Exhibit 3.1
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OF
REDWOOD MORTGAGE INVESTORS VIII
A California Limited Partnership
THIS LIMITED PARTNERSHIP AGREEMENT was made and entered into as of the ____
day of _______________, 1996, by and among D. RUSSELL BURWELL, an individual,
MICHAEL R. BURWELL, an individual, and GYMNO CORPORATION, a California
corporation (collectively, the "General Partners"), and such other persons who
have become Limited Partners ("Existing Limited Partners") and as may be added
pursuant to the terms hereof (the "New Limited Partners") (collectively the
"Limited Partners").
RECITALS
A. On or about _______________, 1993, the General Partners and the Limited
Partners entered into an agreement of limited partnership for the Partnership.
B. In order to increase the Partnership's capital base and permit the
Partnership to further diversify its portfolio, in September, 1996, the General
Partners elected to offer an additional 300,000 Units.
C. In connection with the additional offering of Units and in order to
correct some ambiguities and supplement some provisions of the Partnership
Agreement the General Partners have elected to amend and restate the agreement
of limited partnership (the "Partnership Agreement").
ARTICLE 1
DEFINITIONS
Unless stated otherwise, the terms set forth in this Article I shall, for
all purposes of this Agreement, have the meanings as defined herein:
1.1 "Affiliate" means (a) any person directly or indirectly controlling,
controlled by or under common control with another person, (b) any person owning
or controlling ten percent (10%) or more of the outstanding voting securities of
such other person, (c) any officer, director or partner of such person, or (d)
if such other person is an officer, director or partner, any company for which
such person acts in any such capacity.
1.2 "Agreement" means this Limited Partnership Agreement, as amended from
time to time.
1.3 "Capital Account" means, with respect to any Partner, the Capital
Account maintained for such Partner in accordance with the following provisions:
(a) To each Partner's Capital Account there shall be credited, in the event
such Partner utilized the services of a Participating Broker Dealer, such
Partner's Capital Contribution, such Partner's distributive share of Profits,
and any items in the nature of income or gain (from unexpected adjustments,
allocations or distributions) that are specially allocated to a Partner and the
amount of any Partnership liabilities that are assumed by such Partner or that
are secured by any Partnership property distributed to such Partner.
(b) To each Partner's Capital Account there shall be debited the amount of
cash and the Gross Asset Value of any Partnership property distributed to such
Partner pursuant to any provision of this Agreement, such Partner's distributive
share of Losses, and any items in the nature of expenses or losses that are
specially allocated to a Partner and the amount of any liabilities of such
Partner that are assumed by the Partnership or that are secured by any property
contributed by such Partner to the Partnership.
In the event any interest in the Partnership is transferred in accordance
with Section 7.2 of this Agreement, the transferee shall succeed to the Capital
Account of the transferor to the extent it relates to the transferred interest.
In the event the Gross Asset Values of the Partnership assets are adjusted
pursuant to Section 1.9, the Capital Accounts of all Partners shall be adjusted
simultaneously to reflect the aggregate net adjustment as if the Partnership
recognized gain or loss equal to the amount of such aggregate net adjustment.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in
a manner consistent with such Regulation. In the event the General Partners
shall determine that it is prudent to modify the manner in which the Capital
Accounts, or any debits or credits thereto, are computed in order to comply with
the then existing Treasury Regulation, the General Partners may make such
modification, provided that it is not likely to have a material effect on the
amounts distributable to any Partner pursuant to Article IX hereof upon the
dissolution of the Partnership. The General Partners shall adjust the amounts
debited or credited to Capital Accounts with respect to (a) any property
contributed to the Partnership or distributed to the General Partners, and (b)
any liabilities that are secured by such contributed or distributed property or
that are assumed by the Partnership or the General Partners, in the event the
General Partners shall determine such adjustments are necessary or appropriate
pursuant to Treasury Regulation Section 1.704-l(b)(2)(iv) as provided for in
Section 5.4. The General Partners shall make any appropriate modification in the
event unanticipated events might otherwise cause this Agreement not to comply
with Treasury Regulation Section 1.704-l(b) as provided for in Sections 5.6 and
12.4(k).
1.4 "Cash Available for Distribution" means an amount of cash equal to the
excess of accrued income from operations and investment of, or the sale or
refinancing or other disposition of, Partnership assets during any calendar
month over the accrued operating expenses of the Partnership during such month,
including any adjustments for bad debt reserves or deductions as the General
Partners may deem appropriate, all determined in accordance with generally
accepted accounting principles; provided, that such operating expenses shall not
include any general overhead expenses of the General Partners not specifically
related to, billed to or reimbursable by the Partnership as specified in
Sections 10.13 through 10.15.
1.5 "Code" means the Internal Revenue Code of 1986 and corresponding
provisions of subsequent revenue laws.
1.6 "Continuing Servicing Fee" means an amount equal to approximately 0.25
percent of the Limited Partner's capital account which amount shall be paid to
certain Participating Broker Dealers as compensation in connection with the
offer and sale of units.
