REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Index to Form 10-K
December 31, 2005
Part I
Page No.
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Item 1 - Business 4
Item 2 - Properties 8
Item 3 - Legal Proceedings 9
Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 9
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 9
Item 6 - Selected Consolidated Financial Data 10
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 21
Item 8 - Consolidated Financial Statements and Supplementary Data 24
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 54
Item 9a - Controls and Procedures 54
Item 9b - Other Information 54
Part III
Item 10 - Directors and Executive Officers of the Registrant 54
Item 11 - Executive Compensation 56
Item 12 - Security Ownership of Certain Beneficial Owners and Management 57
Item 13 - Certain Relationships and Related Transactions 57
Item 14 - Principal Accountant Fees & Services 57
Part IV
Item 15 - Exhibits, Financial Statements and Schedules 58
Signatures 59
Certifications 61
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 000-27816
REDWOOD MORTGAGE INVESTORS VIII,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of 94-3158788
incorporation or organization) (I.R.S. Employer Identification)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
(address of principal executive offices) (zip code)
(650) 365-5341
(Registrant's telephone number, including area code)
Securities registered pursuant to Section
12 (b) of the Act: NONE
Securities registered pursuant to Section
12 (g) of the Act: Limited Partnership Units
2
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act of 1933, as amended.
Yes No XX
-------------- -------------
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Act of 1934, as
amended.
Yes No XX
-------------- -------------
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No
-------------- -------------
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).
Yes No XX
-------------- -------------
As of June 30, 2005, the aggregate value of limited partnership units held
by non-affiliates was $205,385,000. This calculation is based on the capital
account balance of the limited partners and excludes limited partnership units
held by the general partner.
Documents incorporated by reference:
Portions of the Prospectus effective August 4, 2005, and post effective
Amendment No. 1 dated March 15, 2006, containing supplement No. 1 dated March
15, 2006, (the "Prospectus"), are incorporated in Parts II, III, and IV.
Exhibits filed as part of Form S-11 Registration Statement #333-125629 are
incorporated by reference in part IV.
3
Part I
Item 1 - 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
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 offering of 75,000,000 units ($75,000,000). This
offering sold $74,904,000 in units and was closed on August 3, 2005. On August
4, 2005 the partnership commenced its sixth and current offering of 100,000,000
units ($100,000,000). As of December 31, 2005, $12,224,000 in units was sold in
this sixth offering, bringing the aggregate sale of units to $212,037,000. Units
in the sixth offering 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, Inc.
The partnership began selling units in February 1993, and began investing
in mortgages in April 1993. At December 31, 2005, the partnership has
investments in secured loans with principal balances totaling $214,012,000.
Interest rates ranged from 8.00% to 13.00%. Currently First Trust Deeds comprise
63.52% of the total amount of the secured loan portfolio, a decrease of 3.49%
over the 2004 level of 67.01%. Junior loans (2nd and 3rd Trust Deeds) make up
36.48%, an increase of 3.49% from the 2004 level of 32.99%. Loans secured by
single family (1-4 units) total 54.64% of the secured loan portfolio. Loans
secured by multi-family properties make up 8.98% of the total secured loans.
Commercial loans comprise 30.45% of the secured portfolio, a decrease of 1.38%
from last year and land made up 5.93% of the secured loan portfolio. Of the
total secured loans, 71.78% are in six counties of the San Francisco Bay Area,
and 15.54% are in counties adjacent to the San Francisco Bay Area. The balance
of secured loans, 12.68% are in other counties located in California. Average
loan size decreased this year, and is now averaging $2,184,000 per loan, down
$105,000 from the average loan balance of $2,289,000 in 2004. Despite this
decrease in the average loan size, the partnership's loan portfolio continued to
grow as the number of loans increased. As of December 31, 2005 the secured loan
portfolio balance was $214,012,000 as compared to $171,745,000 as of December
31, 2004; an increase of $42,267,000 (24.61%). The number of loans also
increased to 98 loans as of December 31, 2005 from 75 loans that existed at
December 31, 2004; an increase of 23 loans (30.67%). These increases are due to
the ability of the partnership, by virtue of its increasing capital, to invest
in more loans. The average loan as of December 31, 2005, represents 0.96% of
partner capital and 1.02% of outstanding secured loans, compared to December 31,
2004 when average loan size represented 1.25% of partners' capital and 1.33% 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 8.16% 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
34.97%, a decrease in equity of 8.09% 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 one property in foreclosure as of the end of
December 2005. The principal balance of this foreclosed property represents
1.68% of the secured loan portfolio. The partnership does expect that during
2006 additional foreclosures may need to be filed in order to collect payment
from borrowers who have become delinquent. This is typical of our loan market
segment and the partnership expects to have a level of delinquency higher than
banking institutions within its portfolio.
4
Delinquencies are discussed under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
For the year ended December 31, 2005 the partnership acquired two
properties through foreclosure. One was a Monterey County undeveloped lot, which
was subsequently sold at a profit. The other was a multi-unit property located
in an upscale neighborhood in San Francisco. Following acquisition, this
property was transferred via a statutory warranty deed to a new entity named
Larkin Street Property Company, LLC. Occasionally, to assist in protecting its
own assets and to reduce liability, the partnership may transfer properties
acquired through the foreclosure process to newly formed Limited Liability
Companies, or "LLCs". The partnership owns a controlling 72.50% interest in the
property along with three other affiliated partnerships that collectively own
the remaining 27.50%. As of December 31, 2005 the partnership has capitalized
approximately $558,000 in costs related to this property and the overall
investment together with the other affiliated partnerships totaled $11,153,000.
During 2004 the partnership acquired one property through foreclosure and
acquired three contiguous parcels of land through deeds in lieu of foreclosure
on three loans to one borrower. With respect to the properties acquired in 2004
the partnership has not transferred the real estate to any of its LLCs. 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, 2005, the partnership's investment in this property, net of a
$500,000 reserve, totaled $1,691,000. 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, 2005 the partnership's investment in
this property totaled $4,505,000. The property is jointly owned by two other
affiliated partnerships. During 2003 no foreclosures were completed. 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. Net income
increased from $9,594,000 in 2003 to $12,132,000 in 2004 and to $15,368,000 in
2005. This was made possible largely through investment of additional capital
derived from sales of partnership units into loans. The secured loan portfolio
increased from $147,174,000 in 2003 to $171,745,000 in 2004 and to $214,012,000
in 2005, an increase of 45.41% over the two-year period. The partnership has
placed its loans at interest rates competitive in the marketplace. Mortgage
interest income increased from $12,496,000 in 2003 to $16,437,000 in 2004 and to
$19,203,000 in 2005, an increase of 54% over the two-year period. During the
year 2005 the partnership's annualized yield on compounding accounts was 7.05%
and 6.83% on monthly distributing accounts.
In 2004, 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.
Competition and General Economic Conditions.
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.
5
Beginning in July of 2004, the Federal Reserve changed its interest rate
policy from one of three years of continuously lowered interest rates, which hit
a 40 year historic interest rate low, to one of tempered but gradual interest
rate increases. In keeping with this new policy since July 2004, the Federal
Reserve has increased the Federal Funds Rate by one quarter percentage point
(1/4 of one percent) at each of its meetings to 5.25% as of December 31, 2005.
This deliberate upward change in the Federal Funds Rate has caused short term
interest rates to rise, and to a lesser degree, pushed longer term rates up as
well. Nationally and more specifically in Northern California, the location of
the majority of our lending activities, the economies have substantially
recovered from the economic downturn lasting from 2000 through 2003. Employment
and job creation has improved. During 2004 and 2005, the residential and
commercial real estate markets in Northern California enjoyed solid price
appreciation. During the latter half of 2005, long-term interest rates have
begun to inch upward. Residential sales volumes have declined yet median home
sales prices have remained at or near their record 2005 highs. While some
concern exists as to whether real estate values will soften, interest rates
continue to remain attractive by historical standards, unemployment remains low
and the economy is strong. Management believes these factors will contribute to
a real estate marketplace with lower appreciation in 2006 compared to 2004 and
2005. With less real estate transactions likely to exist competition for loans
will be fierce. Since it appears that the bottom of the interest rate cycle was
reached in 2004, we believe loan runoff to lower interest rates will be reduced
allowing the partnership to retain its loans for longer periods. Excess cash
will be invested in short-term alternative investments, such as money market
funds yielding considerably less than the current loan investment portfolio.
Secured Loan Portfolio.
A summary of the partnership's secured loan portfolio as of December 31,
2005, is set forth below (in thousands):
Loans as a Percentage of Appraised Values
First Trust Deeds $ 135,945
Appraised Value of Properties at Time of Loan 239,781
-------------
Total Investment as a % of Appraisal 56.70%
=============
First Trust Deed Loans 135,945
Second Trust Deed Loans 73,138
Third Trust Deed Loans 4,929
-------------
Total of Trust Deed Loans 214,012
Priority Positions due Other Lenders:
First Trust Deed Loans due Other Lenders 222,577
Second Trust Deed Loans due Other Lenders 1,996
-------------
Total Debt $ 438,585
=============
Appraised Property Value at Time of Loan 674,436
Total Debt as a % of Appraisal based on appraised
values and prior liens at date loan was consummated 65.03%
=============
Number of Secured Loans Outstanding 98
Average Secured Loan $ 2,184
Average Secured Loan as a % of Secured Loans Outstanding 1.02%
Largest Secured Loan Outstanding 11,927
Largest Secured Loan as a % of Secured Loans Outstanding 5.57%
Largest Secured Loan as a % of Partnership Assets 4.51%
Secured Loans as a Percentage of Total Secured Loans Percent
----------------------------------------------------------------- -------------
First Trust Deed Loans 63.52%
Second Trust Deed Loans 34.18%
Third Trust Deed Loans 2.30%
-------------
Total Trust Deed Loan Percentage 100.00%
=============
6
Type of Secured Loans by Property Amount Percent
------------------------------------------------ ------------- -------------
Single Family (1-4 units) $ 116,945 54.64%
Apartments 19,209 8.98%
Commercial 65,167 30.45%
Land 12,691 5.93%
------------- -------------
Total $ 214,012 100.00%
============= =============
The following is a distribution of secured loans outstanding as of December
31, 2005 by California Counties (in thousands):
Total
California County Secured Loans Percent
---------------------------------------------------- -------------- -------------
San Francisco Bay Area Counties
San Francisco $ 54,273 25.36%
Contra Costa 26,267 12.27%
Santa Clara 25,215 11.78%
Alameda 20,807 9.72%
San Mateo 19,885 9.29%
Marin 7,185 3.36%
-------------- -------------
153,632 71.78%
San Francisco Bay Area Adjacent Counties
Napa 11,930 5.57%
Sacramento 10,524 4.92%
Solano 6,154 2.88%
San Joaquin 4,324 2.02%
Sonoma 324 0.15%
-------------- -------------
33,256 15.54%
Other California Counties
Los Angeles 6,666 3.11%
Fresno 4,493 2.10%
Butte 4,453 2.08%
Sutter 3,996 1.87%
Placer 1,793 0.84%
Amador 1,750 0.82%
Riverside 1,500 0.70%
San Diego 1,114 0.52%
All others 1,359 0.64%
-------------- -------------
27,124 12.68%
Total $ 214,012 100.00%
============== =============
Number of Secured Loans in Foreclosure 1 $3,600,000
7
Scheduled maturity dates of secured loans as of December 31, 2005 are as
follows (in thousands):
Year Ending
December 31,
--------------------------
2006 $ 70,217
2007 89,556
2008 27,132
2009 5,926
2010 20,202
Thereafter 979
-------------
$ 214,012
=============
The scheduled maturities for 2006 include eight loans totaling $26,075,000,
and representing 12.18% of the secured loan portfolio, past maturity at December
31, 2005. The partnership allows borrowers to occasionally continue to make the
payments on debt past maturity for periods of time. Of these past maturity
loans, the partnership has begun foreclosure on one with a principal balance
totaling $3,600,000.
