opinion is based could be changed at
any time, perhaps with retroactive effect. In addition, some of the issues under
existing law that could significantly affect our opinion have not yet been
authoritatively addressed by the IRS or the courts, and our opinion is not
binding on the IRS or the courts. Hence, there can be no assurance that the IRS
will not challenge, or that the courts will agree, with our conclusions.
288
Pursuant to Section 7704 of the Code, a publicly traded partnership is any
partnership the interests in which are traded on an "established securities
market" or are readily tradable on a "secondary market or the substantial
equivalent thereof." Treasury Regulations under Section 7704 (the "Regulations")
provide certain safe harbors, pursuant to which interests in a partnership will
not be considered readily tradable on a secondary market or the substantial
equivalent thereof. The Regulations specifically provide that the fact that a
partnership does not qualify for the safe harbors is disregarded for purposes of
determining whether interests in the partnership are readily tradable on a
secondary market or the substantial equivalent thereof. Instead, in such case,
the partnership's status must be determined under a general "facts and
circumstances" standard set forth in the Regulations.
Based upon, and subject to, the foregoing and the next paragraphs below, we
are of the opinion that, as of the date hereof:
(i) The Partnership will be treated as a partnership for U.S. federal
income tax purposes, and not as an association taxable as a corporation;
(ii) Based upon the legislative history of Section 7704, the text of the
Regulations, the anticipated operations of the Partnership as described in the
Prospectus and the Agreement, and the representations of the General Partners
contained in the Certificate, the Partnership will not be treated as a publicly
traded partnership, within the meaning of Section 7704 of the Code; and
(iii) We have reviewed the statements included or incorporated by reference
in the Prospectus under the headings "Risk Factors - Tax Risks" and "Material
Federal Income Tax Consequences," and insofar as such statements pertain to
matters of law or legal conclusions, in each case with respect to U.S. federal
income tax law, they are correct in all material respects.
We undertake no obligation to update this opinion, or to ascertain after
the date hereof whether circumstances occurring after such date may affect the
conclusions set forth herein. We express no opinion as to matters governed by
any laws other than the Code, the Treasury Regulations, published administrative
announcements and rulings of the IRS, and court decisions.
This opinion is furnished to you solely for use in connection with the
Prospectus. We hereby consent to the filing of this opinion as an exhibit to the
Partnership's filings with the SEC in connection with the offering of the Units.
We also consent to the reference to our firm name in the Prospectus under the
captions "Risk Factors - Tax Risks," "Material Federal Income Tax Consequences"
and "Legal Matters." In giving this consent, we do not admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the SEC thereunder, nor do we
thereby admit that we are experts with respect to any part of the Registration
Statement within the meaning of the term "experts" as used in the Securities Act
or the rules and regulations of the SEC promulgated thereunder.
Very truly yours,
/s/ Morrison & Foerster LLP
July 28, 2005
289
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 the
undersigned beneficiary ("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: Series # County , CA
----------------- -------------
Beneficiary's Investment: Percentage of Ownership: %
------------- -------
It is understood that the Beneficiary's interest in said Note may be a
fractional undivided ownership interest, 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. If Broker
has previously originated and funded the Note and Deed of Trust in Broker's own
name or the interest in the Note and Deed of Trust covered herby were previously
held by another investor, Broker agrees to cause the Note to be duly endorsed or
assigned to Beneficiary and to cause an assignment of the Deed of Trust to be
recorded in favor of Beneficiary in the official records of the county where the
security property is located within ten (10) business days after Broker receives
any funds from Beneficiary or after close of escrow.
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 including, without limitation, the
commencement of foreclosure proceedings. 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 Broker's trust account, which
trust account shall be maintained in accordance with the provisions of law and
regulations applicable to trust accounts of licensed real estate Brokers and in
accordance with the provisions of subsection 10238(k) of the California Real
Estate Law; (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 in conformance with
Section 10233(b) of the California Real Estate Law; (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 file a
request for Notices of Default on prior encumbrances unless Broker will receive
such notices pursuant to California Civil Code Section 2924(b), and Broker will
promptly notify Beneficiary of any such defaults or on the Note covered hereby;
and (8) To the extent required by subsection 10238(k)(3) of the California Real
Estate Law, 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 Real Estate if and to the extent,
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
290
foreclosure proceedings, defend any litigation which may seek to restrain said
foreclosure, receive a trustee's 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. Broker agrees to
notify Beneficiary in writing within fifteen (15) days after the occurrence of
any of the following events: (1) the recording of a notice of default on behalf
of Beneficiary; (2) the recording of a notice of trustee's sale on behalf of
Beneficiary together with a copy of such notice; (3) the receipt of any payment
constituting an amount equal to or greater than five monthly installment
payments together with a request for partial or full reconveyance of the real
property covered by the Deed of Trust, with any necessary or appropriate
transfer or delivery instructions; (4) receipt by Broker on behalf of
Beneficiary of any request for reconveyance of the Deed of Trust together with a
copy of such request; or (5) delinquency of any installment or other obligation
under the Note for more than 30 days.
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 such advance by Broker, Broker shall, not later than 10
days after making any such payment, notify Beneficiary in writing of the date
and amount of payment, the name of the payee, the source of funds and the reason
for the payment.
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. 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 made; (4) Fourth, to the payment of interest under the Note; (5)
Fifth, to the payment of accrued but unpaid principal under the Note (such
principal and interest to be allocated among all Beneficiaries; and (6)
Thereafter, any remaining sums shall be allocated to all Beneficiaries in
accordance with their respective undivided interests in the Note.
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 or endorsement of the Note and a recordable assignment of the Deed of
Trust, and the assignee shall be required to execute a counterpart of this
Agreement.
Beneficiaries holding more than 50% of the unpaid dollar amount of the Note
may determine and direct the actions by Broker on behalf of all partial
Beneficiaries in the event of default or with respect to other matters requiring
the direction or approval of the Beneficiaries under this Agreement.
Beneficiary is hereby notified of his, her or its right to receive a copy
of the appraisal or Broker's evaluation of the real property covered by the Deed
of Trust that was prepared in connection with the origination of the Note and
Deed of Trust.
291
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 list
and market, the security property and to negotiate the sale of such property,
execute sales contracts as agent for Beneficiary and consummate such sale in
Beneficiary's name, place and stead and on Beneficiary's behalf, all on such
terms and conditions as Broker may deem proper and reasonable; provided, that
any sale that will generate net sales proceeds to Beneficiary, after payment of
all selling expenses, in an amount less than the outstanding principal balance
of the Note as of the date of the foreclosure sale, shall be subject to approval
by more than 50% of the partial Beneficiaries under the Note and Deed of Trust.
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; provided, however, if
there are multiple Beneficiaries and the Note and Deed of Trust were sold by
Broker pursuant to the exemption contained in Section 10238 of the California
Real Estate Law, then Broker shall not have the right to terminate this
Agreement without the approval of Beneficiaries holding more than 50% of the
outstanding ownership interests in the Note; or (2) by Beneficiary and/or other
partial Beneficiaries holding more than 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 majority 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 more than
50% of the interests of all owners of the Note. In such event, Beneficiary
agrees to accept the substitution of any servicing agent chosen by such majority
interest so long as the compensation to be paid shall not exceed the amounts set
forth herein.
By signing below, Beneficiary hereby acknowledges receipt of a copy of this
Agreement.
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: REDWOOD MORTGAGE INVESTORS ___, a
California Limited Partnership
By:
-----------------------------------
Michael Burwell, General Partner
Date:
--------------------------------
292
EXHIBIT 10.3 (a)
PROMISSORY NOTE
Loan No.: , 2005
------------------- -----------------
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.
293
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
294
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 94063-1743
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
295
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:
-----------------------------
-----------------------------
296
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.
297
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
corporation or partnership, more than twenty-five percent (25%) of the corporate
298
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 94063-1743
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.
299
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:
----------------------------------
----------------------------------
300
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 _______, 20__, 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 ________, 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.
301
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
302
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 94063-1743
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.
303
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:
-----------------------------------
-----------------------------------
304
EXHIBIT 10.3 (d)
NOTE SECURED BY DEED OF TRUST
Loan No.:
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.
305
(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)
306
EXHIBIT 10.3 (e)
NOTE SECURED BY DEED OF TRUST
Loan No.:
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.
307
(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)
308
EXHIBIT 10.4 (a)
RECORDING REQUESTED BY AND
WHEN RECORDED MAIL TO:
Redwood Mortgage Corp.
900 Veterans Blvd., Suite 500
Redwood City, California 94063-1743
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 46 North
Second Street, Campbell, California 95008, (herein "Trustee"), in favor of
- ------------------------------------------, whose address is 900 Veterans Blvd.,
Suite 500, Redwood City, California 94063-1743 (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;
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(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").
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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:
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(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
1950.5(d). Prior to the occurrence of any Event of Default (hereinafter
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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:
-------------------------------
-------------------------------
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EXHIBIT A
DESCRIPTION OF THE PROPERTY
326
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)
327
EXHIBIT 10.4 (b)
RECORDING REQUESTED BY AND
WHEN RECORDED MAIL TO:
Redwood Mortgage Corp.
900 Veterans Blvd., Suite 500
Redwood City, California 94063-1743
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 ______________, 20___, 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 46 North
Second Street, 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
studies, data and drawings, or to the construction of Improvements on the Land
328
(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.
329
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
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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
fails to perform any of the covenants or agreements contained in this Deed of
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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.
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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.
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
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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
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.
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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.
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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.
342
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.
343
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:
--------------------------------
--------------------------------
344
EXHIBIT A
DESCRIPTION OF THE PROPERTY
345
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)_
346
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 , 20 , 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:
347
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.
348
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 Bernardino 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:
- ------------------------------------- ------------------------------------
- ------------------------------------- ------------------------------------
349
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:
- ------------------------------------ ----------------------------------
- ------------------------------------ ----------------------------------
350
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)
351
EXHIBIT 10.7
FORMATION LOAN
PROMISSORY NOTE
Up to a Maximum of $6,750,000 Effective as of ________, 2005
San Francisco, California
For value received, and in connection with an offering (the "Offering") of
up to $100,000,000 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 NINE MILLION DOLLARS and No/100ths ($9,000,000), 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 ___________, 2005, 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 Sixth Amended and Restated Limited Partnership Agreement of
the Holder, dated __________ (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;
(b) 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
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
352
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:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
353
ADVANCES AND PAYMENT OF PRINCIPAL*
- --------------------------------------------------------------------------------
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
354
EXHIBIT 10.8
SECOND AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDED AND RESTATED LOAN AGREEMENT (this "Agreement") dated as
of November 1, 2004 by and between REDWOOD MORTGAGE INVESTORS VIII, A CALIFORNIA
LIMITED PARTNERSHIP (the "Borrower"), and COUNTY BANK, a California banking
corporation (the "Lender").
RECITALS
A. The Borrower and the Lender previously entered into that certain Amended
and Restated Loan Agreement dated as of April 15, 2004 (the "Existing Loan
Agreement") pursuant to which the Lender established a revolving credit facility
for the Borrower in the maximum principal sum of $32,000,000.
B. The Borrower has requested that the Lender increase the maximum
principal sum of the revolving credit facility to $42,000,000.
C. The Lender is willing to provide such additional financial accommodation
to the Borrower, subject to the terins, conditions and provisions of the
Agreement.
NOW, THEREFORE, in consideration of the mutual benefits accruing to the
parties hereunder and other valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the Borrower and the Lender hereby agree as
follows:
ARTICLE I
CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
"Borrower" shall have the meaning set forth in the preamble hereto.
"Borrowing Availability 'shall have the meaning set forth in Section 2.1.