1.7 "Deed of Trust" means the lien or liens created on the real property or
properties of the borrower securing the borrower's obligation to the Partnership
to repay the Mortgage Investment.
1.8 "Earnings" means all revenues earned by the Partnership less all
expenses incurred by the Partnership.
1.9 "Fiscal Year" means a year ending December 31st.
1.10 "First Formation Loan" means a loan to Redwood Mortgage, an affiliate
of the General Partners, in connection with the initial offering of 150,000
Units pursuant to the Prospectus dated May 19, 1993 equal to the amount of the
sales commissions (excluding any Continuing Servicing Fees) and all amounts
payable in connection with any unsolicited sales. Redwood Mortgage will pay all
sales commissions (excluding any Continuing Servicing Fees) and all amounts
payable in connection with any unsolicited sales from the First Formation Loan.
The First Formation Loan will be unsecured, and will be repaid in ten (10) equal
annual installments of principal, without interest commencing on December 31 of
the year in which the initial offering terminates.
1.11 "Formation Loans" means collectively the First and Second Formation
Loan.
1.12 "General Partners" means D. Russell Burwell, Michael R. Burwell and
Gymno Corporation, a California corporation, or any Person substituted in place
thereof pursuant to this Agreement. "General Partner" means any one of the
General Partners.
1.13 "Gross Asset Value" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(a) The initial Gross Asset Value of any asset contributed by a Partner to
the Partnership shall be the gross fair market value of such asset, as
determined by the contributed Partner and the Partnership;
(b) The Gross Asset Values of all Partnership assets shall be adjusted to
equal their respective gross fair market values, as determined by the General
Partners, as of the following times: (a) the acquisition of an additional
interest in the Partnership (other than pursuant to Section 4.2) by any new or
existing Partner in exchange for more than a de minimis Capital Contribution;
(b) the distribution by the Partnership to a Partner of more than a de minimis
amount of Partnership property other than money, unless all Partners receive
simultaneous distributions of undivided interests in the distributed property in
proportion to their Interests in the Partnership; and (c) the termination of the
Partnership for federal income tax purposes pursuant to Section 708(b)(1)(B) of
the Code; and
(c) If the Gross Asset Value of an asset has been determined or adjusted
pursuant to clause (a) or (b) above, such Gross Asset Value shall thereafter be
adjusted by the depreciation, amortization or other cost recovery deduction
allowable which is taken into account with respect to such asset for purposes of
computing Profits and Losses.
1.14 "Guaranteed Payment for Offering Period" means the payment guaranteed
to Limited Partners by the General Partners during the Guaranteed Payment
Period. The Guaranteed Payment for Offering Period calculated on a monthly
basis, shall be equal to the greater of (i) the Partnership's Earnings or (ii)
the interest rate established by the Monthly Weighted Average Cost of Funds for
the 11th District Savings Institutions, as announced by the Federal Home Loan
Bank of San Francisco during the last week of the preceding month, plus two
points, up to a maximum interest rate of 12%. The Weighted Average Cost of Funds
is derived from interest paid on savings accounts, Federal Home Loan Bank
advances, and other borrowed money adjusted from valuation in the number of days
in each month. The adjustment factors are 1.086 for February, 1.024 for 30 day
months and 0.981 for 31 day months. As of the date of the Prospectus, the
Monthly Weighted Average Funds for the 11th District as announced August 30,
1996 for the period ended July 30, 1996 and in effect until September 30, 1996
is 4.819%. The Guaranteed Payment Period is the period commencing on the day a
Limited Partner is admitted to the Partnership and ending three months after the
Offering Termination Date. To the extent the return to be paid is in excess of
the Partnership's Earnings, the Guaranteed Payment for Offering Period shall be
payable by the General Partners out of a Capital Contribution to the Partnership
and/or fees payable to the General Partners or Redwood Mortgage which are
lowered or waived.
1.15 "Limited Partners" means the Initial Limited Partner until it shall
withdraw as such, and the purchasers of Units in Redwood Mortgage Investors
VIII, who are admitted thereto and whose names are included on the Certificate
and Agreement of Limited Partnership of Redwood Mortgage Investors VIII.
Reference to a "Limited Partner" shall be to anyone of them.
1.16 "Limited Partnership Interest" means the percentage ownership interest
of any Limited Partner in the Partnership determined at any time by dividing a
Limited Partner's current Capital Account by the total outstanding Capital
Accounts of all Limited Partners.
1.17 "Majority of the Limited Partners" means Limited Partners holding a
majority of the total outstanding Limited Partnership Interests as of the first
day of the current calendar month.
1.18 "Mortgage Investment(s)" means the loan(s) and/or an undivided
interest in the loans the Partnership intends to extend to the general public
secured by real property deeds of trust.
1.19 "Net Asset Value" means the Partnership's total assets less its total
liabilities.
1.20 "Partners" means the General Partners and the Limited Partners,
collectively. "Partner" means any one of the Partners.