Item 2 - Properties
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 December 31, 2005 and
December 31, 2004, the partnership had advanced approximately $202,000 and
$150,000, respectively, to Russian for sales and maintenance costs. At December
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 December 31, 2005, the partnership has capitalized approximately $254,000 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 undeveloped parcels of land
through a deed in lieu of foreclosure. The land is located in Stanislaus County,
California. It is comprised of three separate lots, which total approximately 14
acres. The parcels are currently for sale. As of December 31, 2005 the
partnership's investment in this property totaled $4,505,000, 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.
8
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 $10,595,000 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. The
partnership owns a 72.50% interest in the property and the other three
affiliates collectively own the remaining 27.50%. As of December 31, 2005, the
Partnership has capitalized approximately $558,000 in costs related to this
property. As of December 31, 2005 the Partnership's investment, together with
the other affiliated partnerships, totaled $11,153,000.
In January, 2005 the partnership acquired through foreclosure a parcel of
land in Monterey County, CA. This property was subsequently sold in March, 2005
at a profit of $183,000.
Item 3 - Legal Proceedings
In the normal course of business, the partnership may become involved in
various types of legal proceedings such as assignment of rents, bankruptcy
proceedings, appointment of receivers, unlawful detainers, judicial foreclosure,
etc., to enforce the provisions of the deeds of trust, collect the debt owed
under the promissory notes, or to protect, or recoup its investment from the
real property secured by the deeds of trust. None of these actions would
typically be of any material importance. As of the date hereof, the partnership
is not involved in any legal proceedings other than those that would be
considered part of the normal course of business.
Item 4 - Submission of Matters to Vote of Security Holders (Partners)
No matters have been submitted to a vote of the partnership.
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and
Related Unitholder Partnership Matters
100,000,000 units at $1 each (minimum purchase of 2,000 units) are
currently being offered ($200,000,000 in units were previously offered and sold
through separate offerings) through broker-dealer member firms of the National
Association of Securities Dealers on a "best efforts" basis (as indicated in
Part I item 1). Investors have the option of withdrawing earnings on a monthly,
quarterly, or annual basis or compounding the earnings. Limited partners may
withdraw from the partnership in accordance with the terms of the limited
partnership agreement subject to possible early withdrawal penalties. There is
no established public trading market. As of December 31, 2005, 5,844 limited
partners had a capital balance of $227,970,000, net of Formation Loans and
syndication costs.
A description of the partnership units, transfer restrictions and
withdrawal provisions is more fully described under the section of the
prospectus entitled "Description of Units" and "Summary of Limited Partnership
Agreement", pages 81 through 84 of the prospectus, a part of the referenced
registration statement, which is incorporated by reference.
9
Item 6 - Selected Consolidated Financial Data
Redwood Mortgage Investors VIII began operations in April 1993.
Consolidated financial condition and results of operation for the
partnership as of and for the five years ended December 31, 2005 were (in
thousands, except for net income per $1,000 invested by limited partners for
entire period):
Consolidated Balance Sheets
ASSETS
December 31,
--------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------- ------------- ------------ ------------
Cash and cash equivalents $ 28,853 $ 16,301 $ 8,921 $ 7,188 $ 1,917
Loans
Loans, secured by deeds of trust 214,012 171,745 147,174 83,650 82,790
Loans, unsecured - 34 34 - 4
Accrued interest and late fees 3,254 4,895 4,735 3,913 3,345
Advances on loans 103 131 416 279 195
Less allowance for loan losses (3,138) (2,343) (2,649) (3,021) (2,247)
Other receivables - - - 888 -
Real estate held for sale, net 21,328 9,793 3,979 9,286 -
Other assets 72 62 44 22 6
------------ ------------- ------------- ------------ ------------
$ 264,484 $ 200,618 $ 162,654 $ 102,205 $ 86,010
============ ============= ============= ============ ============
LIABILITIES AND PARTNERS' CAPITAL
December 31,
-------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------- ------------- ------------- ------------- -----------
Liabilities
Accounts payable $ 10 $ 25 $ 224 $ 449 $ 74
Payable to affiliate 489 638 448 294 109
Line of credit 32,000 16,000 22,000 - 11,400
Note payable - - - 1,782 -
Deferred interest - - - 112 -
Minority interest 3,042 - - 1,213 -
Subscriptions to partnership in
applicant status 776 424 1,210 2,578 673
------------- ------------- ------------- ------------- -----------
36,317 17,087 23,882 6,428 12,256
------------- ------------- ------------- ------------- -----------
Partners' capital
Limited partners subject to
redemption 227,970 183,368 138,649 95,690 73,687
General partners subject to
redemption 197 163 123 87 67
------------- ------------- ------------- ------------- -----------
Total partners' capital 228,167 183,531 138,772 95,777 73,754
------------- ------------- ------------- ------------- -----------
$ 264,484 $ 200,618 $ 162,654 $ 102,205 $ 86,010
============= ============= ============= ============= ===========
10
Consolidated Statements of Income
December 31,
-----------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------- ------------ ------------ ------------ -----------
Gross revenue $ 20,188 $ 17,133 $ 12,958 $ 11,691 $ 9,088
Expenses 4,779 4,981 3,369 4,204 2,994
------------- ------------ ------------ ------------ -----------
Income before interest credited to
partners in applicant status 15,409 12,152 9,589 7,487 6,094
Interest credited to partners in
applicant status 41 20 37 1 1
------------- ------------ ------------ ------------ -----------
Minority interest share of
subsidiary loss - - 42 - -
Net income $ 15,368 $ 12,132 $ 9,594 $ 7,486 $ 6,093
============= ============ ============ ============ ===========
Net income to general partners (1%) 154 121 96 75 61
Net income to limited partners (99%) 15,214 12,011 9,498 7,411 6,032
------------- ------------ ------------ ------------ -----------
Total net income $ 15,368 $ 12,132 $ 9,594 $ 7,486 $ 6,093
============= ============ ============ ============ ===========
Net income per $1,000 invested by
limited partners for entire period
(annualized)
- where income is compounded and
retained $ 70 $ 72 $ 78 $ 87 $ 90
============= ============ ============ ============ ===========
- where partner receives income in
monthly distributions $ 68 $ 70 $ 75 $ 84 $ 86
============= ============ ============ ============ ===========
Annualized yields when income is compounded or distributed monthly for the
years 2001 through 2005 are outlined in the table below:
Compounded Distributed
--------------- ----------------
2001 8.98% 8.63%
2002 8.69% 8.36%
2003 7.76% 7.50%
2004 7.22% 6.99%
2005 7.05% 6.83%
The average annualized yield, when income is compounded and retained, from
inception through December 31, 2005, was 8.12%. The average annualized yield,
when income is distributed monthly, from inception through December 31, 2005 was
7.87%
Certain reclassifications, not affecting previously reported net income or
total partner capital, have been made to the previously issued consolidated
financial statements to conform to the current year presentation.
11
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
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, 2005, the partnership
owned six real estate properties, which were taken back from defaulted
borrowers.
Loans and the related accrued interest, late fees and advances are analyzed
on a periodic basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral 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. As of December 31, 2005 there were no
impaired loans.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Forward-Looking Statements.
Certain statements in this Report on Form 10-K which are not historical
facts may be considered forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, hopes, intentions, beliefs and strategies regarding the
future. Forward-looking statements include statements regarding future interest
rates and economic conditions and their effect on the Partnership and its
assets, trends in the California real estate market, estimates as to the
allowance for loan losses, estimates of future limited partner withdrawals, the
total amount of the Formation Loan, 2006 annualized yield estimates, additional
foreclosures in 2006, expectations regarding the partnership's level of
delinquency, plans to develop certain properties, beliefs regarding the
partnership recovering the full value of its investment in certain properties,
the expectation that borrower foreclosures will not have a material effect on
liquidity, the use of excess cash flow and the intention not to sell the
partnership's loan portfolio. Actual results may be materially different from
what is projected by such forward-looking statements. Factors that might cause
such a difference include unexpected changes in economic conditions and interest
rates, the impact of competition and competitive pricing and downturns in the
real estate markets in which the Company has made loans. All forward-looking
statements and reasons why results may differ included in this Form 10-K are
made as of the date hereof, and we assume no obligation to update any such
forward-looking statement or reason why actual results may differ.
12
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 partners, subject to limitations imposed by
the partnership agreement. In the past the general partners have elected not to
take the maximum compensation. The following is a list of various partnership
activities for which related parties are compensated.
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, the general partners
may collect an amount equivalent to 12% of the loaned amount until 6 months
after the termination date of the offering. Thereafter, the loan brokerage
commissions (points) will be limited to an amount not to exceed 4% of the total
partnership assets per year. The loan brokerage commissions are paid by the
borrowers, and thus, are not an expense of the partnership. In 2005, 2004 and
2003, loan brokerage commissions paid by the borrowers were $3,697,000,
$2,443,000 and $2,621,000, respectively.
o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the partnership's loans
are paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. 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
$1,736,000, $1,565,000 and $1,057,000 were incurred for the years ended December
31, 2005, 2004 and 2003, respectively.
These servicing fees were charged at 1%, on an annual basis, of the
outstanding principal balances. If the maximum mortgage servicing fee of 1.5%,
on an annual basis, had been charged to the partnership, then net income would
have been reduced by approximately $868,000, $783,000 and $529,000 in 2005, 2004
and 2003, respectively. Reducing net income reduces the annualized yields. An
increase or decrease in this fee within the limits set by the partnership's
agreement directly impacts the yield to the limited partners.
o Asset Management Fees The general partners receive monthly fees for
managing the partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $814,000, $630,000 and $468,000 were incurred by the partnership for
years 2005, 2004 and 2003, respectively.
o Other Fees The partnership agreement provides that the general partners
may receive other fees such as reconveyance, mortgage assumption and mortgage
extension fees. Such fees are incurred by the borrowers and are paid to the
general partners.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective partnership interests. The allocation
to the general partners (combined) shall not exceed 1%.
o Operating Expenses 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.
During 2005, $20,000 in such fees was waived by the general partners.
o Contributed Capital The general partners jointly or severally are
required to contribute 1/10 of 1% in cash contributions as proceeds from the
offerings are received from the limited partners. As of December 31, 2005 and
2004, a general partner, Gymno Corporation, had contributed $213,000 and
$174,000, respectively, as capital in accordance with Section 4.02(a) of the
partnership agreement.
13
o Sales Commission - "Formation Loan" to Redwood Mortgage Corp. Sales
commissions relating to the capital contributions by limited partners are not
paid directly by the partnership out of the offering proceeds. Instead, the
partnership loans to Redwood Mortgage Corp., a general partner, amounts
necessary to pay all sales commissions and amounts payable in connection with
unsolicited sales. The loan is referred to as the "Formation Loan". It is
unsecured and non-interest bearing and is applied to reduce limited partners
capital in the consolidated balance sheets. The sales commissions range between
0% (for units sold by the general partners) and 9%. It is estimated that the
total amount of the Formation Loan will approximate 7.6% based on the assumption
that 65% of the investors will reinvest earnings, which qualify for the higher
commission percentage. Formation Loans made to Redwood Mortgage Corp. were on a
per offering basis.
The following table summarizes Formation Loan transactions through December
31, 2005 (in thousands):
Offering
---------------------------------------------------------------------------------
1st 2nd 3rd 4th 5th 6th Total
---------- ---------- ---------- ---------- ---------- ---------- -----------
Limited partner
contributions $ 14,932 $ 29,993 $ 29,999 $ 49,985 $ 74,904 $ 12,224 $ 212,037
========== ========== ========== ========== ========== ========== ===========
Formation Loans made 1,075 2,272 2,218 3,777 5,661 888 15,891
Repayments to date (888) (1,206) (748) (846) (388) - (4,076)
Early withdrawal
penalties applied (79) (120) (85) (14) (11) - (309)
---------- ---------- ---------- ---------- ---------- ---------- -----------
Balance,
December 31, 2005 $ 108 $ 946 $ 1,385 $ 2,917 $ 5,262 $ 888 $ 11,506
========== ========== ========== ========== ========== ========== ===========
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.