"Borrowing Base" shall mean an amount equal to the sum of (a) fifty percent
(50%) of the aggregate principal outstanding on Eligible Collateral that
consists of Pledged Loans in which the Borrower has a sole ownership interest
and (b) twenty- five percent (25%) of the aggregate principal outstanding on
Eligible Collateral that consists of Pledged Loans in which the Borrower has a
fractional ownership interest, provided that any advances made by the Lender on
Pledged Loans in which the Borrower has a fractional ownership interest shall
not exceed twenty-five percent (25%) of the maximum amount that can be advanced
hereunder on Pledged Loans in which the Borrower has a sole ownership interest,
all as determined and computed by the Lender from time to time.
"Borrowing Base Certificate" shall mean a certificate to be executed and
delivered from time to time by the Borrower in the form of Exhibit A.
"Burwell" shall mean Michael R. Burwell, an individual.
" Business Day" shall mean any day that is not a Saturday, a Sunday or a
day on which the Lender is required or permitted to be closed in the State of
California.
"California Bank & Trust" shall mean California Bank & Trust, a California
banking corporation.
"Collateral" shall mean all property, whether now owned or hereafter
acquired by the Borrower, consisting of and evidencing loans and extensions of
credit of any kind or nature made or acquired by the Borrower (including Pledged
Loans), whether the Borrower has a sole ownership interest or an undivided
fractional ownership interest in such loans and whether such loans are secured
by real property or personal property or unsecured, including all related
promissory notes, or in the case where the Borrower has an undivided fractional
ownership interest in the loan and does not have possession of the original
promissory note, a true copy thereof certified as such by RMC, and other
instruments, deeds of trust, mortgages, assignments of rents and leases,
security agreements and other security instruments, guaranties, title insurance
policies and tax service contracts (including all such agreements, instruments
and documents that evidence or relate to Pledged Loan Collateral), loan
arranging agreements, loan servicing agreements (including Loan Servicing
Agreements), deposit accounts and the other personal property of the Borrower
that is encumbered by the Security Documents.
"Debt" shall mean the following debts, obligations and liabilities of a
Person: (1) all indebtedness for borrowed money, (ii) all obligations evidenced
by bonds, debentures, notes or other debt instruments, (iii) obligations to pay
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the deferred purchase price of property or services, (1v) obligations as lessee
under leases which have been or should be, in accordance with GAAP, recorded as
capital leases, (v) obligations to purchase securities (or other property) which
arise out of or in connection with the sale of the same or substantially similar
securities or property, (vi) obligations to reimburse any bank or other Person
in respect of amounts actually paid under a letter of credit, surety bond or
similar instrument, (vii) indebtedness or obligations of others secured by a
lien on any asset of that Person whether or not such indebtedness or obligations
are assumed by that Person (to the extent of the value of the asset), (viii)
obligations under direct or indirect guaranties in respect of, and obligations
(contingent or otherwise) to purchase or otherwise acquire, or otherwise to
assure a creditor against loss in respect of, indebtedness or obligations of
others of the kinds referred to in clauses (i) through (vii)above, (ix)
liabilities in respect of unfunded vested benefits under plans covered by Title
IV of ERISA, and (x) any other obligation that is characterized as debt in
accordance with GAAP.
"Default" shall mean any event or condition which with the lapse of time,
the giving of notice or both would constitute an Event of Default.
"Designated Account" shall have the meaning set forth in Section 2.3.
"Eligible Collateral" shall mean, as of any time the same is to be
determined, all Pledged Loans (whether the Borrower has a sole ownership
interest or an undivided fractional ownership interest therein) and the related
Pledged Loan Collateral described in the Borrower's most recent Borrowing
Certificate, excluding any Pledged Loan:
(a) On which any installment payment is sixty (60) or more days delinquent
or any agreed upon post- maturity payments are delinquent.
(b) As to which the Pledged Loan Borrower or any other person obligated to
make payment on or in connection with the Pledged Loan has asserted any claim,
defense, setoff or other grounds for nonpayment or reduction of the amount
outstanding that has not been resolved.
(c) As to which the Pledged Loan Borrower or any other person obligated to
make payment on or in connection with the Pledged Loan has become insolvent or
the subject of any insolvency, bankruptcy or receivership proceedings, has made
an assignment for the benefit of creditors or has suspended or terminated its
business operations.
(d) As to which a judicial or nonjudicial foreclosure, receivership or
other judicial or nonjudicial enforcement action has been commenced by or on
behalf of the Borrower in respect of the Pledged Loan Collateral.
(e) As to which the Pledged Loan Collateral includes substantially
unimproved land.
(f) As to which any officer, director, shareholder or employee of the
Borrower or a General Partner is the Pledged Loan Borrower or any other person
obligated to make payment on or in connection with the Pledged Loan.
(g) That is evidenced by a promissory note or other instrument that has not
been assigned or endorsed by the Borrower to the order of the Lender with
recourse or is not in the Lender's possession.
(h) As to which the Pledged Loan Borrower or the Pledged Loan Collateral,
including the priority of the Borrower's lien therein or any matters of record
or exceptions to coverage in respect of the title insurance policy and
endorsements thereto procured by the Borrower therefore, is unacceptable to the
Lender for any reason, as determined by the Lender in good faith.
(i) As to which any of the applicable representations and warranties of the
Borrower set forth in Article VI prove false.
"Effective Date" shall mean the date on which all of the conditions set
forth in Section 4.1 have been satisfied or waived in writing by the Lender.
"Environmental Laws" shall mean all federal, state and local laws,
ordinances, rules and regulations now or hereafter in force, in each case as
amended or supplemented from time to time, in any way relating to or regulating
human health or safety, industrial hygiene or protection of the environment, and
includes the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, 42 U.S.C. ss. 9601, et seq., the Resource Conservation and Recovery
Act, 42 U.S.C. ss. 690 1, et seq., the Clean Water Act, 33 U.S.C. ss. 125 1, et
seq., the Hazardous Substance Account Act, California Health and Safety Code ss.
25300, et seq., the Hazardous Waste Control Law, California Health and Safety
Code ss. 117600, et seq., the Medical Waste Management Act, California Health
and Safety Code ss. 25015, et seq., and the Porter-Cologne Water Quality Control
Act, California Water Code ss. 13000, et seq.
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"ERISA" shall mean the Employee Retirement Income Act of 1974, as amended,
or any successor statute.
"Event of Default" shall mean any event or condition specified as such in
Section 9. 1.
"Existing Loan Agreement 11 shall have the meaning set forth in Recital A
"Existing Note" shall have the meaning set forth in Section 2. 1 (a).
"Extended Maturity Date" shall have the meaning set forth in Section 2. 10.
"Extension Option' shall have the meaning set forth in Section 2. 10.
"GAAP - shall mean generally accepted accounting principles in the United
States of America set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board as in
effect at the time of application.
"General Partners" shall have the meaning set forth in Section 5.2.
"Governmental Authority 'shall mean any nation or government, any state or
other political subdivision thereof, and any agency, department or other entity
exercising executive, legislative, judicial, regulatory or administrative
functions or pertaining to government.
"Hazardous Substances" shall mean any substance or material that is
described, designated or regulated as a toxic or hazardous substance, waste or
material or a pollutant or contaminant, or words of similar import, in any of
the Environmental Laws.
"Lender" shall have the meaning set forth in the preamble hereto.
"Loan Account" shall have the meaning set forth in Section 2.9.
" Loan Documents" shall mean this Agreement, the Note, the Security
Documents and all other documents, certificates, instruments and agreements
heretofore, now or hereafter executed and delivered by the Borrower in
connection herewith or with or otherwise evidencing the Revolving Loan, in each
case as the same may be modified, amended or supplemented from time to time.
"Loan Participation Agreements" shall have the meaning set forth in Section
10. 14.
"Loan Servicing Agreement" shall mean, relative to any Pledged Loan or
other loan that is or becomes Collateral, the written agreement between the
Borrower and RMC, as the same may be modified, amended or supplemented from time
to time.
"Material Adverse Effect" shall mean, relative to any event or occurrence
of whatever nature, a material adverse effect on (i) the collective business,
assets, operations, financial condition or prospects of the Borrower or any
General Partner, (ii) the ability of the Borrower or any General Partner to
perform any of the Obligations or to avoid any Event of Default or Default under
any of the Loan Documents or (111) the Lender's rights and remedies under any
Loan Documents, including the validity or prospective enforcement of any such
rights and remedies.
'Maturity Date" shall mean November 15, 2006.
"Note" shall mean the promissory note described in Section 2.1, as the same
may be modified, amended and supplemented from time to time.
"Obligations " shall mean all debts, liabilities, obligations, covenants
and duties of the Borrower to the Lender of any kind or nature arising from or
in any way related to the Revolving Loan and the Loan Documents, whether
absolute or contingent, direct or indirect, express or implied or now existing
or hereafter arising.
TBGC " shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Person" shall mean any individual, corporation, partnership, limited
liability company, trust, unincorporated organization or other entity or
organization, including any Governmental Authority.
"Pledged Loan Borrower" shall mean the borrower or borrowers in respect of
a relevant Pledged Loan.
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"Pledged Loan Collateral" shall mean all of the real property or personal
property collateral that secures the obligations of a Pledged Loan Borrower to
the Borrower in respect of a Pledged Loan.
"Pledged Loan" shall mean a loan made by the Borrower to a third party that
is Collateral and as to which the promissory note, or in the case where the
Borrower has an undivided fractional ownership interest in the loan and does not
have possession of the original promissory note, a true copy thereof certified
as such by RMC, and other instruments, deed of trust, mortgage, assignment of
rents and leases, security agreements, guaranties, letters of credit,
subordination agreements, loan agreements and Loan Servicing Agreement that
evidence or are directly related to the loan are in the possession of the
Borrower or its agent or bailee.
"Rate Index" shall mean, as of any monthly period the same is to be
determined or applied ' the "Prime Rate" as defined and published in the Wall
Street Journal, Western Edition, as of the last Business Day of the preceding
monthly period. If for any reason the Wall Street Journal, Western Edition, is
no longer published or ceases or suspends publishing such "Prime Rate," the Rate
Index shall mean, as of any monthly period the same is to be determined, the
"Bank prime loan" rate defined and published in the Federal Reserve Statistical
Release H. 15(519) for the last complete week of the preceding monthly period.
"RMC" shall mean Redwood Mortgage Corp., a California corporation.
"Revolving Loan" shall have the meaning set forth in Section 2.1
"Security Documents" shall mean that certain Security Agreement of even
date herewith by the Borrower in favor of the Lender, and all other instruments
and documents referenced therein which evidence a lien or security interest in
favor of the Lender to secure the Obligations, in personal property now owned or
hereafter owned or acquired by the Borrower and the proceeds thereof,
assignments of the Borrower's beneficial interest in the Pledged Loans and the
related Pledged Loan Collateral to the Lender, together with any and all related
instruments, certificates, financing statements, filings, notices and other
documents, in each case as the same may be modified, amended or supplemented
from time to time.
'Subsidiary' shall mean, with respect to any Person, (a) any corporation of
which an aggregate of more than twenty-five percent (25%) of the outstanding
Stock having ordinary voting power to elect a majority of the board of directors
of such corporation (irrespective of whether, at the time, Stock of any other
class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time, directly or
indirectly, owned legally or beneficially by such Person or one or more
Subsidiaries of such Person, or with respect to which any such Person has the
night to vote or designate the vote of 25% or more of such Stock whether by
proxy, agreement, operation of law or otherwise, and (b) any partnership or
limited liability company in which such Person or one or more Subsidiaries of
such Person shall have an interest (whether in the form of voting or
participation in profits or capital contribution) of more than twenty- five
percent (25%) or of which any such Person is a general partner or manager may
exercise the powers of a general partner or manager.
"Union Bank of California" shall mean Union Bank of California, N.A., a
national banking association.
ARTICLE 11
THE CREDIT FACILITY
2.1 Revolving Loan Subject to the terms and conditions of this Agreement,
the Lender agrees to establish and maintain a credit facility (the "Revolving
Loan") which may be availed of by the Borrower from time to time, repaid and
used again during the period commencing on the Effective Date until the Maturity
Date in an aggregate principal amount not to exceed at any time the least of (i)
the Borrowing Base, (ii) Forty-two Million Dollars ($42,000,000) or (111)
thirty-three and one-third percent (33-1/3%) of the partners' capital of the
Borrower, in each instance as the Borrowing Base is determined and computed from
time to time (the "Borrowing Availability"). All unpaid principal, accrued
interest and other amounts outstanding on the Revolving Loan shall be due and
payable on the Maturity Date.
(a) The Revolving Loan shall be evidenced by a promissory note of the
Borrower in form and substance acceptable to the Lender (the "Note"). The Note
shall amend and restate that certain Promissory Note dated April 15, 2004 in the
maximum principal sum at any time of $32,000,000 of the Borrower to the order of
the Lender (the "Existing Note")
(b) As of October 31, 2004, the outstanding balance on the Existing Note
was $27,000,000 consisting entirely of unpaid principal. The Borrower
acknowledges and agrees that as of date the Borrower executes and delivers this
Agreement, there are no claims, defenses to payment, setoffs or credits as to
its obligations respecting the Existing Note or any other Obligations, whether
or not asserted by the Borrower.
2.2 Use of Proceeds. The Borrower shall utilize the Revolving Loan proceeds
solely: W for making real property secured loans that will become Collateral,
(ii) to the extent reasonably required, for the preservation of the Borrower's
lien in Pledged Loan Collateral, including advances to cure defaults on or
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retire senior liens thereon, and (111) to the extent reasonably required, for
the preservation, maintenance, repair, operation and security of Pledged Loan
Collateral, including Pledged Loan Collateral as to which the Borrower has
acquired title by foreclosure or deed-in-lieu of foreclosure.
2.3 Advance Procedures. Each Revolving Loan advance shall be preceded by
the written or oral request of any two of Burwell (in his capacity as a General
Partner), Theodore J. Fischer (in his capacity as Vice President of RMC, a
General Partner) or Kul Sharma (in his capacity as Accountant of RMC, a General
Partner), any two of whom, acting together, are authorized to request an advance
and direct the disposition thereof until notice of the revocation of such
authority is received by the Lender. Advances shall be deposited in and
repayments will be withdrawn from the Borrower's account number 1750502100 with
the Lender (the "Designated Account"). The Borrower shall indemnify and hold the
Lender harmless from all liability, loss and costs in connection with any act
the Lender reasonably believes are made by any individual authorized by the
Borrower to request advances and direct their disposition.
2.4 Interest. The unpaid principal amount of the Revolving Loan shall bear
interest from the date of disbursement until such principal shall become due and
payable at a fluctuating rate per annum equal to the Rate Index, as it may
change from month to month. Changes in the interest rate shall become effective
on the first calendar day of the month following the month in which the Rate
Index changes. While any Event of Default exists, the unpaid principal of the
Revolving Loan shall bear interest at an aggregate annual rate equal to the Rate
Index, as it may change from month to month, plus two (2.0) percentage points.
Interest shall be computed for the actual number of days elapsed on the basis of
a year consisting of three hundred sixty (360) days (including the day of
disbursement and the day of payment in full). Accrued interest on the Revolving
Loan shall be due and payable on the thirtieth day of each month beginning
November 30, 2004.
2.5 Mandatory Prepayments. If at any time or for any reason the unpaid
principal of the Revolving Loan exceeds the Borrowing Availability, the Borrower
shall, within 10 days thereof, either (i) make a principal payment on the
Revolving Loan in an amount not less than such excess or (11) increase the
Borrowing Availability so that it equals or exceeds the unpaid principal balance
of the Revolving Loan by delivering to the Lender sufficient additional Eligible
Collateral, provided that in no event shall the Borrowing Availability exceed
Forty-two Million Dollars ($42,000,000).
2.6 Voluntary Prepayments. The Borrower may prepay all or any part of the
principal outstanding on the Revolving Loan at any time without premium or
penalty.
2.7 Payment Method. All payments (including prepayments) to be made by the
Borrower on account of principal, interest and fees on the Revolving Loan shall
be made in United States dollars, in immediately available funds and without
set-off or counterclaim. Any payment which is received by the Lender later than
12:00 noon (California time) shall be deemed to have been received on the
immediately succeeding Banking Day.
2.8 Monthly Collateral Reports and Borrowing Base Certificate. The Borrower
will furnish or cause to be furnished to the Lender within thirty (30) days
after each month end beginning October 31, 2004, (i) a master list and
delinquency report for all Pledged Loans as of the end of such month in form and
detail satisfactory to the Lender and (11) a completed Borrowing Base
Certificate signed on behalf of the Borrower by Burwell setting forth the amount
of the Borrowing Base as of the end of such month that states, among other
things, that either that no Default or Event of Default exists hereunder as of
the date of such certificate, or if such Default or Event of Default exists, the
nature thereof.
2.9 Loan Account. The Lender shall maintain a loan account (the "Loan
Account") on its books to record: (1) all Revolving Loan advances, (ii) all
payments made by the Borrower and (111) all other debits and credits as provided
in this Agreement with respect to the Revolving Loan or any other Obligations.
All entries in the Loan Account shall be made in accordance with the Lender's
customary accounting practices as in effect from time to time. The balance in
the Loan Account, as recorded on the Lender's most recent printout or other
written statement, shall, absent manifest error, be presumptive evidence of the
amounts due and owing to the Lender by the Borrower, provided that any failure
to so record or any error in so recording shall not limit or otherwise affect
the Borrower's duty to pay the Obligations. The Lender shall render to the
Borrower a monthly accounting of transactions with respect to the Revolving Loan
setting forth the balance of the Loan Account. Unless the Borrower notifies the
Lender in writing of any objection to any such accounting (specifically
describing the basis for such objection), within a reasonable time after the
date thereof, each and every such accounting shall be deemed final, binding and
conclusive on the Borrower (absent manifest error) in all respects as to all
matters reflected therein. Only those items expressly objected to in such notice
shall be deemed disputed by the Borrower.
2.10 Option to Extend. The Lender and, provided that no Default or Event of
Default shall have occurred and be continuing as of the Original Maturity Date,
the Borrower, shall each have the option to extend the term of the Revolving
Loan (the "Extension Option") from the Maturity Date (for purposes of this
Section 2. 10, the "Original Maturity Date"), for a three-year period (the
"Extended Maturity Date") during which period the Borrower shall pay thirty-six
(36) consecutive monthly installments equal to 2.778% of the unpaid principal
balance of the Revolving Loan as of the Original Maturity Date, plus accrued
interest, upon satisfaction of each of the following conditions precedent:
(a) The Lender or the Borrower shall provide the other with written notice
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of its request to exercise the Extension Option not more than sixty (60) days,
but not less than thirty (30) days, prior to the Original Maturity Date;
(b) The Borrower shall execute and deliver or cause the execution and
delivery of all documents reasonably required by the Lender to exercise the
Extension Option on or before the Original Maturity Date;
(c) The Borrower shall pay to the Lender (1) an extension fee equal to
one-eighth of one percent (0.125%) of the unpaid principal balance of the
Revolving Loan as of the Original Maturity Date and (11) all out-of-pocket
expenses reasonably incurred by the Lender in connection with such extension
regarding the negotiation, preparation, execution and closing of the extension
documents, including the Lender's attorneys' fees and costs; and
(d) All other conditions precedent to the operation of the documents
reasonably required by Lender to exercise the Extension Option shall be
satisfied or waived in writing by Lender.
Without limiting the generality of this Section 2. 10, in the event the
unpaid principal balance of the Revolving Loan exceeds the Borrowing
Availability after the Extension Option has been exercised, the Borrower shall,
within ten (10) days thereof, either (1) make a principal payment on the
Revolving Loan in an amount not less than such excess or (ii) increase the
Borrowing Availability so that it equals or exceeds the unpaid principal balance
of the Revolving Loan by delivering to the Lender sufficient additional Eligible
Collateral, provided that in no event shall the Borrowing Availability exceed
Forty-two Million Dollars ($42,000,000).
2.11 Collateral The Revolving Loan and other Obligations shall be secured
by a first priority security interest in the Collateral and such security
interest shall be evidenced by Security Documents that are in form and substance
acceptable to the Lender.
ARTICLE III
FEES, EXPENSES AND DEPOSITS
3.1 Annual Facility and Administrative Fees. The Borrower agrees to pay an
annual facility fee equal to Fifty-two Thousand Five Hundred Dollars ($52,500)
and an annual administrative fee equal to Ten Thousand Dollars ($ 10,000) on
each November 15, beginning November 15, 2004.
3.2 Reimbursement Costs.
(a) The Borrower agrees to reimburse the Lender for any fees and expenses
it incurs in the negotiation, documentation or closing of this Agreement, any
agreement or instrument required by this Agreement and the Loan Participation
Agreement, including all recording fees, filing fees and the Lender's reasonable
attorneys' fees and costs.
(b) The Borrower agrees that the Lender or the Lender's independent
auditors may undertake audits of the Collateral as to which the Borrower shall
provide full cooperation. Such audits shall be undertaken annually, provided
that if a Default or Event of Default has occurred and is continuing or the
results of the preceding audit were not satisfactory, such audits may be
undertaken more frequently in the Lender's good faith discretion. The Borrower
further agrees to reimburse the Lender for the cost of such Collateral audits.
3.3 Required Deposit . The Borrower agrees that until the availability
period for the Revolving Loan expires and all obligations under this Agreement
are repaid, the Borrower (1) will maintain all of its deposit accounts with the
Lender and (ii) will cause (a) each of Redwood Mortgage Investors 111, a
California limited partnership, Redwood Mortgage Investors IV, a California
limited partnership, Redwood Mortgage Investors V, a California limited
partnership, and Redwood Mortgage Investors VI, a California limited
partnership, to maintain all of their respective deposit accounts with the
Lender and (b) Redwood Mortgage Investors 11, a California limited partnership,
to maintain all of its trust deposit accounts with the Lender.
ARTICLE IV
CONDITIONS PRECEDENT
4.1 Conditions to Establishing Revolving Loa The obligation of the Lender
to establish the Revolving Loan shall become effective only upon satisfaction of
each of the following conditions precedent on or before December 7, 2004 unless
the Lender shall otherwise agree in writing:
(a) The Lender shall have received each of the following:
(1) A counterpart original of this Agreement, duly executed by the
Borrower.
(2) The other Loan Documents required by the Lender for the Revolving Loan,
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duly executed by the Borrower.
(3) A copy of the Borrower's (1) partnership agreement and all amendments
thereto certified by Burwell and (11) Certificate of Limited Partnership,
together with copies of any amendments thereto, certified by the California
Secretary of State as having been tiled in such office.
(4) Copies of the articles of incorporation and all amendments thereto,
certified as of a recent date by the California Secretary of State, and the
bylaws and all amendments thereto certified by the corporate secretary of each
of the corporate General Partners.
(5) A true, complete and correct copy of the certificates, resolutions or
other evidence satisfactory to the Lender of necessary actions taken by the
Borrower and the corporate General Partners authorizing the execution, delivery
and performance of this Agreement and, as applicable, the other Loan Documents.
(6) A certification by the Borrower of the name and signature of each party
authorized to sign the Loan Documents and to request advances on the Revolving
Loan.