On December 31, 2005, the partnership was in the offering stage of its
sixth offering, ($100,000,000). 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, $74,904,000 for the fifth
offering and $12,224,000 for the sixth offering, totaling an aggregate of
$212,037,000 as of December 31, 2005. Of this amount, $776,000 remained in
applicant status.
14
Results of Operations - For the years ended December 31, 2005, 2004 and
2003
Changes in the partnership's operating results for the years ended December
31, 2005, 2004 and 2003 are discussed below:
Changes for the years ended December 31,
--------------------------------------------
2005 2004
-------------- -------------
Net income $ 3,236,000 $ 2,538,000
============== =============
Revenue
Interest on loans 2,766,000 3,941,000
Late fees (98,000) 17,000
Other 387,000 217,000
-------------- -------------
$ 3,055,000 $ 4,175,000
-------------- -------------
Expenses
Mortgage servicing fees 171,000 508,000
Interest expense (344,000) 551,000
Amortization of loan origination fees 9,000 33,000
Provision for losses on loans (291,000) 364,000
Clerical costs through Redwood Mortgage Corp. (9,000) 17,000
Asset management fees 184,000 162,000
Professional services (64,000) 100,000
Broker expense - (181,000)
Amortization of discount on imputed interest 76,000 124,000
Other 87,000 (41,000)
-------------- -------------
$ (181,000) $ 1,637,000
-------------- -------------
Net income increase $ 3,236,000 $ 2,538,000
============== =============
Although the average interest rate of the loan portfolio declined to 9.93%
from 10.02% for the years ended December 31, 2005 and 2004, respectively, the
interest income of the partnership continued to increase by $2,766,000 (16.83%)
to $19,203,000 in 2005 and by $3,941,000 (31.54%) to $16,437,000 in 2004. This
was primarily due to the increased size of the partnership's secured loan
portfolio, which increased by $42,267,000 (24.61%) to $214,012,000 in 2005 and
by $24,571,000 (16.70%) to $171,745,000 in 2004. Average loan portfolio balances
for the years ended December 31, 2005, 2004 and 2003, were $183,390,000,
$159,460,000 and $115,412,000, respectively. Additionally, interest income
increased through the collection of interest enhancements and interest rate
provisions due upon repayment of our loans. In 2005, these totaled approximately
$1,063,000.
The decrease in late charge income of $98,000 (45%) for the year ended
December 31, 2005 and increase of $17,000 (8%) for the year ended December 31,
2004 were primarily due to the reduction in overall portfolio delinquencies in
2005 as compared to 2004.
The increase in other income of $387,000 (81%) and $217,000 (83%) for the
years ended December 31, 2005 and 2004, respectively, was primarily due to
increased imputed interest income from the larger Formation Loan existing of
$11,506,000, $9,751,000 and $7,550,000 for the years ended December 31, 2005,
2004 and 2003, respectively. Imputed interest income was $395,000 and $319,000
for the years ended December 31, 2005 and 2004, respectively. Interest income
from the bank deposit was $100,000 and $40,000 for the years ended December 31,
2005 and 2004, respectively. Other income also increased by $183,000 through a
gain on the sale of a real estate held for sale property in 2005, whereas no
such income was derived in 2004.
The increase in mortgage servicing fees of $171,000 (10.93%) and $508,000
(48.06%) for the years ended December 31, 2005 and 2004, respectively, was
primarily due to increases in the outstanding loan portfolio. The loan portfolio
increased by $42,267,000 (24.61%) in 2005 and $24,571,000 (16.70%) in 2004. The
increase in servicing fees for the year ended December 31, 2005 was due to an
increased average loan portfolio balance of $183,390,000, which the partnership
maintained in 2005 versus an average balance of $159,460,000 in 2004.
15
Interest expense on the line of credit is tied to the bank's prime rate.
The decrease in interest expense of $344,000 (55.31%) for the year ended
December 31, 2005 was primarily due to a substantial reduction in the weighted
average borrowing of $4,536,000 in 2005 offset by an increase in the weighted
average interest rate to 6.14%. An increase in interest expense of $551,000
(776%) in 2004 was primarily due 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 due to the costs
involved in negotiating an extension of the maturity date and an increase in the
credit line facility.
The decrease in provision for losses on loans and real estate of $291,000
(25.39%) for the year ended December 31, 2005 was primarily due to increased
stability in the real estate market, the stabilization of the economy, a decline
in foreclosures to one loan totaling $3,600,000 as of December 31, 2005 versus
six loans totaling $14,682,000 as of December 31, 2004, a reduction in the
delinquent loans 90 days or more past due in maturity and/or interest payments
percentage to nine totaling $26,863,000 (12.55% of portfolio) as of December 31,
2005 from eleven totaling $25,013,000 (14.56% of portfolio) as of December 31,
2004, and management's determination that no additional amounts were needed
related to the real estate held for sale. The increase in the provision for
losses on loans of $364,000 in 2004 was primarily due to an increase in
foreclosures to six loans totaling $14,682,000 as of December 31, 2004 from
three loans totaling $2,931,000 as of December 31, 2003, and the potential
acquisition of two properties totaling $6,315,000 in late 2004 and another
property totaling $7,635,000 in early 2005.
The decrease in clerical costs of $9,000 (2.93%) for the year ended
December 31, 2005 was due to a waiver of approximately $20,000 in costs by
management. The increase of $17,000 (5.86%) for the year ended December 31, 2004
was primarily due to an increase in partnership size and costs associated with
the increased size.
The increase in asset management fees of $184,000 (29.21%) and $162,000
(34.62%) for the years ended December 31, 2005 and 2004, respectively, was due
to an increase in limited partners' capital under management, which increased
from $138,649,000 in 2003 to $183,368,000 in 2004 and to $227,970,000 in 2005.
The decrease in professional fees of $64,000 (30.33%) for the year ended
December 31, 2005 was due to increased efficiencies and reductions in costs
associated with various partnership regulatory filings. The increase in
professional services of $100,000 (90.09%) for the year ended December 31, 2004
was primarily due to the increased size of the partnership and increased costs
associated with various partnership regulatory filings and the annual audit.
The decrease in broker expense of $181,000 (100%) for the year ended
December 31, 2004, 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 increases in amortization of discount on imputed interest of $76,000
(23.82%) and $124,000 (63.59%) for the years ended December 31, 2005 and 2004,
respectively, is primarily due to increases in the Formation Loan from the sale
of additional limited partnership investments.
The increase in other expenses of $87,000 (60%) for the year ended December
31, 2005 was primarily due to increased subscription interest while new funds
from limited partners awaited entry into the partnership of $41,000 in 2005 as
compared to $20,000 in 2004, and the expensing of the upkeep costs of the
properties owned by the partnership, which totaled $118,000 in 2005 as compared
to $58,000 in 2004. The decrease in other expenses of $41,000 (28.28%) for the
year ended December 31, 2004 was due to the partnership sustaining a loss on the
sale of a real estate held for sale property in 2003.
Partnership capital continued to increase as the partnership received new
limited partner capital contributions of $39,816,000, $40,954,000 and
$40,030,000 and retained the earnings of limited partners that have chosen to do
so of $9,476,000, $7,367,000 and $5,958,000 for the years 2005, 2004 and 2003,
respectively. The fifth offering commenced on October 7, 2003 and closed on
August 3, 2005. On August 4, 2005 the partnership commenced its sixth 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, 2005 the limited
partners total units purchased was 211,264,000 units aggregating $212,037,000.
16
The partnership began funding loans on April 14, 1993 and as of December
31, 2005 had credited earnings to limited partners who elected to retain
earnings at an average annualized yield of 8.12% since inception through
December 31, 2005. Limited partners who elected to have their earnings
distributed monthly had an average annualized yield of 7.87% since inception
through December 31, 2005.
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 $50,000,000. 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, 2005 and 2004, the outstanding balance
on the line of credit was $32,000,000 and $16,000,000, respectively.
Allowance for Losses.
The general partners periodically review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these loans,
borrowers' payment records, etc. Based upon this information and other data, the
allowance for loan losses is increased or decreased. Borrower foreclosures are a
normal aspect of partnership operations. The partnership is not a credit based
lender and hence while it reviews the credit history and income of borrowers,
and if applicable, the income from income producing properties, the general
partners expect that we will on occasion take back real estate security. During
2004 and 2005 the California economy and the Northern California real estate
market have strengthened. At December 31, 2005 the partnership had six loans
past due 90 days or more in interest payments totaling $17,662,000. Three of
these six loans with principal totaling $5,697,000 were 90 days or more past
maturity. With respect to one of these three loans, the partnership filed a
notice of default, beginning the process of foreclosure. The principal amount of
the one filed notice of default totals $3,600,000 or 1.68% of the loan
portfolio. Among the six loans past due 90 days or more, one loan totaling
$788,000 has entered into a workout agreement. In addition to the six loans past
due 90 days or more in interest payments the partnership has three loans
totaling $9,201,000 at December 31, 2005, which are past maturity, however, the
borrowers have continued to make regular monthly interest payments. The
partnership allows borrowers to occasionally continue to make the interest
payments on debt past maturity for periods of time. At December 31, 2005 the
partnership had nine loans totaling $26,863,000, which were 90 days past
maturity and/or past due 90 days or more in interest payments.
The partnership occasionally enters into workout agreements with borrowers
who are past maturity or delinquent in their regular payments. 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. Workout agreements and foreclosures generally exist within our
loan portfolio to greater or lesser degrees, depending primarily on the health
of the economy. Management expects the number of foreclosures and workout
agreements will rise during difficult economic times and conversely fall during
good economic times. The number and amount of foreclosures existing at December
31, 2005, in management's opinion, does not have a material effect on our
results of operations or liquidity. Workouts and foreclosures are considered
when management arrives at appropriate loan loss reserves and based on our
experience, are reflective of our loan marketplace segment. In 2005, the
partnership filed 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 2005, we completed the foreclosure of two loans, which
resulted in the partnership taking back two real estate properties. In 2005, one
of the properties acquired through foreclosure was sold within the year at a
gain of $183,000.These properties are more fully discussed under Item 2 -
Properties. In 2004, the partnership took back four properties through
foreclosure or deeds in lieu of foreclosure. 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. We may take back additional real
estate through the foreclosure process in 2006. 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 owned through foreclosure of $4,138,000 at December 31, 2005.
These provisions for losses were made to guard against collection losses. The
total cumulative provision for losses as of December 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.
17
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.
No loans were restructured in 2005 and 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.
Borrower Liquidity and Capital Resources.
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
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 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.
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:
2005 2004 2003
------------- ------------- -------------
Compounding $9,476,000 $7,367,000 $5,958,000
Distributing $5,481,000 $4,452,000 $3,362,000
Capital balances of limited partners electing to receive cash distributions
of earnings represented 37%, 36% and 36% of the limited partners' outstanding
capital accounts as of December 31, 2005, 2004 and 2003, 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.
18
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, 2005, 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, 2005 were:
2005 2004 2003
-------------- -------------- -------------
Cash distributions $ 5,481,000 $ 4,452,000 $ 3,362,000
Capital liquidation* $ 2,042,000 $ 1,988,000 $ 1,845,000
-------------- -------------- -------------
Total $ 7,523,000 $ 6,440,000 $ 5,207,000
============== ============== =============
* 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, 2005, capital liquidated subject to the 10%
penalty for early withdrawal, included in the distribution amounts above, was:
2005 2004 2003
-------------- -------------- -------------
$ 592,000 $ 794,000 $ 786,000
This represents 0.25%, 0.43% and 0.57% of the limited partners' ending
capital for the years ended December 31, 2005, 2004 and 2003, respectively.
These withdrawals are within the normally anticipated range and represent a
small percentage of limited partner capital.
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 "Risk Factors - Purchase of Units is a Long Term
Investment").
19
Current Economic Conditions.