(7) Payment of the Revolving Loan facility fee for 2004-2005 in the sum of
$50,278 ($52,500 less a credit of $2,222 for the unused 2003-2004 fee).
(8) Payment of the Revolving Loan administrative fee for 2004-2005 in the
sum of $10,000.
(9) A true, complete and correct copy of the Loan Servicing Agreement in
the form of Exhibit 6.3-1 and Exhibit A thereto in form and substance
satisfactory to the Lender, duly executed by the Borrower and RNIC .
(10) A counterpart original of each Loan Participation Agreement, duly
executed by California Bank & Trust and Union Bank of California, respectively.
(11) All other documents, instruments, subordinations, agreements,
consents, approvals, certificates, opinions and evidences of other conditions or
legal matters required by the Lender, in form and substance satisfactory to the
Lender.
(b) All of the representations and warranties of the Borrower set forth in
Articles V and VI and elsewhere in the Loan Documents shall be true and correct.
4.2 Conditions to Each Advance. The obligation of the Lender to make an
advance on the Revolving Loan is conditioned on each of the following conditions
being satisfied as of the date the advance is made:
(a) All conditions precedent to lending set forth in the Loan Documents for
the advance shall have been fully satisfied.
(b) The liens and security interests of the Lender in each item of
Collateral shall have been perfected by the filing of appropriate financing
statements and other documents in the appropriate governmental offices or by
such other action as is necessary or, in the sole discretion of the Lender,
desirable to perfect any such lien or security interest and the Lender shall
have received evidence satisfactory to the Lender of such perfection and that
the priority of such liens and security interests are subject only to those
liens, security interests and encumbrances that are acceptable to the Lender at
the sole discretion of the Lender. Without limiting the generality of the
foregoing:
(1) The originals of all promissory notes and instruments, or in the case
where the Borrower has an undivided fractional ownership interest in the loan
and does not have possession of the original promissory note, a true copy
thereof certified as such by RMC, and related deeds of trust, mortgages,
assignments of rents and leases and security agreements evidencing the Pledged
Loans, Pledged Loan Collateral or other Collateral shall have been physically
delivered to the Lender or its representatives.
(2) The Borrower shall have executed and delivered to the Lender an
assignment of beneficial interest in deed of trust in form and substance
satisfactory to the Lender in respect of each Pledged Loan.
(c) All of the representations and warranties of the Borrower set forth in
Articles V and VI and elsewhere in the Loan Documents shall be true and correct.
(d) No condition or event shall have occurred and be continuing that has
resulted or could reasonably be expected to result in a Material Adverse Effect.
361
(e) No Event of Default shall have occurred and be continuing, and no
Default shall have occurred.
(f) The Lender has sold, assigned or granted participation in the portion
of its rights and obligations under the Loan Documents to one or more financial
institutions, private investors and/or other entities sufficient in amount to
satisfy any lending limits applicable to the Lender in respect of the Loan under
California or federal banking law and the participant(s) are not in default of
their obligations thereunder.
ARTICLE V
GENERAL REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Agreement, the Borrower represents
and warrants as follows:
5.1 Organization of Borrower. The Borrower is a limited partnership, duly
formed, validly existing and in good standing under the laws of the State of
California and duly qualified and in good standing in each other jurisdiction
wherein the conduct of its businesses or the ownership of its properties
requires such qualification, except for those jurisdictions in which the failure
to be qualified and in good standing would not result in a Material Adverse
Effect, and has the requisite power and authority to own and manage its
properties and to carry on its businesses.
5.2 General Partners and their Organization The general partners of
Borrower are Burwell, Gymno Corporation and RMC (collectively, the "General
Partners"). Each of Gymno Corporation and RMC is a corporation, duly organized,
validly existing and in good standing under the laws of the State of California
and duly qualified and in good standing in each other jurisdiction wherein the
conduct of its businesses or the ownership of its properties requires such
qualification, except for those jurisdictions in which the failure to be
qualified and in good standing would not result in a Material Adverse Effect,
and has the requisite power and authority to own and manage its properties and
to carry on its businesses.
5.3 Agreement Authorized for Borrower. The execution, delivery and
performance of this Agreement by the Borrower are within its powers, have been
duly authorized by all necessary action and do not contravene (1) its
partnership agreement, (ii) any law or contractual restriction binding on or
affecting the Borrower or (111) any agreement binding on the Borrower or its
property and do not result in or require the creation of any lien, security
interest or other charge or encumbrance (other than pursuant to the Security
Documents) upon or with respect to any of its properties.
5.4 Agreement Authorized for General Partners. The execution, delivery and
performance of this Agreement by the General Partners on behalf of the Borrower
are within their respective powers, have been duly authorized by all necessary
action and do not contravene (1) its respective articles of incorporation and
bylaws, (11) any law or contractual restriction binding on or affecting such
General Partner or (iii) any agreement binding on such General Partner or its
property and do not result in or require the creation of any lien, security
interest or other charge or encumbrance (other than pursuant to the Security
Documents) upon or with respect to any of its properties.
5.5 No Consent Required. No consent or approval or other action by, and no
notice to or filing with, any Governmental Authority or regulatory body is
required for the due execution, delivery and performance by the Borrower of the
Loan Documents.
5.6 Enforceable Obligations. The Loan Documents when delivered hereunder
shall each be the legal, valid and binding obligation of the Borrower,
enforceable against the Borrower in accordance with their respective terms,
subject only to the effect of applicable bankruptcy, insolvency, reorganization
or other similar laws affecting the rights of creditors generally.
5.7 Financial Information All financial and other statements and data
submitted by or on behalf of the Borrower and the General Partners to the Lender
as of the date hereof are true, complete and correct in all material respects
and, taken as a whole, truly reflect the matters set forth therein as of the
date thereof.
5.8 Litigation and Contingent Liabilities. Except as disclosed in Exhibit
5.8, there is no litigation, arbitration, claim or governmental proceeding
pending, nor to the knowledge of the Borrower or the General Partners
threatened, against the Borrower or any General Partner or any assets of the
Borrower or any General Partner or respecting the operations or business of the
Borrower or any General Partner, including any franchises, rights, consents,
pen-nits, licenses or approvals relating thereto, which, if adversely
determined, could reasonably be expected to result in a Material Adverse Effect.
5.9 Tax Matters. The Borrower and each General Partner has filed all
federal and state income tax returns that are required to be filed and has paid
all taxes, interest and assessments due in connection with such returns; and
there is no proposed, asserted or assessed tax deficiency against the Borrower
or any General Partner, except those being contested in good faith and for which
any reserve required by GAAP has been created.
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5.10 Adverse Obligations. Except as disclosed in Exhibit 5.10, neither the
Borrower nor any General Partner is a party to any instrument, agreement or
indenture or subject to any charter or corporate restriction and has not
incurred any commitment, obligation or liability, whether voluntarily or
involuntarily or contingent or non- contingent, the observance, performance,
enforcement, imposition or execution of which could reasonably be expected to
result in a Material Adverse Effect.
5.11 ERISA. The Borrower is in compliance in all material respects with
ERISA to the extent applicable and has received no notice to the contrary from
PBGC.
5.12 Margin Stock. The Borrower is not engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulation G, T, U or X issued by the Board of Governors of the
Federal Reserve System), and no proceeds of any advance will be used to purchase
or carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.
5.13 Not an Investment Company. The Borrower is not an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
5.14 Trademarks, Licenses and Approvals. The Borrower possesses all
necessary trademarks, service marks, patents, copyrights, licenses, franchises,
rights, consents, permits, licenses or approvals that are materially necessary
to conduct its business operations, including the mortgage lending business, as
now operated without any known conflict with the valid trademarks, service
marks, patents, copyrights, licenses, franchises, rights, consents, permits,
licenses or approvals of other Persons. RMC possesses all necessary trademarks,
service marks, patents, copyrights, licenses, franchises, rights, consents,
permits, licenses or approvals that are materially necessary to conduct its
business operations, including the business of arranging and servicing mortgage
loans that are the assets of the Borrower, as now operated without any known
conflict with the valid trademarks, service marks, patents, copyrights,
licenses, franchises, rights, consents, permits, licenses or approvals of other
Persons.
5.15 Hazardous Substances and Environmental Laws Compliance. Except as set
forth in Exhibit 5.15:
(a) The Borrower has no knowledge of or reason to believe that, or any duty
to investigate whether, any Hazardous Substances have been located, used,
manufactured, generated, treated, handled, stored, spilled, disposed of,
discharged or released by any Person on, under or about any real property owned,
leased or used by the Borrower or constituting Pledged Loan Collateral except in
the ordinary course of business and in full compliance with all Environmental
Laws.
(b) The Borrower has no knowledge or reason to believe that, or any duty to
investigate whether, any Hazardous Substances have been treated, handled,
stored, spilled, disposed of or released in connection with any of the
Borrower's business operations, except in the ordinary course of business and in
full compliance with all Environmental Laws.
(c) The Borrower has no knowledge of or reason to believe that there is any
pending or threatened investigation, assessment, claim, demand, action or
proceeding of any kind relating to (1) any alleged or actual Hazardous
Substances located under or about any real property owned, leased or used by the
Borrower or constituting Pledged Loan Collateral, (ii) the Borrower's business
operations to the extent any Hazardous Substances or compliance with any
Environmental Laws is involved, or (111) any other alleged or actual violation
or noncompliance by the Borrower with regard to any Environmental Laws.
(d) The Borrower has obtained and will maintain every right, consent,
permit, license, financial responsibility certificate or other approval
reasonably believed by the Borrower to be required by any Environmental Laws as
a condition to its business operations or in connection with its respective use,
development or maintenance of any real property owned, leased or used by the
Borrower.
(e) The Borrower has been, is and will remain in full compliance with all
Environmental Laws applicable to its business operations and the use,
development or maintenance of any real property owned, leased or used by the
Borrower.
5.16 No Subsidiaries. The Borrower has no Subsidiaries other than Russian
Hill Property Company LLC, a California limited liability company, and Stockton
Street Property Company LLC, a California limited liability company.
5.17 Fictitious Name. If the Borrower operates under a fictitious name, the
Borrower has made all fictitious name filings which may be required in
connection with the business conducted under such fictitious name.
5.18 Compliance with Law. Without derogating from any other representation
or warranty contained in this Article V or elsewhere in the Loan Documents, the
Borrower is in substantial compliance with all laws, regulations, ordinances and
rules applicable to the Borrower and its business, operations, properties and
assets, including laws pertaining to occupational safety and employment, other
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than those laws the failure to comply with which would not have or result in a
Material Adverse Effect.
5.19 Reliance. Neither any written information, certificate, statement,
exhibit or report furnished by or on behalf of the Borrower to the Lender in
connection with the Loan Documents, including any request of the Borrower for a
Revolving Loan advance or in connection with any representation, warranty,
covenant, agreement or provision of the Loan Documents, contains any material
misstatement of fact or, when taken as a whole, omits to state a material fact
or any fact necessary to make the statements contained therein not misleading.
ARTICLE VI
SPECIFIC REPRESENTATIONS AND WARRANTIES REGARDING PLEDGED LOANS
To induce the Lender to make each advance on the Revolving Loan, the
Borrower represents and warrants as to each Pledged Loan as follows:
6.1 Binding Obligation So long as it constitutes Collateral, the Pledged
Loan represents the legal, valid and binding payment obligation of the Pledged
Loan Borrower, enforceable in accordance with its terms, except that (i) such
enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium
or other similar laws (whether statutory, regulatory or decisional) now or
hereafter in effect relating to creditors' rights generally and (11) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to certain equitable defenses and to the discretion of the court
before which any proceeding therefore may be brought, whether a proceeding at
law or in equity.