During 2005, the United States economy as a whole performed well. Gross
Domestic Product estimates for 2005 of 3.5% show a slight slowdown from the 4.2%
Gross Domestic Product of 2004. The United States average annual unemployment
rate for 2005 was 4.9% and has trended downward throughout 2005. Regionally, the
San Francisco Bay Area demonstrated a very similar unemployment rate with an
average annual unemployment rate of 5.1% for 2005 down 0.9% from 2004. The rate
of inflation concerns many with energy costs having risen significantly over the
last year. The consumer price index rose 3.4% in 2005 compared to 3.3% for 2004.
These statistics indicate an economy that is continuing to grow, which is good
for both mortgage lenders and the real estate industry as a whole. The 10 year
treasury rate is hovering around 4.5% at year end but is expected to increase in
the future. Should this occur, real estate markets may slow due to the higher
costs of money.
The partnership makes loans primarily in Northern California. As such the
regional real estate market is of primary concern to the partnership. As of
December 31, 2005, approximately 71.78%, ($153,632,000) of the loans held by the
partnership were in six San Francisco Bay Area Counties. The remainder of the
loans held was secured primarily by Northern California real estate outside of
the San Francisco Bay Area.
In general, California residential real estate continued to appreciate in
value during 2005. In California the median price of a single family home in
December, 2005 was $548,430 which was 15.6% higher than in December, 2004. In
the nine county San Francisco Bay Area, the median price of a single-family home
in December, 2005 was $633,000 14.3% above the December, 2004 median
single-family home sales price of $554,000. The total sales volumes, the number
of homes sold, has recently been declining. This slow down in the number of
homes sold has not significantly impacted residential sales prices. Mortgage
interest rates for both fixed and adjustable rate loans have been rising,
decreasing housing affordability. Rising interest rates and decreasing sales
volumes will likely slow down the rate of housing appreciation we have seen over
the last two years. Nonetheless, a strong residential real estate marketplace
exists and as such increases lending opportunities and assists in providing
adequate equity to help repay mortgage debt should borrowers become delinquent
in their payments.
Commercial real estate in the San Francisco Bay Area continued its rebound.
Occupancy rates and rents increased during 2005 in most markets throughout the
San Francisco Bay Area. CB Richard Ellis reports that San Francisco Class A
office rents averaged $34.54, up from $32.52 in 2004 and that vacancy decreased
from 15.4% in 2004 to approximately 12% in 2005. The San Francisco leasing
market absorbed an estimated 1.5 million square feet net during 2005 according
to Grubb and Ellis. Sales of San Francisco commercial office buildings are brisk
with record per square foot prices being attained and 2005 being a record volume
sales year (Grubb & Ellis Research Fourth Quarter 2005). A healthy commercial
real estate market increases lending opportunities and assists in providing
adequate equity to repay mortgage debt should borrowers become delinquent in
their payments.
For partnership loans outstanding as of December 31, 2005, the partnership
had an average loan-to-value ratio of 65.03%, computed based on appraised values
and senior liens as of the date the loan was made. This percentage does not
account for any increases or decreases in property values since the date the
loan was made, nor does it include any reductions in principal on senior
indebtedness through amortization of payments after the loan was made.
Management expects this low loan-to-value ratio will assist the partnership in
weathering loan delinquencies and foreclosures should they eventuate.
Contractual Obligations
A summary of the contractual obligations of the partnership as of December
31, 2005 is set forth below (in thousands):
Contractual Obligation Total Less than 1 Year 1-3 Years 3-5 Years
---------------------------- ---------------- ------------------ --------------- ----------------
Line of credit $ 32,000 $ - $ 22,225 $ 9,775
Construction loans 639 639 - -
Rehabilitation loans 12,898 12,898 - -
---------------- ------------------ --------------- ----------------
Total $ 45,537 $ 13,537 $ 22,225 $ 9,775
================ ================== =============== ================
20
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, loans held in the partnership's portfolio and our line of
credit as of December 31, 2005. The presentation, for each category of
information, aggregates the assets and liabilities by their maturity dates for
maturities occurring in each of the years 2006 through 2010 and separately
aggregates the information for all maturities arising after 2010. The carrying
values of these assets and liabilities approximate their fair market values as
of December 31, 2005 (in thousands).
2006 2007 2008 2009 2010 Thereafter Total
-----------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 26,279 $ 26,279
Average interest rate 1.50% 1.50%
Loans secured by deeds of trust $ 70,217 $ 89,556 $ 27,132 $ 5,926 $ 20,202 $ 979 $ 214,012
Average interest rate 10.32% 9.32% 10.15% 9.27% 8.86% 9.00% 9.71%
Interest bearing liabilities
Line of credit - $ 889 $10,668 $10,668 $ 9,775 $ 32,000
Average interest rate 6.75% 6.75%
Market Risk.
The partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the partnership's primary market risk exposure with
respect to its obligations is to changes in interest rates, which will affect
the interest cost of outstanding amounts on the line of credit. The partnership
may also suffer market risk tied to general trends affecting real estate values
that may impact the partnership's security for its loans.
The partnership's primary market risk in terms of its profitability is the
exposure to fluctuations in earnings resulting from fluctuations in general
interest rates. The majority of the partnership's mortgage loans earn interest
at fixed rates. Changes in interest rates may also affect the value of the
partnership's investment in mortgage loans and the rates at which the
partnership reinvests funds obtained from loan repayments and new capital
contributions from limited partners. If interest rates increase, the interest
rates the partnership obtains from reinvested funds will generally increase, but
the value of the partnership's existing loans at fixed rates will generally tend
to decrease. The risk is mitigated by the fact that the partnership does not
intend to sell its loan portfolio, rather such loans are held until they are
paid off. If interest rates decrease, the amounts becoming available to the
partnership for investment due to repayment of partnership loans may be
reinvested at lower rates than the partnership had been able to obtain in prior
investments, or than the rates on the repaid loans. In addition, interest rate
decreases may encourage borrowers to refinance their loans with the partnership
at a time where the partnership is unable to reinvest in loans of comparable
value.
The partnership does not hedge or otherwise seek to manage interest rate
risk. The partnership does not enter into risk sensitive instruments for trading
purposes.
PORTFOLIO REVIEW - For the years ended December 31, 2005, 2004 and 2003
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,
2005, 2004 and 2003 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 $153,632,000 (71.78%),
$131,143,000 (76.36%) and $107,211,000 (72.85%), 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.
21
The following table sets forth the distribution of loans held by the
partnership by property type for the years ended December 31, 2005, 2004 and
2003 (in thousands):
December 31,
--------------------------------------------------------------------------------------
2005 2004 2003
------------------------ ------------------------- --------------------------
Single Family (1-4 units) $116,945 54.64% $ 84,359 49.12% $ 66,631 45.27%
Apartments (over 4 units) 19,209 8.98% 30,981 18.04% 22,649 15.39%
Commercial 65,167 30.45% 54,670 31.83% 52,502 35.67%
Land 12,691 5.93% 1,735 1.01% 5,392 3.67%
----------- ---------- ----------- ---------- ----------- ----------
Total $214,012 100.00% $171,745 100.00% $147,174 100.00%
=========== ========== =========== ========== =========== ==========
As of December 31, 2005, the partnership held 98 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, 2005.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF SECURED LOANS
As of December 31, 2005 (in thousands)
# of Loans Amount Percent
----------- ----------- ------------
1st Mortgages 53 $135,945 63.52%
2nd Mortgages 39 73,138 34.18%
3rd Mortgages 6 4,929 2.30%
=========== =========== ============
Total 98 $214,012 100.00%
Maturing in 2006 22 $ 70,217 32.81%
Maturing in 2007 40 89,556 41.85%
Maturing in 2008 8 27,132 12.68%
Maturing after 12/31/08 28 27,107 12.66%
=========== =========== ============
Total 98 $214,012 100.00%
Average secured loan as a % of secured loan portfolio $ 2,184 1.02%
Largest secured loan as a % of secured loan portfolio 11,927 5.57%
Smallest secured loan as a % of secured loan portfolio 55 0.03%
Average secured loan-to-appraised values of security
based on appraised values and prior liens at time
loan was consummated 65.03%
Largest secured loan as a % of partnership assets $ 11,927 4.51%
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the loan portfolio as affected by
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
22
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, 2005 the general partners have determined that
the allowance for loan losses and real estate held for sale of $4,138,000 (1.81%
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. At December
31, 2005 the partnership had six loans past due 90 days or more in interest
payments totaling $17,662,000. Three of these six loans with principal totaling
$5,697,000 were 90 days or more past maturity. With respect to one of these
three loans, the partnership filed a notice of default, beginning the process of
foreclosure. The principal amount of the one filed notice of default totals
$3,600,000 or 1.68% of the loan portfolio. Among the six loans past due 90 days
or more, one loan totaling $788,000 has entered into a workout agreement. In
addition to the six loans past due 90 days or more in interest payments the
partnership has three loans totaling $9,201,000 at December 31, 2005, which are
past maturity, however, the borrowers have continued to make regular monthly
interest payments. The partnership allows borrowers to occasionally continue to
make the interest payments on debt past maturity for periods of time. At
December 31, 2005 the partnership had nine loans totaling $26,863,000, which
were 90 days past maturity and/or past due 90 days or more in interest payments.
The partnership also makes loans requiring periodic disbursements of funds.
As of December 31, 2005 there were fifteen 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, 2005, is set forth below (in thousands):
Complete Construction Rehabilitation
----------------------- -----------------
Disbursed funds $ 5,434 $ 48,818
Undisbursed funds $ 639 $ 12,898
"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, 2005, the partnership had commitments for Construction Loans
totaling $6,073,000, of which $5,434,000 in Construction Loans had been
disbursed and had an additional $639,000, which is yet to be disbursed. The
$6,073,000 of Construction Loans committed is less than 10% of the loan
portfolio, which is the partnership's limit on Construction Loan funding.
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, 2005 the
partnership had funded $48,818,000 in Rehabilitation Loans and $12,898,000
remained to be disbursed for a combined total of $61,716,000. 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.
23
Item 8 - Consolidated Financial Statements and Supplementary Data
A - Consolidated Financial Statements
The following consolidated financial statements of Redwood Mortgage
Investors VIII are included in Item 8:
o Report of Independent Registered Public Accounting Firm
o Consolidated Balance Sheets - December 31, 2005, and December 31, 2004
o Consolidated Statements of Income for the years ended December 31, 2005,
2004 and 2003
o Consolidated Statements of Changes In Partners' Capital for the years
ended December 31, 2005, 2004 and 2003
o Consolidated Statements of Cash Flows for the years ended December 31,
2005, 2004 and 2003
o Notes to Consolidated Financial Statements
B - Consolidated Financial Statement Schedules
The following consolidated financial statement schedules of Redwood
Mortgage Inventors VIII are included in Item 8.
o Schedule II - Valuation and Qualifying Accounts
o Schedule IV - Loans on Real Estate
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
24
REDWOOD MORTGAGE INVESTORS VIII
(A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTAL INFORMATION
DECEMBER 31, 2005 AND 2004
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
25
TABLE OF CONTENTS
Page No.