6.2 Compliance with Laws. All requirements of applicable federal, state and
local laws, and regulations thereunder, in respect of the Pledged Loan have been
complied with at the time the Pledged Loan was originated and so long as it
remains Collateral, including laws relating to usury, truth- in- lending, real
estate settlement procedures, consumer credit protection, equal credit
opportunity, good faith estimates, fair lending, foreign assets and disclosure
laws.
6.3 Characteristics of a Pledged Loan The Pledged Loan has the following
characteristics: (1) the Pledged Loan was originated by the Borrower in the
State of California and was arranged and will be serviced by RMC pursuant to a
Loan Servicing Agreement in the form of either Exhibit 6.3-1 or Exhibit 6.3-2,
(11) was fully and properly executed by the parties thereto, (iii) the Pledged
Loan Borrower's obligations are secured by a valid, subsisting and enforceable
security interest in favor of the Borrower in the related Pledged Loan
Collateral, (iii) at the time it becomes Collateral, the Pledged Loan is in full
force and effect in accordance with its terms and contains enforceable
provisions such that the rights and remedies of the holder thereof shall be
adequate for realization against the related Pledged Loan Collateral of the
benefits of the security, (vi) at the time it becomes Collateral, the Pledged
Loan is free and clear of all security interests, pledges, liens, encumbrances
and adverse claims of any kind or character created, suffered or permitted by
the Borrower and (vii) the Pledged Loan provides for periodic payments which are
principally due and payable on a monthly basis.
6.4 Obligations; No Impairment. At the time it becomes Collateral, the
Borrower or RMC has fulfilled all obligations on its part to be fulfilled under
or in connection with the Pledged Loans.
6.5 No Proceedings. At the time it becomes Collateral, to the best of the
Borrower's knowledge, there were no proceedings or investigations pending or
threatened before any court, regulatory body, administrative agency, or other
tribunal or governmental instrumentality (1) asserting the invalidity of the
Pledged Loan, (ii) asserting the bankruptcy or insolvency of the Pledged Loan
Borrower, (iii) seeking to prevent payment and discharge of the Pledged Loan or
(iv) seeking any determination or ruling that might materially and adversely
affect the validity or enforceability of the Pledged Loan.
6.6 No Modifications. At the time it becomes Collateral, the terms of the
instruments, agreements and other documents evidencing the Pledged Loan and the
security interest in the Pledged Loan Collateral and the relevant Loan Servicing
Agreement have not been impaired, waived, altered or modified in any respect,
except by written instruments which have been recorded, if necessary to protect
the interests of Lender, and which have been delivered to the Lender or the
Lender's agent.
6.7 No Defenses. At the time it becomes Collateral, the Pledged Loan and
the security interest in the Pledged Loan Collateral are not subject to any
right of rescission, set-off, counterclaim or defense, including the defense of
usury.
6.8 Insurance. The Pledged Loan Collateral consisting of real property is
insured by an insurer qualified to do business in the State of California
against loss by fire, hazards of extended coverage and such other hazards as are
customary in the area where the mortgaged property is located. All such
insurance policies (collectively, the "Insurance Policies") contain a standard
mortgagee clause naming the Borrower, its successors and assigns as mortgagee
and all premiums thereon have been paid. If upon origination of the Pledged
Loan, the mortgaged property was in an area identified in the Federal Register
by the Federal Emergency Management Agency as having special flood hazards (and
such flood insurance has been made available) a flood insurance policy meeting
the requirements of the current guidelines of the Federal Insurance
Administration is in effect, provided that the Borrower is required to obtain
such insurance. The deed of trust evidencing the security interest in the
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Pledged Loan Collateral obligates the Pledged Loan Borrower to maintain all such
insurance at the Pledged Loan Borrower's cost and expense and, on the Pledged
Loan Borrower's failure to do so, authorizes the holder of the deed of trust to
maintain such insurance at the Pledged Loan Borrower's cost and expense and to
seek reimbursement therefore from the Pledged Loan Borrower.
6.9 No Satisfaction of Deed of Trust. As of the date it becomes Collateral,
the deed of trust evidencing the security interest in the Pledged Loan
Collateral has not been satisfied, canceled, subordinated, or rescinded, in
whole or in part, and the mortgaged property has not been released from the lien
thereof, in whole or in part, nor has any instrument been executed that would
effect any such release, cancellation, subordination or rescission;
6.10 Validity of Deed of Trust Documents. As of the date it becomes
Collateral, the deed of trust is a valid, existing and enforceable lien on the
Pledged Loan Collateral consisting of real property, including all improvements
on the mortgaged property, subject only to (a) the lien of current real property
taxes and assessments not Wt due and payable, (b) covenants, conditions and
restrictions, rights of way, easements and other matters of public record as of
the date of recording being acceptable to mortgage lending institutions
generally and specifically referred to in lender's title insurance policy
delivered to the originator of the Pledged Loan and which do not adversely
affect the appraised value of the mortgaged property, (c) other matters to which
like property are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by the deed of trust or the
use, enjoyment, value or marketability of the related mortgaged property and (d)
any first priority mortgage or deed of trust. Any security agreement, chattel
mortgage or equivalent document related to and delivered in connection with the
Pledged Loan establishes and creates a valid, existing and enforceable lien on
the property described therein, and the Borrower has full right to sell and
assign the same to the Lender.
6.11 Title Insurance. The Borrower's security interest in the Pledged Loan
Collateral consisting of real property is covered by a California Land Title
Association or American Land Title Association lender's title insurance policy,
including all applicable endorsements, insuring the Borrower, its successors and
assigns as to the lien of the deed of trust in the original principal amount of
the Pledged Loan against any loss by reason of the invalidity or
unenforceability of the lien. Additionally, such lender's title insurance policy
affirmatively insures ingress and egress, and against encroachments by or upon
the mortgaged property or any interest therein. No claims have been made under
such lender's title insurance policy, and no prior holder of the related deed of
trust, including the Borrower, has done, by act or omission, anything which
would impair the coverage of such lender's title insurance policy.
6.12 No Defaults. As of the date it becomes Collateral, there is no
default, breach, violation or event of acceleration existing under the documents
evidencing the Pledged Loan and no event which, to the best of the Borrower's
knowledge, with the passage of time or with notice and the expiration of any
grace or cure period, would constitute a default, breach, violation or event of
acceleration, and the Borrower has not waived any default, breach, violation or
event of acceleration.
6.13 Origination and Servicing Practices. The origination and collection
practices used by the Borrower and RMC with respect to the Pledged Loan and the
Pledged Loan Collateral have been in all respects legal and customary in the
mortgage loan origination and servicing business. Each Pledged Loan expressly
pen-nits the holder thereof or of the related note to advance sums for unpaid
insurance premiums, property taxes and/or any other payments necessary to
protect the value of or the note holders rights in the Pledged Loan Collateral
consisting of real property.
6.14 No Damage. To the best of the Borrower's knowledge as of the date it
becomes Collateral, as of the date it becomes Collateral, the Pledged Loan
Collateral consisting of real property is free of damage and waste and there is
no proceeding pending for the total or partial condemnation thereof
6.15 Occupancy and Licensing. To the best of the Borrower's knowledge,
after reasonable inquiry and investigation, any Pledged Loan Collateral
consisting of occupied real property is lawfully occupied under applicable law.
6.16 Appraisal As of the date it becomes Collateral, the Pledged Loan
Collateral consisting of real property has been the subject of an appraisal
undertaken by an appraiser who is licensed or qualified as an independent
appraiser by state certification or national organization or other
qualifications acceptable to the General Partners. All of the improvements that
were included for the purpose of determining the appraised value of the related
property at the time of the origination of the Pledged Loan lie wholly within
the boundaries and building restriction lines of such property, and no
improvements on adjoining properties encroach upon mortgaged property-
ARTICLE VII
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that unless otherwise approved by the
Lender, the Borrower shall comply with the following provisions:
7.1 Performance of Obligations. The Borrower shall fully and timely perform
its obligations and observe, maintain and perform all covenants, terms and
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conditions of the Revolving Loan and other Obligations.
7.2 Books and Records. The Borrower shall keep proper books and records
relating to the ownership and operation of its businesses, properties, equipment
and facilities, including books of record and account in which true, complete
and correct entries shall be timely made of their respective business affairs
and transactions. The Borrower shall permit the Lender, or any representative
thereof, at reasonable times and intervals, to visit the offices of the Borrower
and to examine all books of accounts, records and reports and other papers of
such entity, make copies and extracts thereof. If an Event of Default has
occurred and is continuing, such examinations and the making of copies and
extracts shall be at the expense of the Borrower. The rights of the Lender under
this Section 7.2 are cumulative of the rights of the Lender under Section ~_~
and the Security Documents.
7.3 Financial and Other Reports. The Borrower will furnish or cause to be
furnished to the Lender:
(a) As soon as available and in any event within one hundred twenty (120)
days after the end of each fiscal year, financial statements of the Borrower for
the relevant year end, including a balance sheet, statement of earnings and
statement of cash flows, all as prepared in accordance with GAAP consistently
applied, and in form and detail satisfactory to the Lender. All statements
required by this Section 7.3(a) shall include appropriate comparisons to the
prior year. Such financial statements shall be audited by an independent
certified public accounting firm acceptable to the Lender, and shall include a
report of such accounting firm, which report shall be unqualified and shall
state that such financial statements fairly present in all material respects the
financial position of the Borrower as of the dates indicated and the results of
its operations and its cash flows for the periods indicated in conformity with
GAAP, consistently applied. Such report shall include an undertaking in form and
substance satisfactory to the Lender indicating that the Lender may rely on such
opinion. Such accountants shall also certify to the Lender that in the course of
the regular annual examination of the business of the Borrower, which
examination was conducted by such accounting firm in accordance with GAAP, such
accounting firm has obtained no knowledge that an Event of Default has occurred
and is continuing as of the date of certification, or if in the opinion of such
accounting firm, an Event of Default has occurred and is continuing, a statement
as to the nature thereof.
(b) As soon as available and in any event within one hundred (100) days
after the end of each fiscal year, a copy of the Borrower's Form 10-K filed with
the Securities and Exchange Commission.
(c) As soon as available and in any event within forty-five (45) days after
the end of each fiscal quarter, financial statements of the Borrower for the
relevant quarter end, including a balance sheet, statement of earnings and
statement of cash flow, all as prepared by the Borrower in accordance with GAAP
consistently applied, and in form and detail satisfactory to the Lender.
(d) As soon as available and in any event within fort~-five (45) days after
the end of each fiscal quarter, a copy of the Borrower's Form IO-Q filed with
the Securities and Exchange Commission.
(e) As soon as available and in any event within one hundred twenty (120)
days after the end of each fiscal year, financial statements of each of the
corporate General Partners for the relevant year ended, including a balance
sheet, statement of earnings and statement of cash flows, all as prepared in
accordance with GAAP consistently applied, and in form and detail satisfactory
to the Lender. All statements required by this Section 7.3(e) shall include
appropriate comparisons to the prior year. Such financial statements shall be
audited by an independent certified public accounting firm acceptable to the
Lender, and shall include a report of such accounting firm, which report shall
be unqualified and shall state that such financial statements fairly present in
all material respects the financial position of the Borrower as of the dates
indicated and the results of its operations and its cash flows for the periods
indicated in conformity with GAAP, consistently applied.
(f) As soon as available and in any event within one hundred twenty (120)
days after the end of each calendar year, financial statements of Burwell for
the relevant year ended, including a balance sheet, all in form and detail
satisfactory to the Lender.
(g) As soon as available, and in any event within fifteen (15) days of
filing, a copy of federal and state income tax returns or filing extensions
therefore and related K- Is of Burwell.
(h) Promptly after the Lender's request therefore, such other information
respecting the condition or operations, financial or otherwise, of the Borrower
as the Lender may request from time to time.
(i) Promptly after knowledge thereof shall have come to the attention of
any officer of the Borrower, notice of (i) any restatement of, or other material
change to, any financial statement of the Borrower or any General Partner
previously furnished to the Lender, (ii) default by the Borrower or RMC in the
observance or performance of any covenant, term or condition of, or the
termination by the Borrower or RMC of, any Loan Servicing Agreement or (111) the
occurrence of any Default or Event of Default.
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7.4 Taxes. The Borrower shall file all federal and state income tax returns
which are required to be filed and shall pay and discharge all taxes,
assessments, fees and governmental charges upon or against the Borrower or its
properties, in each case before the same become delinquent and before penalties
accrue thereon, unless and to the extent that the same are being contested in
good faith and by appropriate proceedings which prevent enforcement of the
matter under contest (and for which appropriate reserves have been established
and are being maintained in accordance with GAAP).
7.5 Rights and Facilities to Do Business; Conduct of Business. The Borrower
and the corporate General Partners shall preserve and maintain their respective
existence under California law in good standing and maintain, preserve and
protect all of their respective franchises, rights, consents, licenses, permits,
approvals and other authority necessary for the conduct of their respective
business and maintain their respective qualification to do business and good
standing in each jurisdiction wherein the conduct of their respective businesses
or the ownership of their respective properties requires such qualification,
except for those jurisdictions in which the failure to be qualified and in good
standing would not result in a Material Adverse Effect, have the requisite power
and authority to own and manage their respective properties, maintain their
respective equipment, facilities and other properties in good order and
condition, subject to normal wear and tear, and not permit any waste thereof,
and conduct their respective business in an orderly manner without voluntary
interruption.
7.6 Performance of Other Obligations. The Borrower and each General Partner
shall comply with and timely perform or cause to be timely performed all of the
covenants, agreements, terms and conditions to be complied with by the Borrower
or such General Partner under all documents, instruments, agreements or
indentures as to which the Borrower or such General Partner is a party
(including a Loan Servicing Agreement) if noncompliance or nonperformance of any
of the foregoing could reasonably be expected to result in a Material Adverse
Effect. Notwithstanding the generality of the foregoing other than in the
context of a Loan Servicing Agreement, the Borrower and the General Partners
may, at their respective expense, by appropriate legal proceedings initiated and
conducted in good faith and with due diligence contest the amount, validity,
interpretation or construction of such instruments, contracts or indentures so
long as such actions or the result thereof do not otherwise conflict with or
breach their respective obligations to the Lender under the Loan Documents.
7.7 Insurance. The Borrower and the corporate General Partners shall insure
and keep insured with good and responsible insurance companies, all insurable
property they own which is of a character usually insured by companies similarly
situated and in amounts usually insured by companies similarly situated and
operating like properties; and shall insure such other hazards and risks
(including fire, hazard, workers' compensation, directors' and officers' and
public liability risks) with good and responsible insurance companies as and to
the extent usually insured by companies similarly situated and conducting
similar businesses. The Borrower shall upon request of the Lender furnish a
certificate setting forth in summary form the nature and extent of the insurance
maintained pursuant to this Section 7.7.
7.8 ERISA. The Borrower and each General Partner shall promptly pay and
discharge all of its obligations and liabilities arising under ERISA of a
character which if unpaid or unperformed would result in the imposition of a
lien against any of its properties or assets, will promptly notify the Lender
when it becomes aware of the occurrence of any Reportable Event (as defined in
ERISA) which would likely result in the termination by the PBGC of any employee
benefit plan covering any officers or employees of the Borrower or the General
Partner any benefits of which are, or are required to be, guarantied by PBGC (a
"Plan") or of receipt of any notice from PBGC of its intention to seek
termination of any such Plan or appointment of a trustee therefore. The Borrower
or a General Partner, as applicable, shall notify the Lender of its intention to
terminate any Plan and will not terminate any such Plan, the termination of
which will result in a material liability to the Borrower or such General
Partner unless it shall be in compliance with all of the terms and conditions of
this Agreement after giving effect to any estimated liability to PBGC (as
determined by the Plan's actuaries) resulting from such termination or
withdrawal.
7.9 Profitability, The Borrower shall maintain a positive net income after
taxes and extraordinary items for each quarterly accounting period.
7.10 Minimum Net Income. The Borrower shall earn net income after taxes and
extraordinary items of at least Five Million Dollars ($5,000,000) for each
fiscal year, as determined by GAAP consistently applied.
7.11 Minimum Partner Capita. The Borrower shall at all times have partner
capital of at least One Hundred Fifty-five Million Dollars ($155,000,000), as
determined by GAAP consistently applied.
7.12 Other Collateral Documents. So long as no Default or Event of Default
exists and is continuing, the Borrower may safeguard and hold in trust for the
Lender all guaranties, letters of credit, subordination agreements, loan
agreements, loan arranging agreements, Loan Servicing Agreements and other
instruments, agreements and documents evidencing the Pledged Loans, Pledged Loan
Collateral or other Collateral. If a Default or Event of Default exists and is
continuing, the Borrower shall, promptly following the Lender's demand
therefore, physically deliver to the Lender or its representatives all
guaranties, letters of credit, subordination agreements, loan agreements, loan
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arranging agreements, Loan Servicing Agreements and other instruments,
agreements and documents evidencing the Pledged Loans, Pledged Loan Collateral
or other Collateral.
7.13 Compliance with Law. The Borrower and the General Partners shall be in
substantial compliance with all laws, regulations, ordinances and rules and
licenses, permits and approvals of any Governmental Authority applicable to such
person and its respective business operations, properties and assets, including
laws pertaining to the arranging, origination, funding and servicing Pledged
Loans.
ARTICLE VIII
NEGATIVE COVENANTS
The Borrower covenants and agrees unless otherwise approved by the Lender,
the Borrower shall comply with the following provisions:
8.1 Change in the Nature of Business and Operations. The Borrower and the
corporate General Partners shall not engage in any business or activity which
would result in a change in the general nature of their respective business or
operations as of the date hereof
8.2 Mergers. The Borrower and the corporate General Partners, as
applicable, shall not be a party to any conversion, merger, consolidation,
reorganization (as defined in California Corporations Code Sections 15679.1 or
181) or recapitalization, or any agreement or commitment to do any of the
foregoing.
8.3 Indebtedness. The Borrower shall not issue, incur, assume, create or
have outstanding any Debt; provided, however, that the foregoing provisions
shall not restrict or operate to prevent:
(a) Accounts payable for the purchase of goods or services on ordinary
trade terms.
(b) Deferred taxes.
(c) Unfunded pension fund and other employee benefit plan obligations and
liabilities to the extent they are permitted to remain unfunded under applicable
law.
(d) The indebtedness of the Borrower to the Lender under the Revolving
Loan.
(e) The indebtedness in respect of letters of credit or other indemnities
supplied by the Borrower in satisfaction of bonding requirements under worker's
compensation or unemployment insurance laws.
(f) Leases contemplated by Section 8.5.
(g) The indebtedness of the Borrower incurred for (i) the preservation of
the Borrower's lien in Pledged Loan Collateral, including advances to cure
defaults on or retire senior liens thereon, and (11) the preservation,
maintenance, repair, operation and security of Pledged Loan Collateral,
including Pledged Loan Collateral as to which the Borrower has acquired title by
foreclosure or deed- in- lieu of foreclosure.
8.4 Liens. The Borrower shall not pledge, mortgage or otherwise encumber,
permit, have outstanding upon or be subject to, any lien, security interest or
charge upon, or engage in any sale and leaseback transaction in respect of, any
assets or property of any kind or character now owned or hereafter acquired by
the Borrower; provided, however, the foregoing shall not operate to prevent:
(a) Liens, pledges or deposits in connection with worker's compensation,
social security obligations, taxes, assessments, statutory obligations or other
similar charges, good faith deposits in connection with tenders, contracts or
leases to which the Borrower is a party or other deposits required to be made in
the ordinary course of business and not in connection with borrowing of money or
obtaining advances or credit; provided in each case that the obligation or
liability arises in the ordinary course of business and is not overdue, or if
overdue, is being contested in good faith by appropriate proceedings promptly
initiated and being pursued to conclusion by the Borrower with diligence.
(b) Liens in favor of the Lender evidenced by the Security Documents.
8.5 Capital Leases and Capital Expenditures. The Borrower shall not acquire
the use or possession of any real or personal property under a capital lease or
similar arrangement or expend or become obligated for any capital expenditures
as defined and classified in accordance with GAAP.
8.6 Investments, Loan and Guaranties. The Borrower shall not, without the
prior consent of the Lender, such consent not to be unreasonably withheld, (1)
acquire a Subsidiary or make, permit, retain or have outstanding, whether
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directly or indirectly, any investments in another Person (whether by means of a
purchase of stock or other acquisition of stock or other securities or
membership interest or other ownership interest or by means of the acquisition
of control of another Person or of all or a material part of the assets of
another Person), (ii) be or become liable as endorser, guarantor, surety or
otherwise for any debt, obligation or undertaking of any other Person or (Ili)
otherwise agree to make loans to or otherwise provide funds for the payment of
the obligations of any other Person; provided, however, that the foregoing
provisions shall not apply to or operate to prevent (y) the operation of the
Borrower's mortgage lending business or (z) endorsements for collection or
deposit of commercial paper received by the Borrower in the ordinary course of
business.
8.7 Change in General Partners. The composition, identity, ownership and
control of the General Partners shall not change.
8.8 Insider Transactions. The Borrower shall not enter into or be a party
to any transaction with any employee or partner of the Borrower, any General
Partner or any employee, officer or shareholder of any General Partner except in
the ordinary course of business and upon fair and reasonable terms that are no
less favorable to the Borrower than would be obtained in a comparable arm's
length transaction with a Person who is not such an insider.
8.9 Servicing of Pledged Loans. The Borrower shall not:
(a) Modify, amend, supplement, replace, terminate or assign any Loan
Servicing Agreement nor waive any right, privilege or benefit of the Borrower
thereunder.
(b) Enter into any agreement for the purpose of servicing or administering
a Pledged Loan other than a Loan Servicing Agreement with RMC that is in form
and substance acceptable to the Lender.
ARTICLE IX
EVENTS OF DEFAULT AND REMEDIES
9.1 Events of Default. Any one or more of the following shall constitute an
"Event of Default" hereunder:
(a) Default by the Borrower in the payment of any part of the interest or
principal due and payable on the Revolving Loan which is not remedied within
five (5) days after notice thereof to the Borrower by the Lender.
(b) Except as otherwise specifically provided in this Section 9. 1, default
by the Borrower in the observance or performance of any other covenant, term or
provision of the Loan Documents, other than the Security Documents, which is not
remedied within fifteen (15) days after notice thereof to the Borrower by the
Lender, provided that if the default is a recurrence of the same or
substantially similar default that has occurred twice within the previous twelve
(12) month period, the Borrower shall not have any right to notice or night to
cure in respect of the third or any subsequent default.
(c) Default by the Borrower in the observance or performance of any
covenant, term or condition set forth in the Security Documents which is not
remedied within fifteen (15) days after notice thereof to the Borrower, provided
that if such default, in the Lender's good faith judgment, represents, involves,
threatens or causes a material impairment of the Lender's lien or a material
diminution of the value or salability of the Collateral thereunder, no such
notice or cure period shall be applicable, and provided further, that if the
default is a recurrence of the same or substantially similar default that has
occurred twice within the previous twelve (12) month period, the Borrower shall
not have any right to notice or right to cure in respect of the third or any
subsequent default.