------------
Report of Independent Registered Public Accounting Firm 27
Consolidated Balance Sheets 28
Consolidated Statements of Income 29
Consolidated Statements of Changes in Partners' Capital 30
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements 33
Supplemental Schedules
Schedule II - Valuation and Qualifying Accounts 49
Schedule IV - Mortgage Loans on Real Estate 50
Rule 12-29 Loans on Real Estate
26
ARMANINO McKENNA LLP
CERTIFIED PUBLIC ACCOUNTANTS
12667 Alcosta Blvd., Suite 500
San Ramon, CA 94583
(925) 790-2600
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners
Redwood Mortgage Investors 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,
2005 and 2004 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, 2005. 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, 2005 and 2004 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the
basic 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
San Ramon, California
March 3, 2006
27
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Balance Sheets
December 31, 2005 and 2004
(in thousands)
ASSETS
2005 2004
------------ ------------
Cash and cash equivalents $ 28,853 $ 16,301
------------ ------------
Loans
Loans, secured by deeds of trust 214,012 171,745
Loans, unsecured - 34
Allowance for loan losses (3,138) (2,343)
------------ ------------
Net loans 210,874 169,436
------------ ------------
Interest and other receivables
Accrued interest and late fees 3,254 4,895
Advances on loans 103 131
------------ ------------
Total interest and other receivables 3,357 5,026
------------ ------------
Other assets
Loan origination fees, net 72 62
Real estate held for sale, net 21,328 9,793
------------ ------------
Total other assets 21,400 9,855
------------ ------------
Total assets $ 264,484 $ 200,618
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ 32,000 $ 16,000
Accounts payable 10 25
Payable to affiliate 489 638
------------ ------------
Total liabilities 32,499 16,663
------------ ------------
Investors in applicant status 776 424
------------ ------------
Minority interest 3,042 -
------------ ------------
Partners' capital
Limited partners' capital, subject to redemption, net of unallocated
syndication costs of $1,653 and $1,084 for 2005 and 2004, respectively;
and net of Formation Loan receivable of $11,506 and $9,751 for 2005
and 2004, respectively 227,970 183,368
General partners' capital, net of unallocated syndication costs of
$16 and $11 for 2005 and 2004, respectively 197 163
------------ ------------
Total partners' capital 228,167 183,531
------------ ------------
Total liabilities and partners' capital $ 264,484 $ 200,618
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
28
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Income
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands, except for per limited partner amounts)
2005 2004 2003
------------ ------------ ------------
Revenues
Interest on loans $ 19,203 $ 16,437 $ 12,496
Late fees 120 218 201
Other 865 478 261
------------ ------------ ------------
20,188 17,133 12,958
------------ ------------ ------------
Expenses
Mortgage servicing fees 1,736 1,565 1,057
Interest expense 278 622 71
Amortization of loan origination fees 65 56 23
Provision for losses on loans 855 1,146 782
Asset management fees 814 630 468
Clerical costs from Redwood Mortgage Corp. 298 307 290
Professional services 147 211 111
Broker expense - - 181
Amortization of discount on imputed interest 395 319 195
Other 232 145 228
------------ ------------ ------------
4,820 5,001 3,406
------------ ------------ ------------
Income before minority interest 15,368 12,132 9,552
Minority interest share of subsidiary loss - - 42
------------ ------------ ------------
Net income $ 15,368 $ 12,132 $ 9,594
============ ============ ============
Net income
General partners (1%) $ 154 $ 121 $ 96
Limited partners (99%) 15,214 12,011 9,498
------------ ------------ ------------
$ 15,368 $ 12,132 $ 9,594
============ ============ ============
Net income per $1,000 invested by
limited partners for entire period
Where income is reinvested $ 70 $ 72 $ 78
Where partner receives income in monthly distributions $ 68 $ 70 $ 75
The accompanying notes are an integral part of these consolidated financial
statements.
29
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Changes in Partners' Capital
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)
Limited Partners
----------------------------------------------------------
Capital Total
Investors In Account Unallocated Limited
Applicant Limited Syndication Formation Partners'
Status Partners Costs Loan, Gross Capital
------------- ------------- ------------- ------------ ------------
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
Contributions on application 39,816 - - - -
Formation Loan increases - - - (2,978) (2,978)
Formation Loan payments received - - - 1,178 1,178
Interest credited to partners in applicant
status 41 - - - -
Interest withdrawn (15) - - - -
Transfers to partners' capital (39,490) 39,490 - - 39,490
Net income - 15,214 - - 15,214
Syndication costs incurred - - (837) - (837)
Allocation of syndication costs - (257) 257 - -
Partners' withdrawals - (7,465) - - (7,465)
Early withdrawal penalties - (56) 11 45 -
------------- ------------- ------------- ------------ ------------
Balances at December 31, 2005 $ 776 $ 241,129 $ (1,653) $(11,506) $ 227,970
============= ============= ============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
30
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Changes in Partners' Capital (continued)
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)
General Partners
-----------------------------------------------
Capital Total
Account Unallocated General Total
General Syndication Partners' Partners'
Partners Costs Capital Capital
--------------- ------------- ------------ --------------
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
Contributions on application - - - -
Formation Loan increases - - - (2,978)
Formation Loan payments received - - - 1,178
Interest credited to partners in applicant
status - - - -
Interest withdrawn - - - -
Capital contributed 40 - 40 39,530
Net income 154 - 154 15,368
Syndication costs incurred - (8) (8) (845)
Allocation of syndication costs (3) 3 - -
Partners' withdrawals (152) - (152) (7,617)
Early withdrawal penalties - - - -
--------------- ------------- ------------ --------------
Balances at December 31, 2005 $ 213 $ (16) $ 197 $ 228,167
=============== ============= ============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
31
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)
2005 2004 2003
------------ ----------- -----------
Cash flows from operating activities
Net income $ 15,368 $ 12,132 $ 9,594
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization of loan origination fees 65 56 23
Imputed interest income (395) (319) (195)
Amortization of discount 395 319 195
Provision for losses on loans and real estate 855 1,146 782
Realized (gain) loss on sale of real estate (183) - 127
Minority interest share of subsidiary loss - - (42)
Change in operating assets and liabilities
Unsecured loans 34 - -
Accrued interest and late fees 1,040 (2,566) (3,448)
Advances on loans (63) 74 (500)
Other receivables - - 888
Loan origination fees (75) (74) (45)
Accounts payable (15) (199) (225)
Payable to affiliate (149) 190 154
Deferred interest - - (112)
------------ ----------- -----------
Net cash provided by operating activities 16,877 10,759 7,196
------------ ----------- -----------
Cash flows from investing activities
Loans originated (169,460) (81,579) (96,820)
Principal collected on loans 118,772 52,359 35,097
Payments for development of real estate (939) - (706)
Proceeds from disposition of real estate 1,541 - 6,036
------------ ----------- -----------
Net cash used in investing activities (50,086) (29,220) (56,393)
------------ ----------- -----------
Cash flows from financing activities
Borrowings (repayments) on line of credit, net 16,000 (6,000) 22,000
Repayments on note payable - - (1,782)
Contributions by partner applicants 39,882 41,007 40,093
Partners' withdrawals (7,617) (6,483) (5,223)
Syndication costs paid (845) (421) (483)
Formation Loan lending (2,978) (3,117) (2,929)
Formation Loan collections 1,178 855 575
Increase (distribution) to minority interest 141 - (1,321)
------------ ----------- -----------
Net cash provided by financing activities 45,761 25,841 50,930
------------ ----------- -----------
Net increase in cash and cash equivalents 12,552 7,380 1,733
Cash and cash equivalents - beginning of year 16,301 8,921 7,188
------------ ----------- -----------
Cash and cash equivalents - end of year $ 28,853 $ 16,301 $ 8,921
============ =========== ===========
Supplemental disclosures of cash flow information $ 278 $ 622 $ 71
Cash paid for interest
The accompanying notes are an integral part of these consolidated financial
statements.
32
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
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, 2005, the Partnership
was in its sixth offering stage, wherein contributed capital totaled
$212,037,000 of approved aggregate offerings of $300,000,000. As of December 31,
2005 and 2004, $776,000 and $424,000, respectively, remained in applicant
status, and total Partnership units sold were in the aggregate of $212,037,000
and $172,223,000, 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 which closed in August 2005. On August 4, 2005, the
Partnership commenced a sixth offering for an additional $100,000,000.
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.
The Formation Loan relating to the fifth offering ($75,000,000) totaled
$5,661,000, which was 7.6% of the limited partners contributions of $74,904,000.
It is being repaid, without interest, in ten annual installments of $526,000,
which will commence on January 1, 2006, following the year the fifth offering
closed. Payments on this loan were also made during the offering stage prior to
the close of the offering.
33
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
1. Organizational and General (continued)
Sales commissions - Formation Loans (continued)
The Formation Loan relating to the sixth offering ($100,000,000) totaled
$888,000 as of December 31, 2005, which was 7.3% of the limited partners
contributions of $12,224,000 through December 31, 2005. 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, 2005
(in thousands):
Initial Subsequent Third Fourth Fifth Sixth
Offering of Offering of Offering of Offering of Offering of Offering of
$15,000 $30,000 $30,000 $50,000 $75,000 $100,000 Total
------------ ------------ ------------ ----------- ----------- ------------ -----------
Limited Partner
contributions $ 14,932 $ 29,993 $ 29,999 $ 49,985 $ 74,904 $ 12,224 $ 212,037
============ ============ ============ =========== =========== ============ ===========
Formation Loan made $ 1,075 $ 2,272 $ 2,218 $ 3,777 $ 5,661 $ 888 $ 15,891
Discount on
imputed interest (8) (219) (230) (462) (1,215) (257) (2,391)
------------ ------------ ------------ ----------- ----------- ------------ -----------
Formation Loan
made, net 1,067 2,053 1,988 3,315 4,446 631 13,500
Repayments to date (888) (1,206) (748) (846) (388) - (4,076)
Early withdrawal
penalties applied (79) (120) (85) (14) (11) - (309)
------------ ------------ ------------ ----------- ----------- ------------ -----------
Formation Loan, net
at December 31, 2005 100 727 1,155 2,455 4,047 631 9,115
Unamortized discount
on imputed interest 8 219 230 462 1,215 257 2,391
------------ ------------ ------------ ----------- ----------- ------------ -----------
Balance,
December 31, 2005 $ 108 $ 946 $ 1,385 $ 2,917 $ 5,262 $ 888 $ 11,506
============ ============ ============ =========== =========== ============ ===========
Percent loaned 7.2% 7.6% 7.4% 7.6% 7.6% 7.3% 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, which
ranged from 4.00% to 9.50%. An estimated amount of imputed interest is recorded
for offerings still outstanding. During 2005, 2004 and 2003, $395,000, $319,000
and $195,000, respectively, were recorded related to the discount on imputed
interest.
34
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
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, 2005, syndication costs of $3,819,000 had been
incurred by the Partnership with the following distribution (in thousands):
Costs incurred $ 3,819
Early withdrawal penalties applied (114)
Allocated to date (2,036)
------------
December 31, 2005 balance $ 1,669
============
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% of contributions.
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) were
limited to the lesser of 10% of the gross proceeds or $3,000,000 with any excess
to be paid by the general partners. Gross proceeds of the fifth offering were
$74,904,000. Syndication costs totaled $789,000 or 1.1% of contributions.
Syndication costs attributable to the sixth offering ($100,000,000) will be
limited to the lesser of 10% of the gross proceeds or $4,000,000 with any excess
to be paid by the general partners. As of December 31, 2005, the sixth offering
had incurred syndication costs of $561,000 (4.6% 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.
35
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
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 72.50%-owned subsidiary,
Larkin Street Property Company, LLC ("Larkin"). 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.
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, 2005 and 2004, there
were no loans categorized as impaired by the Partnership. The average recorded
investment in impaired loans was $0 for 2005, 2004 and 2003.
At December 31, 2005 and 2004, the Partnership had nine and eleven loans 90
days past maturity and/or past due 90 days or more in interest payments,
totaling $26,863,000 and $25,013,000, respectively. In addition, accrued
interest, late charges and advances on these loans totaled $1,774,000 and
$3,202,000 at December 31, 2005 and 2004, 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 10 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, 2005 and 2004 was 65.03% and 56.94% 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.
36
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
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 periodic basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral 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. 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 was as follows (in
thousands):
December 31,
-------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- -------------------------- ----------------------------
Percent of Percent of Percent of
loans in loans in loans in
each each each
category category category
to total to total to total
Amount loans Amount loans Amount loans
------------ ------------ ------------ ------------ ----------- ------------
Balance at End of Year
Applicable to:
- ---------------------------------
Domestic
Real estate - mortgage
Single family (1-4 units) $ 1,598 54.64% $ 850 49.12% $ 1,072 45.27%
Apartments 145 8.98% 430 18.04% 315 15.39%
Commercial 1,140 30.45% 1,033 31.83% 880 35.67%
Land 255 5.93% 30 1.01% 382 3.67%
------------ ------------ ------------ ------------ ----------- ------------
Total $ 3,138 100.00% $ 2,343 100.00% $ 2,649 100.00%
============ ============ ============ ============ =========== ============
37
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Allowance for loan losses (continued)
Activity in the allowance for loan losses is as follows (in thousands):
Years Ended December 31,
------------------------------------------------
2005 2004 2003
------------- ------------- -------------
Balance at beginning of year $ 2,343 $ 2,649 $ 3,021
Charge-offs
Domestic
Real estate - mortgage
Single family (1-4 units) 26 (842) (1,068)
Apartments - - (86)
Commercial 34 (110) -
Land - - -
------------- ------------- -------------
(60) (952) (1,154)
------------- ------------- -------------
Recoveries
Domestic
Real estate - mortgage
Single family (1-4 units) - - -
Apartments - - -
Commercial - - -
Land - - -
------------- ------------- -------------
- - -
------------- ------------- -------------
Net charge-offs (60) (952) (1,154)
------------- ------------- -------------
Additions charge to operations 855 1,146 782
------------- ------------- -------------
Transfer to real estate held for sale reserve - (500) -
------------- ------------- -------------
Balance at end of year $ 3,138 $ 2,343 $ 2,649
============= ============= =============
Ratio of net charge-offs during the period
to average secured loans outstanding during
the period 0.03% 0.60% 1.00%
============= ============= =============
38
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Cash and cash equivalents
The Partnership considers all highly liquid financial instruments with
maturities of three months or less at the time of purchase to be cash
equivalents.
Real estate held for sale
Real estate held for sale includes real estate acquired through foreclosure
and is stated at the lower of the recorded investment in the loan, plus any
senior indebtedness, or at the property's estimated fair value, less estimated
costs to sell.
The Partnership periodically compares the carrying value of real estate to
expected 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.
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 2005, 2004 and 2003, late fee revenue of $120,000, $218,000 and
$201,000, respectively, was recorded. The Partnership has a recorded late fee
receivable at December 31, 2005 and 2004 of $103,000 and $180,000, respectively.
Recently issued accounting pronouncements
In June 2005, the FASB issued FAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB
No. 3, Reporting Accounting Changes in Interim Financial Statements. The
Statement applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. FAS 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. It is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes and corrections of errors made occurring in
fiscal years beginning after June 1, 2005. The Partnership does not expect the
effect of FAS 154 will have material impact on its financial statements.
39
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
3. Other Partnership Provisions
The Partnership is a California limited partnership. The rights, duties and
powers of the general and limited partners of the Partnership are governed by
the limited partnership agreement and Sections 15611 et seq. of the California
Corporations Code.
The general partners are in complete control of the Partnership business,
subject to the voting rights of the limited partners on specified matters. Any
one of the general partners acting alone has the power and authority to act for
and bind the Partnership.
A majority of the outstanding limited partnership interests may, without
the permission of the general partners, vote to: (i) terminate the Partnership,
(ii) amend the limited partnership agreement, (iii) approve or disapprove the
sale of all or substantially all of the assets of the Partnership and (iv)
remove or replace one or all of the general partners.
The approval of all the limited partners is required to elect a new general
partner to continue the Partnership business where there is no remaining general
partner after a general partner ceases to be a general partner other than by
removal.
Applicant status
Subscription funds received from purchasers of Partnership units are not
admitted to the Partnership until subscription funds are required to fund a
loan, fund the Formation Loan, create appropriate reserves, or to pay
organizational expenses 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 2005, 2004 and 2003, interest totaling $41,000, $20,000 and $37,000,
respectively, was credited to partners in applicant status. As loans were made
and partners were transferred to regular status to begin sharing in Partnership
operating income, 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.
40
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
3. Other Partnership Provisions (continued)
Liquidity, capital withdrawals and early withdrawals (continued)
In order to provide a certain degree of liquidity to the limited partners
after the one-year period, limited partners may withdraw all or part of their
capital accounts from the Partnership in four quarterly installments beginning
on the last day of the calendar quarter following the quarter in which the
notice of withdrawal is given, subject to a 10% early withdrawal penalty. The
10% penalty is applicable to the amount withdrawn as stated in the notice of
withdrawal and will be deducted from the capital account.
After five years from the date of purchase of the units, limited partners
have the right to withdraw from the Partnership on an installment basis.
Generally this is done over a five-year period in twenty quarterly installments.
Once a limited partner has been in the Partnership for the minimum five-year
period, no penalty will be imposed if withdrawal is made in twenty quarterly
installments or longer. Notwithstanding the five-year (or longer) withdrawal
period, the general partners may liquidate all or part of a limited partner's
capital account in four quarterly installments beginning on the last day of the
calendar quarter following the quarter in which the notice of withdrawal is
given. This withdrawal is subject to a 10% early withdrawal penalty applicable
to any sums withdrawn prior to the time when such sums could have been withdrawn
without penalty.
The Partnership will not establish a reserve from which to fund withdrawals
and, accordingly, the Partnership's capacity to return a limited partner's
capital is restricted to the availability of Partnership cash flow. Furthermore,
no more than 20% of the total limited partners' capital accounts outstanding at
the beginning of any year, shall be liquidated during any calendar year.
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 2005, 2004 and 2003, loan brokerage commissions paid by the
borrowers were $3,697,000, $2,443,000 and $2,621,000, 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
$1,736,000, $1,565,000 and $1,057,000 were incurred for 2005, 2004 and 2003,
respectively. The Partnership had a payable to Redwood Mortgage Corp. for
servicing fees of $489,000 and $638,000 at December 31, 2005 and 2004,
respectively.
41
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
4. General Partners and Related Parties (continued)
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 $814,000, $630,000 and $468,000 were
incurred for 2005, 2004 and 2003, respectively.
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to 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 2005, 2004 and 2003,
operating expenses totaling $298,000, $307,000 and $290,000, 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, 2005 and
2004, 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):
2005 2004
-------------- -------------
Costs of properties $ 22,328 $ 10,793
Reduction in value (1,000) (1,000)
-------------- -------------
Real estate held for sale, net $ 21,328 $ 9,793
============== =============
Larkin
During 2005, the Partnership acquired a multi-unit property through
foreclosure. At the time the Partnership took ownership of the property, the
Partnership's investment, together with three other affiliate partnerships,
totaled $10,595,000, including accrued interest and advances. Upon acquisition,
the property was transferred via a statutory warranty deed to a new entity named
Larkin Street Property Company, LLC ("Larkin"). The Partnership owns a 72.50%
interest in the property and the other three affiliates collectively own the
remaining 27.50%. No valuation allowance has been established against this
property as management is of the opinion that the property will have adequate
equity to recover all partnerships' investments. The assets, liabilities and
operating results of Larkin have been consolidated into the accompanying
consolidated financial statements of the Partnership. As of December 31, 2005,
approximately $558,000 in costs related to the development of this property have
been capitalized. As of December 31, 2005, the Partnership's investment,
together with the other affiliated partnerships, totaled $11,153,000.
42
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
5. Real Estate Held for Sale (continued)
During 2005, the Partnership acquired land through a deed in lieu of
foreclosure. At the time the Partnership took ownership of the property, the
Partnership's investment totaled $1,359,000 including accrued interest and
advances. The property was subsequently sold for a total of $1,542,000 and the
Partnership recognized a gain on sale of real estate in the amount of $183,000.
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, $4,505,000 at December 31, 2005, 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. At
December 31, 2005 and 2004, the Partnership's total investment in this property
was $1,691,000 and $1,437,000, net of a valuation allowance of $500,000.
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 were being
expensed. At December 31, 2005 and 2004, the Partnership's total investment in
Russian was $3,979,000, net of a valuation allowance of $500,000.
6. 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):
2005 2004
-------------- -------------
Partners' capital per consolidated
financial statements $ 228,167 $ 183,531
Non-allocated syndication costs 1,669 1,094
Allowance for loan losses and
real estate held for sale 4,138 3,343
Formation Loans receivable 11,506 9,751
-------------- -------------
Partners' capital - tax basis $ 245,480 $ 197,719
============== =============
In 2005 and 2004, approximately 45% and 46%, respectively, of taxable
income was allocated to tax-exempt organizations (i.e., retirement plans).
43
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
7. Bank Line of Credit
The Partnership has a bank line of credit in the maximum amount of the
lesser of (1) $50,000,000, (2) one-third of partners' capital, or (3) the
borrowing base as defined in the agreement. The line of credit matures on
November 15, 2007, with borrowings at prime less 0.50% and secured by the
Partnership's loan portfolio. The outstanding balances were $32,000,000 and
$16,000,000 at December 31, 2005 and 2004, respectively. The interest rate was
6.75% at December 31, 2005 and 5.00% at December 31, 2004. The Partnership may
also be subject to a 0.5% fee on specified balances in the event the line is not
utilized. The line of credit requires the Partnership to comply with certain
financial covenants. The Partnership was in compliance with these covenants at
December 31, 2005 and 2004.
8. 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 $214,012,000 and $171,745,000 at
December 31, 2005 and 2004, respectively. The fair value of these loans of
$215,102,000 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 be
considered in evaluating the fair value versus the carrying value.
9. Non-Cash Transactions
During 2005, the Partnership foreclosed on, or acquired property through
deed in lieu of foreclosure, two properties (see Note 5), which resulted in an
increase in real estate held for sale and minority interest of $11,954,000 and
$2,901,000, respectively, and a decrease in loans receivable, accrued interest
and advances of $8,361,000, $601,000 and $91,000, respectively.
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.
44
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
10. Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At December 31, 2005 and
2004, there were 98 and 75 secured loans outstanding, respectively, with the
following characteristics (dollars in thousands):
2005 2004
--------------- --------------
Number of secured loans outstanding 98 75
Total secured loans outstanding $ 214,012 $ 171,745
Average secured loan outstanding $ 2,184 $ 2,289
Average secured loan as percent of total
secured loans 1.02% 1.33%
Average secured loan as percent
of partners' capital .96% 1.25%
Largest secured loan outstanding $ 11,927 $ 12,045
Largest secured loan as percent of total
secured loans 5.57% 7.01%
Largest secured loan as percent
of partners' capital 5.23% 6.56%
Largest secured loan as percent of total assets 4.51% 6.00%
Number of counties where security
is located (all California) 24 17
Largest percentage of secured loans
in one county 25.36% 20.48%
Average secured loan to appraised value
of security based on appraised values and
prior liens at time loan was consummated 65.03% 56.94%
Number of secured loans in foreclosure status 1 6
Amount of secured loans in foreclosure $ 3,600 $ 14,682
45
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
10. Asset Concentrations and Characteristics (continued)
The following secured loan categories were held at December 31, 2005 and
2004 (in thousands):
2005 2004
--------------- ---------------
First trust deeds $ 135,945 $ 115,082
Second trust deeds 73,138 50,282
Third trust deeds 4,929 6,381
--------------- ---------------
Total loans 214,012 171,745
Prior liens due other lenders at time of loan 224,573 99,140
--------------- ---------------
Total debt $ 438,585 $ 270,885
=============== ===============
Appraised property value at time of loan $ 674,436 $ 475,710
Average secured loan to appraised value
of security based on appraised values and
prior liens at time loan was consummated 65.03% 56.94%
Secured loans by type of property
Single family (1-4 units) $ 116,945 $ 84,359
Apartments 19,209 30,981
Commercial 65,167 54,670
Land 12,691 1,735
--------------- ---------------
$ 214,012 $ 171,745
=============== ===============
The interest rates on the loans range from 8.0% to 13.0% at December 31,
2005 and 8.50% to 13.25% at December 31, 2004.
Scheduled maturity dates of secured loans as of December 31, 2005 are as
follows (in thousands):
Year Ending December 31,
--------------------------------
2006 $ 70,217
2007 89,556
2008 27,132
2009 5,926
2010 20,202
Thereafter 979
--------------
$ 214,012
==============
46
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
10. Asset Concentrations and Characteristics (continued)
The scheduled maturities for 2006 include eight loans totaling $26,075,000,
and representing 12.18% of the portfolio, which are past maturity at December
31, 2005. Interest payments on five of these loans were delinquent and are
included in the total of loans 90 days or more delinquent presented in Note 2.