(d) Any representation or warranty of the Borrower or any of the General
Partners made in the Loan Documents or pursuant hereto or thereto proves untrue
in any material respect as of the date of the issuance or making thereof
(e) Bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings or other proceedings for relief under any bankruptcy law or similar
law for the relief of debtors are instituted against the Borrower or any of the
General Partners or a decree or order of a court having jurisdiction in the
premises for the appointment of a trustee, custodian or receiver for the
Borrower or any of the General Partners or for the major part of its respective
assets is entered and the same is not dismissed within sixty (60) days.
(f) The Borrower or any of the General Partners shall commence bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings or other
proceedings for relief under any bankruptcy law or other laws for the relief of
debtors or shall consent to the institution of such proceedings against it by
others or to the entry of any decree or order adjudging it bankrupt or insolvent
or approving as filed any petition seeking reorganization under any bankruptcy
or similar law or shall apply for or shall consent to the appointment of a
369
receiver, custodian or trustee for it or for the major part of its assets or
shall make an assignment for the benefit of creditors or shall take any action
authorizing any of the foregoing.
(g) The Lender fails to have an enforceable first priority lien or
perfected security interest on the Collateral, subject only to any liens,
security interests, encumbrances and matters of record to which the Lender has
previously consented.
9.2 Remedies. When any Event of Default has occurred and is continuing, the
Lender may take any or all of the following actions without notice, demand,
protest or presentment of any kind:
(a) Terminate any obligation of the Lender to make further advances on the
Revolving Loan or to honor or observe the Extension Option.
(b) Declare the unpaid principal of, and the accrued interest on, the
Revolving Loan and all other indebtedness owing by the Borrower to the Lender,
to be immediately due and payable.
(c) Enforce or cause to be enforced all rights of the Lender with respect
to the Collateral and the Security Documents.
(d) Exercise any other remedies available to the Lender under statute, case
law, equity or contract, including the Loan Documents, it being acknowledged and
agreed by the Borrower that all the Lender's remedies are cumulative and may be
exercised by the Lender concurrently or separately from time to time. The Lender
will further have the right to determine in its sole discretion the order and
manner in which the Lender's rights and remedies are to be exercised.
ARTICLE X
MISCELLANEOUS
10.1 Further Assurances. From and after the date of this Agreement, the
Lender and the Borrower agree to do such things, perforin such acts, and make,
execute, acknowledge and deliver such documents as may be reasonably necessary
or proper and usual to carry out the purpose of the Loan Documents in accordance
with their terms.
10.2 Survival of Representations. All representations, warranties,
covenants, agreements, terms and conditions made herein will survive the
execution, delivery and closing of this Agreement and all transactions
contemplated hereunder.
10.3 Failure or Indulgence Not Waiver. No failure or delay on the part of
the Lender in the exercise of any power, right or privilege hereunder or to
insist on strict compliance with or performance of the representations,
warranties, covenants, agreements, terms and conditions of the Loan Documents
will operate as a waiver thereof, nor will any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other night, power or privilege. All rights and remedies existing under the
Loan Documents are cumulative to, and not exclusive of, any rights or remedies
otherwise available to the Lender.
10.4 Notices. Except as otherwise provided herein, all notices, requests,
demands, consents, instructions or other communications to or upon the Borrower
or the Lender under this Agreement or the other Loan Documents shall be in
writing and faxed, mailed or delivered, to such Person at its respective
facsimile number or address set forth below or (or to such other facsimile
number or address for any party as indicated in any notice given by that party
to the other parties). All such notices and communications shall be effective
(a) when sent by an overnight courier service of recognized standing, on the
second Business Day following the deposit with such service; (b) when mailed,
first class postage prepaid and addressed as aforesaid through the United States
Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and (d)
when faxed, upon confirmation of receipt:
To the Lender: County Bank
130 Battery Street, Suite 300
San Francisco, CA 94111
Attn: Roger Shelton
Facsimile: (415) 217-3715
To the Borrower: Redwood Mortgage Investors VIII,
A California Limited Partnership
900 Veterans Blvd., Suite 500
Redwood City, CA 94063
Facsimile: (650) 364-1665
Attn: Michael R. Burwell
10.5 Limitations and Time. The Borrower's right to plead the statute of
limitations as a defense to any and all of the obligations contained herein or
secured hereby is waived, to the full extent permitted by law. Time and
exactitude of each of the terms, obligations, covenants and conditions are
hereby declared to be the essence hereof.
370
10.6 Descriptive Headings. The descriptive headings of the several sections
of this Agreement are inserted for convenience and will not be deemed to affect
the meaning or construction of any of the provisions hereof.
10.7 Construction The Borrower agrees that the rule of construction to the
effect that any ambiguities are to be resolved against the drafting party will
not be employed in the interpretation of the Loan Documents. This Agreement is
for the sole and exclusive benefit of the Borrower, the Lender, California Bank
& Trust, as a participant in respect of the Loan, the Collateral and the Loan
Documents, and any other purchaser, assignee or participant in respect of the
Loan, the Collateral and the Loan Documents, and no other Person is intended to
be benefited by its terms or shall be entitled to enforce its provisions or
assume that the Lender will insist upon strict compliance of its terms.
10.8 Terms Generally. The defined terms in this Agreement will apply
equally to both the singular and the plural forms of the terms defined. Whenever
the context may require, any pronoun will include the corresponding masculine,
feminine and neuter forms. The words "include," "includes" and "including" when
used in this Agreement will be deemed to be followed by the phrase "without
limitation." The words "approval" and "notice" when used in this Agreement will
be deemed to be preceded by the word "written." All references to "Exhibit" or
"Exhibits" in this Agreement mean the exhibits attached hereto, the terms and
conditions of which are made a part hereof. All references to "Section" or
"Sections" in this Agreement mean the applicable section of this Agreement
unless otherwise specified.
10.9 Severability. In case any provision in this Agreement will be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions will not in any way be affected or impaired thereby.
10.10 Amendment Provision The term "Agreement" or "this Agreement" and all
reference thereto as used throughout this instrument will mean this instrument
as originally executed or, if later amended or supplemented, then as so amended
or supplemented. Any amendment to this Agreement must be in writing signed by
the party to be charged.
10.11 Counterparts. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which shall constitute one and the same
Agreement.
10.12 Applicable Law. The Loan Documents and the rights and obligations of
the parties thereto will be governed by the laws of the State of California
except to the extent that the Lender shall have greater rights or remedies under
federal law in which case such choice of California law will not be deemed to
deprive the Lender of such rights and remedies as may be available under federal
law.
10.13 Assignability. The Loan Documents will be binding upon the parties
hereto and their respective successors and assigns, and will inure to the
benefit of the parties hereto and the successors and assigns of the Lender. The
Borrower may not assign its rights or delegate its obligations under this
Agreement without the Lender's prior approval.
10.14 Loan Sales and Participations; Disclosure of Information. The
Borrower agrees that the Lender may elect, at any time, to sell, assign or grant
participation in all or any portion of its rights and obligations under the Loan
Documents, and that any such sale, assignment or participation may be to one or
more financial institutions, private investors and/or other entities, at the
Lender's sole discretion. The Borrower acknowledges that as a condition to the
operation of this Agreement, the Lender will sell to each of California Bank &
Trust and Union Bank of California, and each of California Bank & Trust and
Union Bank of California shall purchase from the Lender, an undivided 31.6667%
(up to $13,300,000) participating interest in the Revolving Loan, the Collateral
and the Loan Documents, as evidenced by separate loan participation agreements
to be executed by the Lender and California Bank & Trust and by the Lender and
Union Bank of California (collectively, the "Loan Participation Agreements").
The Borrower further agrees that Lender may disseminate to California Bank &
Trust, Union Bank of California and other potential purchaser(s), assignee(s) or
participant(s) all documents and information (including all financial
information) which has been or is hereafter provided to or known to the Lender
with respect to: (a) the Collateral; (b) any party connected with the Loan
(including the Borrower and any General Partner) and/or (c) any lending
relationship other than the Revolving Loan which the Lender may have with any
party connected with the Revolving Loan. In the event of any such sale,
assignment or participation, the Lender and the parties to such transaction
shall share in the rights and obligations of the Lender as set forth in the Loan
Documents only as and to the extent they agree among themselves. In connection
with any such sale, assignment or participation, the Borrower further agrees
that the Loan Documents shall be sufficient evidence of the obligations of the
Borrower to each purchaser, assignee, or participant, and upon written request
by the Lender, the Borrower shall enter into such amendments or modifications to
the Loan Documents as may be reasonably required in order to evidence any such
sale, assignment or participation. The indemnity obligations of the Borrower
under the Loan Documents shall also apply with respect to California Bank &
Trust, Union Bank of California and any other purchaser, assignee or
participant.
10.15 Relation to Other Agreement . The requirements imposed on the
Borrower under this Agreement are cumulative of the requirements imposed on the
Borrower under any other agreements under which the Borrower has obligations to
the Lender. If any conflict arises between the terms of this Agreement and any
such other agreement, including any other Loan Document, the terms of this
371
Agreement will prevail except to the extent the conflicting provision in such
other agreement is applicable specifically to the subject of that transaction or
unless the Lender and the Borrower agree to the contrary in a writing which
references the inapplicable provisions of this Agreement. This Agreement shall
constitute the entire and integrated agreement between the Lender and the
Borrower relating to the Lender's commitment to make any Advances and all other
matters addressed herein and shall supersede all prior negotiations,
communications, understandings and commitments relating thereto, whether written
or oral. When effective, this Agreement amends, restates and supplants in all
respects the Existing Loan Agreement.
10.16 Enforcement Costs. In the event of any action or proceeding that
involves the rights or obligations of the Lender or the Borrower under the Loan
Documents, the prevailing party shall be entitled to reimbursement from the
other party of all costs and expenses associated with said action or proceeding,
including reasonable attorney's fees and litigation expenses. The Borrower will
reimburse the Lender for all reasonable attorneys' fees and expenses incurred in
the representation of the Lender in any aspect of any bankruptcy or insolvency
proceeding initiated by or on behalf of the Borrower that concerns any of its
obligations to the Lender under the Loan Documents or otherwise. In the event of
a judgment against one party concerning any aspect of this Agreement, the right
to recover post-judgment attorneys' fees incurred in enforcing the judgment
shall not be merged into and extinguished by any money judgment.
10.17 Indemnity. The Borrower will indemnify, protect, defend and hold the
Lender harmless from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, claims, costs, charges, expenses
or disbursements (including attorneys' fees and the allocated cost of in-house
counsel) which may be incurred by or asserted against the Lender in connection
with or arising out of any inaccuracy or breach of any representation, warranty
or agreement made in the Loan Documents, except to the extent arising out of the
gross negligence or willful misconduct of the Lender.
10.18 Lending Relationship Only . The Borrower acknowledges and agrees that
its relationship with the Lender pursuant to this Agreement and the other Loan
Documents and in respect of any conduct relating thereto shall be solely that of
debtor and lender and is not intended to, and shall not be deemed to create or
be evidence of a partnership, joint venture or any other business relationship
or be "outside the scope of the activities of a lender of money" within the
meaning of California Civil Code Section 3434.
10.19 Dispute Resolution. The Borrower and the Lender desire to resolve
quickly and efficiently any disputes that might arise between them. For any
controversy, claim or judicial action arising from or relating to the Existing
Loan Agreement, the Revolving Loan, the Collateral, this Agreement or the other
Loan Documents or any related agreement, transaction or conduct, whether
sounding in contract, tort or otherwise:
(a) Where an action is pending before a court of any judicial district of
the State of California, the Borrower and the Lender shall each have the right
to require that all questions of fact or law be submitted to general reference
pursuant to California Code of Civil Procedure Section 638 et se , and any
successor statutes thereto.
(1) A single referee who is a retired superior court judge shall be
appointed by the court pursuant to Code of Civil Procedure 640 and shall preside
over the reference proceeding. If the Borrower and the Lender do not agree upon
the referee, each of them may submit to the court up to three nominees who are
retired superior court judges.
(2) If the Borrower and the Lender do not agree on how the payment of the
referee's fees and expenses will be shared, the court may apportion such fees
and expenses between the Borrower and the Lender in a fair and reasonable manner
that is consistent with Code of Civil Procedure Section 645.1.
(3) The Borrower and the Lender shall be entitled to discovery, and the
referee shall oversee discovery and may enforce all discovery orders in the same
manner as any trial court judge.
(4) The referee's statement of decision shall contain written findings of
fact and conclusions of law, and the court shall enter judgment thereon pursuant
to Code of Civil Procedure Sections 644(a) and 645. The decision of the referee
shall then be appealable as if made by the court.
No provision of this Section 10.19(a) shall limit the right of any party to
exercise self-help remedies, to foreclose against or sell any real or personal
property collateral or to obtain provisional or ancillary remedies, such as
injunctive relief or appointment of a receiver, from a court of competent
jurisdiction before, after, or during the pendency of any reference proceeding.
The exercise of a remedy does not waive the right of either party to resort to
reference.
(b) In any action pending before any court of any jurisdiction, the
Borrower and the Lender each waive any right it may have to a jury trial.
372
10.20 Venue. Venue for any action related to the Loan Documents shall be in
an appropriate court in San Francisco, California selected by the Lender to
which the Borrower consents or to an appropriate court in another venue having
jurisdiction over the parties selected by the Lender to which the Borrower also
consents.
10.21 Advice of Counsel The Borrower represents, acknowledges and agrees
that:
(a) Before signing the Loan Documents, the Borrower's legal counsel fully
explained the legal nature, potential applications and ramifications of the
provisions of such Loan Documents.
(b) The Borrower has read and fully understands the terms and conditions of
the Loan Documents.
(c) The Borrower freely and voluntarily executes the Loan Documents.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first hereinabove written.
Lender: Borrower:
COUNTY BANK, REDWOOD MORTGAGE INVESTORS VIII,
a California banking corporation A CALIFORNIA LIMITED PARTNERSHIP
By: /s/ Roger Shelton /s/ Michael Burwell
Roger Shelton Vice President Michael R. Burwell - General Partner
By: Gymno Corporation, a California
corporation - General Partner
By: /s/ Michael Burwell
Its: President
By: Redwood Mortgage Corp.,
a California corporation -
General Partner,
By: /s/ Michael Burwell
Its: President
373
EXHIBIT A
BORROWING BASE CERTIFICATE
FOR THE MONTH ENDING 200_
TOTAL WHOLLY-OWNED MORTGAGES
2. Un-Assigned Wholly-Owned Mortgages
3. Ineligible Wholly-Owned Mortgages
A. Delinquent 60 or more days
B. Land Loans
C. Default/Foreclosure
D. Bankrupt Borrowers
E. Matured Loans
4. Total Ineligible Wholly-Owned Mortgages (add 3A,3B,3C,3D,3E)
5. Eligible Wholly-Owned Mortgages (Line1I less Line2 and Line4)
6. MAXIMUM BORROWING ON WHOLLY-OWNED MORTGAGES (50%of Line 5)
7. TOTAL FRACTIONAL MORTGAGES
8. Un-Assigned Fractional Mortgages
9. Ineligible Fractional Mortgages
A. Delinquent 60 or more days
B. Land Loans
C. Default/Foreclosures
D. Bankrupt Borrowers
E. Matured Loans
10. Total Ineligible Fractional Mortgages (add 9A, 913, 9C, 913, 9E)
11. Eligible Fractional Mortgages (Line 7, less Line 8 and Line 10)
12. MAXIMUM BORROWING BASE ON FRACTIONAL MORTGAGES
(Smaller of 25% of Line II or 25% of Line 6)
13. BORROWING BASE (Add Line 6 and Line 12)
14. COMMITMENT
15. PARTNERSHIP CAPITAL (Multiply by.3333)
16. MAX I MUM BORROWING BASE (Smaller of Lines 13,14 or 15)
17. REVOLVING LOAN OUTSTANDING
18. BORROWING AVAILABILITY (SHORTFALL) (Line 16 less Line 17)
The undersigned represents and warrants that: (i) the foregoing is true,
complete and correct; (ii) the loans reflected above in Line 13, Borrowing
Base, constitute "Pledged Loans" under, and satisfy al I of the
representations and warranties of Article V1 of, the Loan Agreement dated
November 1, 2004 between the undersigned and County Bank and (iii) no
"Default" or "Event of Default" exists under such Loan Agreement.
Borrower: REDWOOD MORTGAGE INVESTORS VIll, a California Limited Partnership
By: Date: 200
--------
MICHAEL R. BURWELL, General Partner
374
EXHIBIT 5.8
Litigation and Contingent Liabilities
[The remainder of this page intentionally left blank by the Borrower.]
375
EXHIBIT 5.10
Adverse Obligations
[The remainder of this page intentionally left blank by the Borrower.]
376
EXHIBIT 5.15
Hazardous Substances and
Environmental Laws Compliance
There has been a release or releases of Hazardous Substances in apparent
violation of applicable Environmental Laws on, about or under the real property
that secures Loan No. 000696. The Borrower understands that the release is in
the remediation process.
377
EXHIBIT 6.3-1
Loan Servicing Agreement
[To be copy of Loan Servicing Agreement and Authorization to Collect,
Document No. 069031/289668vll
378
EXHIBIT 6.3-2
Loan Servicing Agreement
[To be copy of Loan Servicing Agreement and Authorization to Collect,
Document No. 069001/282342v3l
379
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the use of our report dated February 11, 2005
accompanying the balance sheet of the general partner, Gymno Corporation, our
report dated November 29, 2004 accompanying the balance sheet of the general
partner, Redwood Mortgage Corp., and our report dated February 14, 2005, except
as to footnote 14, which is as of March 10, 2005, accompanying the consolidated
financial statements of the partnership, Redwood Mortgage Investors VIII, in the
prospectus and 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.
/s/ Armanino McKenna, LLP
- --------------------------------
Armanino McKenna, LLP
San Ramon, CA
July 28, 2005
380
Exhibit 99.1
Table VI
Description of Open Loans of Prior Limited Partnerships
(unaudited)
NOT COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Three Year Summary of Loans Originated by Prior Limited Partnerships.
During the three-year period ending December 31, 2004, 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, 2004. 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,
2004.
- -----------------------------------------------------------------------------------------------------------------------------
Name of partnership Number of Estimated Total Amount Outstanding Loan Balances Total Outstanding Loans
Loans of Loans Made 01/01/02 Originated 01/01/02 as of 12/31/04
to 12/31/04 to 12/31/04
- -----------------------------------------------------------------------------------------------------------------------------
CMI 14 $1,406,204.87 $644,799.72 $782,124.37
- -----------------------------------------------------------------------------------------------------------------------------
RMI 6 $820,635.02 $571,561.27 $602,337.64
- -----------------------------------------------------------------------------------------------------------------------------
RMI II 2 $355,814.97 $308,461.22 $343,965.60
- -----------------------------------------------------------------------------------------------------------------------------
RMI III 20 $2,100,200.01 $671,842.31 $825,097.99
- -----------------------------------------------------------------------------------------------------------------------------
RMI IV 9 $4,306,072.69 $2,807,140.89 $4,514,305.88
- -----------------------------------------------------------------------------------------------------------------------------
RMI V 7 $942,061.03 $644,214.94 $1,590,978.80
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 58 $9,930,988.59 $5,648,020.35 $8,658,810.28
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Name of partnership Number of Estimated Total Amount Outstanding Loan Balances Total Outstanding Loans
Loans of Loans Made 01/01/02 Originated 01/01/02 as of 12/31/04
to 12/31/04 to 12/31/04
- -----------------------------------------------------------------------------------------------------------------------------
RMI VI 21 $6,632,475.97 $4,846,802.30 $5,225,128.49
- -----------------------------------------------------------------------------------------------------------------------------
RMI VII 39 $11,983,746.59 $6,239,193.08 $7,388,478.20
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 60 $18,616,222.56 $11,085,995.38 $12,613,606.69
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Name of partnership Number of Estimated Total Amount Outstanding Loan Balances Total Outstanding Loans
Loans of Loans Made 01/01/02 Originated 01/01/02 as of 12/3104
to 12/31/04 to 12/31/04
- -----------------------------------------------------------------------------------------------------------------------------
RMI VIII 119 $269,235,162.59 $159,267,312.44 $171,744,735.19
- -----------------------------------------------------------------------------------------------------------------------------
381
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 $7,420,875.55
Second Trust Deeds $2,510,113.04
-----------------
Total $9,930,988.59
=================
Location of Loans
Alameda County $3,556,222.00
Santa Clara County $2,318,200.00
San Francisco County $1,661,512.50
San Mateo County $694,671.04
Stanislaus County $578,181.82
Contra Costa County $560,079.23
Marin County $339,622.00
San Joaquin County $150,000.00
Sacramento County $72,500.00
-----------------
Total $9,930,988.59
=================
Type of Property
Owner Occupied Homes $2,111,872.00
Non-Owner Occupied $3,425,515.55
Commercial $4,393,601.04
-----------------
Total $9,930,988.59
=================
382
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 (1)
First Trust Deeds $12,461,067.60
Second Trust Deeds $5,205,154.96
Third Trust Deeds $950,000.00
-------------------
Total $18,616,222.56
===================
Location of Loans
Alameda County $7,456,585.99
Santa Clara County $3,470,653.75
San Francisco County $1,569,767.50
San Mateo County $1,451,328.96
Contra Costa County $886,250.00
San Diego County $800,000.00
Stanislaus County $717,386.36
Sacramento County $710,500.00
Monterey County $400,000.00
San Joaquin County $317,750.00
Marin County $300,000.00
Solano County $160,000.00
Merced County $146,000.00
Colusa County $120,000.00
Madera County $110,000.00
-------------------
Total $18,616,222.56
===================
Type of Property
Owner Occupied Homes $6,127,000.00
Non-Owner Occupied $6,813,789.86
Commercial $5,675,432.70
-------------------
Total $18,616,222.56
===================
383
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 $176,526,080.59
Second Trust Deeds $92,109,082.00
Third Trust Deeds $600,000.00
------------------
Total $269,235,162.59
==================
Location of Loans
Alameda County $82,135,811.39
San Francisco County $43,221,320.00
Contra Costa County $31,228,800.00
Santa Clara County $27,031,250.00
San Mateo County $23,671,450.00
Sacramento County $13,040,000.00
Marin County $10,135,000.00
Los Angeles County $7,292,000.00
Fresno County 6,073,600.00
Riverside County $5,150,000.00
Napa County $4,885,000.00
San Joaquin County $4,017,250.00
El Dorado County $3,032,500.00
San Diego County $2,670,000.00
Calaveras County $1,500,000.00
Lake County $1,458,000.00
Placer County $1,070,000.00
Stanislaus County $793,181.20
Sonoma County $750,000.00
King County $80,000.00
------------------
Total $269,235,162.59
==================
Type of Property
Owner Occupied Homes $25,622,569.38
Non-Owner Occupied $134,683,273.20
Commercial $77,392,320.01
Land $4,507,000.00
Apartments $27,030,000.00
------------------
Total $269,235,162.59
==================
(1) These amounts include loans made by the partnership in its prior
offerings aggregating $132,149,000
384