Occasionally, the Partnership allows borrowers to continue to make the payments
on debt past maturity for periods of time. Of these eight past maturity loans,
the Partnership has begun foreclosure proceedings by filing a notice of default,
on one with an aggregate principal balance totaling $3,600,000.
Cash deposits at December 31, 2005, exceeded FDIC insurance limits (up to
$100,000 per bank) by approximately $29,461,000.
11. 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, 2005, there were
$13,537,000 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, 2005.
There is one loan totaling $788,000 under a workout agreement as of December 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.
47
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
12. Selected Financial Information (Unaudited)
Calendar Quarter
(in thousands, except for per limited partner amounts)
-----------------------------------------------------------
First Second Third Fourth Annual
------------ ------------ ------------ ------------ ------------
Revenues
2005 $ 4,525 $ 4,498 $ 5,099 $ 6,066 $ 20,188
2004 $ 3,850 $ 3,785 $ 4,504 $ 4,994 $ 17,133
Expenses
2005 $ 981 $ 802 $ 1,144 $ 1,893 $ 4,820
2004 $ 1,117 $ 907 $ 1,418 $ 1,559 $ 5,001
Net income allocated to general partners
2005 $ 35 $ 37 $ 40 $ 42 $ 154
2004 $ 27 $ 29 $ 31 $ 34 $ 121
Net income allocated to limited partners
2005 $ 3,509 $ 3,659 $ 3,915 $ 4,131 $ 15,214
2004 $ 2,706 $ 2,849 $ 3,055 $ 3,401 $ 12,011
------------ ------------ ------------ ------------ ------------
Net income per $1,000 invested
where income is
Compounded
2005 $ 17 $ 17 $ 17 $ 19 $ 70
2004 $ 18 $ 18 $ 18 $ 18 $ 72
Withdrawn
2005 $ 17 $ 17 $ 17 $ 17 $ 68
2004 $ 18 $ 17 $ 17 $ 18 $ 70
13. Subsequent Events
Subsequent to December 31, 2005 and through March 3, 2006, the Partnership
has received $6,777,000 of new investor money for the current offering and had
admitted $6,571,000 of partners in applicant status into the Partnership. The
admitted amount includes $776,000 that awaited admission at December 31, 2005.
48
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 2003, 2004 and 2005
(in thousands)
C
B Additions
Balance at ------------------------------------ E
A Beginning Charged to Costs Charged to D Balance at
Description of Period and Expenses Other Accounts Deductions End of Period
- ----------------------------------- -------------- ---------------- --------------- -------------- ---------------
Year Ended December 31, 2003
Deducted from asset accounts
Allowance for loan losses $ 3,021 $ 782 $ - $ (1,154) (a) $ 2,649
Cumulative write-down of
real estate held for sale (REO) 500 - - - 500
-------------- ----------------- --------------- -------------- ---------------
$ 3,521 $ 782 $ - $ (1,154) (a) $ 3,149
============== ================= =============== ============== ===============
Year Ended December 31, 2004
Deducted from asset accounts
Allowance for loan losses $ 2,649 $ 1,146 $ (500) $ (952) (a) $ 2,343
Cumulative write-down of
real estate held for sale (REO) 500 - 500 - 1,000
-------------- ----------------- --------------- -------------- ---------------
$ 3,149 $ 1,146 $ - $ (952) (a) $ 3,343
============== ================= =============== ============== ===============
Year Ended December 31, 2005
Deducted from asset accounts
Allowance for loan losses $ 2,343 $ 855 $ - $ (60) (a) $ 3,138
Cumulative write-down of
real estate held for sale (REO) 1,000 - - - 1,000
-------------- ----------------- --------------- -------------- ---------------
$ 3,343 $ 855 $ - $ (60) (a) $ 4,138
============== ================= =============== ============== ===============
Note (a) - Represents write-offs of loans.
49
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Schedule IV - Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
For the Years Ended December 31, 2005, 2004 and 2003
(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 $ 109 $ - 1st Yuba
Res. 12.00% 05/01/03 13 - 1,210 1,210 1,210 1st Marin
Apts. 12.50% 11/15/10 4 53 39 321 - 2nd Contra Costa
Comm. 12.00% 05/01/07 9 2,916 799 788 788 2nd Santa Clara
Res. 12.00% 03/01/01 13 - 1,325 1,325 1,325 1st Marin
Land 9.50% 02/01/07 8 - 987 986 - 1st Santa Clara
Res. 10.00% 12/01/02 3 - 318 316 316 1st San Mateo
Comm. 13.00% 11/1/06 44 8,100 4,550 4,072 - 2nd Santa Clara
Comm. 10.50% 08/01/04 32 - 3,600 3,600 3,600 1st Santa Clara
Res. 10.25% 06/01/06 2 1,647 263 215 - 2nd Santa Clara
Res. 10.50% 09/01/07 11 1,468 805 1,184 - 3rd Santa Clara
Res. 10.50% 10/01/05 16 - 1,781 1,781 1,781 1st San Mateo
Comm. 10.50% 10/01/07 4 - 441 432 - 1st San Mateo
Comm. 11.25% 12/01/07 9 718 900 784 - 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 Riverside
Res. 11.50% 12/01/05 98 - 7,700 9,857 9,857 1st San Mateo
Comm. 10.00% 04/01/05 57 - 7,292 6,666 6,666 1st Los Angeles
Comm. 12.00% 07/01/06 25 - 2,500 2,500 - 1st Sacramento
Res. 11.00% 01/31/06 43 - 6,074 4,493 - 1st Fresno
Apts. 9.50% 01/01/09 4 - 413 404 - 1st San Joaquin
Res. 9.25% 12/01/08 1 376 130 128 - 2nd Santa Clara
Res. 8.50% 01/01/06 8 - 1,070 1,052 - 1st Placer
Comm. 9.50% 01/01/06 13 - 1,610 1,610 - 1st Alameda
Res. 8.50% 10/01/10 4 190 500 493 - 2nd Alameda
Res. 8.50% 02/02/09 1 42 85 84 - 3rd San Mateo
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
Apts. 9.25% 06/01/06 7 - 881 881 - 1st San Francisco
Apts. 9.25% 06/01/06 7 - 875 875 - 1st San Francisco
Res. 9.25% 06/01/09 2 - 188 186 - 1st San Joaquin
Comm. 9.00% 06/01/09 4 2,850 500 495 - 2nd Santa Clara
Res. 8.50% 07/01/09 1 - 100 99 - 1st San Mateo
Comm. 10.00% 06/01/07 39 - 4,650 4,650 - 1st Marin
Res. 9.25% 07/01/09 6 716 690 684 - 2nd San Mateo
Comm. 9.00% 08/01/09 12 - 2,000 1,600 - 1st San Francisco
Comm. 9.50% 08/01/09 16 - 1,947 1,931 - 1st Alameda
Res. 9.25% 10/01/07 3 764 385 385 - 2nd San Francisco
50
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Schedule IV - Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
For the Years Ended December 31, 2005, 2004 and 2003
(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. 8.75% 09/01/06 85 - 11,685 11,684 - 1st Contra Costa
Res. 10.00% 09/01/06 99 11,685 15,288 11,927 - 2nd Contra Costa
Res. 9.25% 01/01/10 1 248 75 74 - 2nd San Mateo
Apts. 11.00% 06/01/06 1 881 641 401 - 2nd San Francisco
Apts. 11.00% 06/01/06 2 875 1,093 1,076 - 2nd San Francisco
Comm. 9.50% 03/01/07 25 - 3,113 3,112 - 1st San Francisco
Res. 8.50% 03/15/10 10 2,097 450 447 - 2nd San Francisco
Comm. 10.00% 02/01/08 16 2,200 2,335 1,750 - 2nd Amador
Comm. 9.00% 03/01/07 10 5,497 1,305 1,305 - 3rd San Francisco
Comm. 9.00% 03/01/10 2 179 204 202 - 2nd Monterey
Res. 9.00% 04/01/10 1 358 55 55 - 2nd Santa Cruz
Res. 8.50% 05/01/07 37 - 5,200 2,561 - 1st Solano
Res. 10.00% 05/01/07 28 5,200 4,016 3,394 - 2nd Solano
Res. 9.25% 04/01/07 32 - 4,464 3,996 - 1st Sutter
Apts. 9.25% 04/01/07 12 - 1,620 1,620 - 1st San Francisco
Res. 9.25% 05/01/10 1 411 160 159 - 2nd San Mateo
Res. 10.00% 12/01/07 59 36,000 8,165 6,884 - 2nd San Francisco
Res. 9.00% 05/01/10 1 286 70 70 - 2nd El Dorado
Res. 8.50% 10/01/10 2 379 325 324 - 3rd Sonoma
Apts. 9.25% 05/01/07 8 - 1,040 1,040 - 1st San Francisco
Apts. 8.50% 06/01/07 13 - 1,800 1,800 - 1st Sacramento
Apts. 8.50% 06/01/07 11 - 1,500 1,500 - 1st Sacramento
Comm. 8.50% 07/01/10 32 6,064 4,400 4,398 - 2nd San Francisco
Comm. 8.00% 06/01/07 60 - 9,000 9,000 - 1st Napa
Land 8.50% 06/01/10 56 - 9,000 7,689 - 1st San Francisco
Apts. 9.25% 06/01/07 16 - 2,080 2,080 - 1st San Francisco
Res. 9.25% 07/01/10 2 - 200 199 - 1st Solano
Comm. 8.00% 07/01/07 37 5,731 5,341 5,341 - 2nd Alameda
Res. 12.50% 07/01/08 39 19,700 4,250 3,653 - 2nd San Mateo
Apts. 9.25% 07/01/07 17 - 2,200 2,200 - 1st San Francisco
Res. 9.25% 07/01/07 12 - 1,560 1,560 - 1st San Francisco
Apts. 9.25% 07/01/07 17 - 2,200 2,200 - 1st San Francisco
Comm. 9.00% 08/01/15 13 9,500 1,000 979 - 2nd San Francisco
Res. 8.50% 08/01/07 21 - 3,000 3,000 - 1st Butte
Res. 10.00% 07/01/07 11 3,000 2,675 1,453 - 2nd Butte
Apts. 11.00% 06/01/07 7 2,080 1,483 711 - 2nd San Francisco
Res. 9.00% 08/01/10 1 - 140 140 - 1st Ventura
Res. 10.00% 02/01/08 82 41,200 11,200 9,271 - 2nd Santa Clara
51
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Schedule IV - Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
For the Years Ended December 31, 2005, 2004 and 2003
(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% 08/01/07 24 - 3,450 3,450 - 1st Sacramento
Res. 10.00% 08/01/07 10 3,450 2,325 1,274 - 2nd Sacramento
Res. 9.25% 09/01/10 1 260 71 71 - 2nd San Mateo
Res. 9.25% 09/01/07 22 - 3,555 2,774 - 1st San Joaquin
Comm. 9.50% 10/01/10 11 322 1,250 1,249 - 3rd Alameda
Res. 9.25% 09/01/07 8 - 1,265 960 - 1st San Joaquin
Res. 9.50% 03/01/07 23 - 3,040 2,895 - 1st San Francisco
Res. 11.00% 05/01/08 31 18,744 4,080 3,229 - 2nd Santa Clara
Land 9.50% 10/01/07 4 - 488 447 - 1st Santa Clara
Land 10.00% 10/01/07 30 - 3,795 3,568 - 1st San Francisco
Comm. 9.50% 10/01/10 37 - 4,200 4,193 - 1st Alameda
Apts. 9.25% 04/01/07 8 - 1,050 1,050 - 1st San Francisco
Res. 9.25% 05/01/07 8 - 1,031 1,031 - 1st San Francisco
Res. 10.00% 11/01/07 20 11,500 2,564 2,335 - 2nd Contra Costa
Res. 8.50% 11/01/10 1 99 120 120 - 2nd San Mateo
Apts. 9.25% 05/01/07 8 - 1,050 1,050 - 1st San Francisco
Res. 8.50% 11/01/06 18 - 2,555 2,555 - 1st San Mateo
Res. 12.00% 12/01/07 12 3,797 1,265 1,114 - 2nd San Diego
Res. 10.50% 12/01/07 6 2,811 740 740 - 2nd Placer
Comm. 9.50% 12/01/07 23 - 2,900 2,900 - 1st San Francisco
Res. 8.75% 01/01/08 41 - 5,625 5,625 - 1st Alameda
Res. 10.00% 01/01/08 15 5,625 4,500 1,976 - 2nd Alameda
-----------------------------------------------------
Total $ 224,573 $ 235,963 $ 214,012 $ 26,863
=====================================================
52
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,
-----------------------------------------------
2005 2004 2003
------------- ------------- -------------
Balance at beginning of year $ 171,745 $ 147,174 $ 83,650
Additions during period
New loans 169,460 81,579 96,820
Other - - 2,989
------------- ------------- -------------
Total additions 169,460 81,579 99,809
------------- ------------- -------------
Deductions during period
Collections of principal 118,772 52,359 35,097
Foreclosures 8,361 4,422 -
Cost of loans sold - - -
Amortization of premium - - -
Other 60 227 1,188
------------- ------------- -------------
Total deductions 127,193 57,008 36,285
------------- ------------- -------------
Balance at close of year $ 214,012 $ 171,745 $ 147,174
============= ============= =============
53
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with the partnership's independent registered
public accounting firm during the years ended December 31, 2005 and 2004.
Item 9a. - Controls and Procedures
The partnership carried out an evaluation, under the supervision and with
the participation of the general partners of the effectiveness of the design and
operation of the partnership's disclosure controls and procedures as of the end
of the period covered by this report pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the general
partners concluded that the partnership's disclosure controls and procedures
were effective in timely alerting the general partners to material information
relating to the Partnership that is required to be included in our periodic
filings with the Securities and Exchange Commission.
There were no significant changes in the partnership's internal control
over financial reporting during the partnership's fourth fiscal quarter that
have materially affected, or are likely to materially affect, the partnership's
internal control over financial reporting.
Item 9b. - Other Information
None
Part III
Item 10 - Directors and Executive Officers of the Registrant
The partnership has no Officers or Directors. Rather, the activities of the
partnership are managed by three general partners, one of whom is an individual,
Michael R. Burwell. The other two general partners are Gymno Corporation and
Redwood Mortgage Corp. Both are California corporations, formed in 1986 and
1978, respectively. Mr. Burwell is one of the two shareholders of Gymno
Corporation, a California corporation, on an equal (50-50) basis. Redwood
Mortgage Corp. is a subsidiary of The Redwood Group Ltd., whose principal
stockholders are the Burwell Trusts, the other shareholder of Gymno Corporation
and Michael R. Burwell. Michael R. Burwell has a controlling interest in these
companies through his stock ownership or as trustee of the Burwell trusts.
The General Partners.
Michael R. Burwell. Michael R. Burwell, age 49, General Partner, past
member of Board of Trustees and Treasurer, Mortgage Brokers Institute
(1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage
Corp. (1979-present); Director, Secretary and Treasurer A & B Financial
Services, Inc. (1980-present); President, Director, Chief Financial Officer and
Secretary (since 1986) of Gymno Corporation; President, Director, Secretary and
Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as
a real estate sales person.
Gymno Corporation. Gymno Corporation, General Partner, is a California
corporation formed in 1986 for the purpose of acting as a general partner of
this partnership and of other limited partnerships formed by the individual
general partners. The shares in Gymno Corporation are held equally by Michael R.
Burwell and the Burwell trusts. Michael R. Burwell is a director of Gymno and
the director position previously held by D. Russell Burwell is currently vacant.
Michael R. Burwell is its President, Chief Financial Officer and Secretary.
Michael R. Burwell has a controlling interest in this company through his stock
ownership or as trustee of the Burwell trusts.
54
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.
Financial Oversight by General Partners.
The partnership does not have a board of directors or an audit committee.
Accordingly, the general partners serve the equivalent function of an audit
committee for, among other things, the following purposes: appointment,
compensation, review and oversight of the work of our independent public
accountants, and establishing the enforcing of the Code of Ethics. However,
since the partnership does not have an audit committee and the general partners
are not independent of the partnership, the partnership does not have an "audit
committee financial expert."
Code of Ethics.
The general partners have adopted a Code of Ethics applicable to the
general partners and to any agents, employees or independent contractors engaged
by the general partners to perform the functions of a principal financial
officer, principal accounting officer or controller of the partnership, if any.
You may obtain a copy of this Code of Ethics, without charge, upon request by
calling our Investor Services Department at (650) 365-5341.
55
Item 11 - Executive Compensation
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
As indicated above in Item 10, the partnership has no Officers or
Directors. The partnership is managed by the general partners. There are certain
fees and other items paid to management and related parties.
A more complete description of management compensation is found in the
prospectus (S-11) dated August 4, 2005, page 6, under the section "Compensation
of the General Partners and the Affiliates", which is incorporated by reference.
Such compensation is summarized below.
The following compensation has been paid to the general partners and
affiliates for services rendered during the year ended December 31, 2005. All
such compensation is in compliance with the guidelines and limitations set forth
in the partnership agreement.
Entity Receiving Compensation Description of Compensation and Services Rendered Amount
---------------------------------------------------------------------------------------------------------------
I. Redwood Mortgage Corp. Mortgage Servicing Fee for servicing loans..................$1,736,000
(General Partner)
General Partners &/or Affiliates Asset Management Fee for managing assets......................$814,000
General Partners 1% interest in profits........................................$154,000
Less allocation of syndication costs............................$3,000
--------------
$151,000
General Partners &/or Affiliates Portion of early withdrawal penalties applied to
reduce Formation Loan..........................................$45,000
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY
COMPANIES RELATED TO THE GENERAL PARTNERS DURING THE YEAR ENDED DECEMBER 31,
2005 (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP)
Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in
connection with the review, selection, evaluation,
negotiation, and extension of the loans paid by the
borrowers and not by the partnership..........................$3,697,000
Redwood Mortgage Corp. Processing and Escrow Fees for services in borrowers
connection with notary, document preparation, credit
investigation, and escrow fees payable by the
and not by the partnership.......................................$46,000
Gymno Corporation Reconveyance Fee.................................................$21,211
III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN
EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE
CONSOLIDATED STATEMENTS OF INCOME DURING THE YEAR ENDED DECEMBER 31, 2005 . . .
.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $298,000
56
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The general partners own a combined total of 1% of the partnership
including a 1% portion of income and losses.
Item 13 - Certain Relationships and Related Transactions
Refer to footnotes 3 and 4 of the Notes to Consolidated Financial
Statements in Part II item 8, which describes related party fees and data.
Also refer to the Prospectus dated August 4, 2005, (incorporated herein by
reference) on page 6 "Compensation of General Partners and Affiliates".
Item 14 - Principal Accountant Fees and Services
Fees for services performed for the partnership by the principal accountant
for 2005 and 2004 are as follows:
Audit Fees The aggregate fees billed during the years ended December 31,
2005 and 2004 for professional services rendered for the audit of the
partnership's annual financial statements included in the partnership's Annual
Report on Form 10-K, review of financial statements included in the
partnership's Quarterly Reports on Form 10-Q and for services provided in
connection with regulatory filings were $151,082 and $161,839, respectively.
Audit Related Fees There were no fees billed during the years ended
December 31, 2005 and 2004 for audit-related services.
Tax fees The aggregate fees billed for tax services for the years ended
December 31, 2005 and 2004, were $11,506 and $9,027, respectively. These fees
relate to professional services rendered primarily for tax compliance.
All Other Fees There were no other fees billed during the years ended
December 31, 2005 and 2004.
All audit and non-audit services are approved by the general partner prior
to the accountant being engaged by the partnership.
57
Part IV
Item 15 - Exhibits, Financial Statements and Schedules
A. Documents filed as part of this report are incorporated:
1. In Part II, Item 8 under A - Consolidated Financial Statements.
2. The Consolidated Financial Statement Schedules are listed in Part II -
Item 8 under B - Consolidated Financial Statement Schedules.
3. Exhibits.
Exhibit No. Description of Exhibits
------------- --------------------------------------------------------
3.1 Limited Partnership Agreement
3.2 Form of Certificate of Limited Partnership Interest
3.3 Certificate of Limited Partnership
10.1 Escrow Agreement
10.2 Servicing Agreement
10.3 (a)Form of Note secured by Deed of Trust for Construction
Loans, which provides for principal and interest payments.
(b)Form of Note secured by Deed of Trust for Commercial and
Multi-Family loans which provides for principal and
interest payments
(c)Form of Note secured by Deed of Trust for Commercial and
Multi-Family loans which provides for interest only
payments
(d)Form of Note secured by Deed of Trust for Single Family
Residential Loans, which provides for interest and
principal payments.
(e)Form of Note secured by Deed of Trust for Single Family
Residential loans, which provides for interest only
payments.
10.4 (a)Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing to accompany Exhibits
10.3 (a), and (c).
(b)Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing to accompany Exhibit 10.3
(b).
(c)Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing to accompany Exhibit 10.3
(c).
10.5 Promissory Note for Formation Loan
10.6 Agreement to Seek a Lender
31.1 Certification of General Partner pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of General Partner pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.3 Certification of General Partner pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of General Partner pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of General Partner pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.3 Certification of General Partner pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
All of the above exhibits, other than exhibit 31.1, 31.2, 31.3, 32.1, 32.2
and 32.3, were previously filed as the exhibits to Registrant's Registration
Statement on Form S-11 (Registration No. 333-106900 and incorporated by
reference herein).
B. See A (3) above.
C. See A (2) above. Additional reference is made to the prospectus (filed
as part of the S-11 registration statement) dated August 4, 2005,
supplement No. 1 dated March 15, 2006 (post effective amendment No. 1
to the S-11 registration statement), for financial data related to
Gymno Corporation, and Redwood Mortgage Corp., the Corporate General
Partners.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 30th day of March,
2006.
REDWOOD MORTGAGE INVESTORS VIII
By: /S/ Michael R. Burwell
--------------------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
-------------------------------------------
Michael R. Burwell, President, Secretary,
and Principal Financial Officer
By: Redwood Mortgage Corp.
By: /S/ Michael R. Burwell
-------------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer
59
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity indicated on the 30th day of March, 2006.
Signature Title Date
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell General Partner March 30, 2006
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell President of Gymno Corporation, March 30, 2006
(Principal Executive Officer);
Director of Gymno Corporation
Secretary/Treasurer of Gymno
Corporation (Principal Financial
and Accounting Officer);
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell President, Secretary/Treasurer of March 30, 2006
Redwood Mortgage Corp. (Principal
Financial and Accounting
Officer);
Director of Redwood Mortgage Corp.
60
Exhibit 31.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner of the Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's control over
financial reporting that occurred during the Registrant's most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
March 30, 2006
61
Exhibit 31.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner of the partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's control over
financial reporting that occurred during the Registrant's most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President, and
Chief Financial Officer of Gymno
Corporation, General Partner
March 30, 2006
62
Exhibit 31.3
PRESIDENT'S CERTIFICATION
I, Michael R. Burwell, president of Redwood Mortgage Corporation, General
Partner, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation, and
(c) disclosed in this report any change in the Registrant's control over
financial reporting that occurred during the Registrant's most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- ---------------------------
Michael R. Burwell, President,
Redwood Mortgage Corporation,
General Partner
March 30, 2006
63
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-K for the period ended December 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
partnership at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, "filed" with the
Securities and Exchange Commission.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
March 30, 2006
64
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-K for the period ended December 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial
Officer of Gymno Corporation, General Partner of the partnership, certify that
to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
partnership at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, "filed" with the
Securities and Exchange Commission.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President, and
Chief Financial Officer of Gymno
Corporation, General Partner
March 30, 2006
65
Exhibit 32.3
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-K for the period ended December 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President, Redwood Mortgage
Corporation, General Partner, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
partnership at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, "filed" with the
Securities and Exchange Commission.
/s/ Michael R. Burwell
- ---------------------------
Michael R. Burwell, President,
Redwood Mortgage Corporation,
General Partner
March 30, 2006
66