1.21 "Partnership" means Redwood Mortgage Investors VIII, a California
limited partnership, the limited partnership created pursuant to this Agreement.
1.22 "Partnership Interest" means the percentage ownership interest of each
Partner in the partnership as defined in Section 5.1 below.
1.23 "Person" means any natural person, partnership, corporation,
unincorporated association or other legal entity.
1.24 "Profits" and "Losses" mean, for each Fiscal Year or any other period,
an amount equal to the Partnership's taxable income or loss for such Fiscal Year
or other given period, determined in accordance with Section 703(a) of the Code
(for this purpose, all items of income, gain, loss, or deduction required to be
stated separately pursuant to Code Section 703(a)(1) shall be included in
taxable income or loss), with the following adjustments:
(a) Any income of the Partnership that is exempt from federal income tax
and not otherwise taken into account in computing Profits or Losses pursuant to
this Section 1.21 shall be added to such taxable income or loss;
(b) Any expenditures of the Partnership described in Section 705(a)(2)(B)
of the Code or treated as Section 705(a)(2)(B) of the Code expenditures pursuant
to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken
into account in computing Profits or Losses pursuant to this Section 1.21, shall
be subtracted from such taxable income or loss.
(c) Gain or loss resulting from any disposition of Partnership property
with respect to which gain or loss is recognized for federal income tax purposes
shall be computed by reference to the Gross Asset Value of the property disposed
of, notwithstanding that the adjusted tax basis of such property differs from
its Gross Asset Value;
(d) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account depreciation, amortization or other cost recovery
deductions for such Fiscal Year or other period, computed such that if the Gross
of an Asset Value of an asset differs from its adjusted basis for federal income
tax purposes at the beginning of a Fiscal Year or other period, depreciation,
amortization or other cost recovery deductions shall be an amount which bears
the same ratio to such beginning Gross Asset Value as the federal income tax
depreciation, amortization or other cost recovery deductions for such Fiscal
Year or other period bears to such beginning adjusted tax basis; and
(e) Notwithstanding any other provision of this Section 1.21, any items in
the nature of income; or gain or expenses or losses, which are specially
allocated, shall not be taken into account in computing Profits or Losses.
1.25 "Sales Commissions" means the amount of compensation, which may be
paid under one of two options, to be paid to Participating Broker Dealers in
connection with the sale of Units.
1.26 "Second Formation Loan" means the loan to Redwood Mortgage, an
affiliate of the General Partners, in connection with the second offering of
300,000 Units pursuant to the Prospectus dated __________, 1996 equal to the
amount of the sales commissions (not including any Continuing Servicing Fees)
and the amounts payable in connection with unsolicited sales. Redwood Mortgage
will pay all sales commissions (not including any Continuing Servicing Fees) and
amounts due in connection with unsolicited sales from the Second Formation Loan.
The Second Formation Loan will be unsecured, will not bear interest and will be
repaid in annual installments.
1.27 "Units" mean the shares of ownership of the Partnership issued to
Limited Partners upon their admission to the Partnership, pursuant to the
Partnership's Prospectuses dated February 2, 1993 and ____________, 1996 and any
supplements or amendments thereto (the "Prospectus").
ARTICLE 2
ORGANIZATION OF THE LIMITED PARTNERSHIP
2.1 Formation. The parties hereto hereby agree to form a limited
partnership, pursuant to the provision of Chapter 3, Title 2, of the California
Corporations Code, as in effect on the date hereof, commonly known as the
California Revised Limited Partnership Act (the "California Act").
2.2 Name. The name of the Partnership is REDWOOD MORTGAGE INVESTORS VIII, a
California limited partnership.
2.3 Place of Business. The principal place of business of the Partnership
shall be located at 650 El Camino Real, Suite G, Redwood City, California 94063,
until changed by designation of the General Partners, with notice to all Limited
Partners.
2.4 Purpose. The primary purpose of this Partnership is to engage in
business as a mortgage lender for the primary purpose of making Mortgage
Investments secured by deeds of trust (the "Mortgage Investments") on California
real estate.
2.5 Substitution of Limited Partner. A Limited Partner may assign all or a
portion of his Partnership Interest and substitute another person in his place
as a Limited Partner only in compliance with the terms and conditions of Section
7.2 below.
2.6 Certificate of Limited Partnership. The General Partners shall duly
execute and file with the Office of the Secretary of State of the State of
California a Certificate of Limited Partnership pursuant to the provisions of
Section 15621 of the California Corporations Code. Thereafter, the General
Partners shall execute and cause to be filed Certificates of Amendment of the
Certificate of Limited Partnership whenever required by the California Act or
this Agreement. At the discretion of the General Partners, a certified copy of
the Certificate of Limited Partnership may also be filed in the Office of the
Recorder of any country in which the Partnership shall have a place of business
or in which real property to which it holds title shall be situated.
2.7 Term. The Partnership shall be formed and its term shall commence as of
the date on which this Limited Partnership Agreement is executed and the
Certificate of Limited Partnership referred to in Section 2.6 is filed with the
Office of the Secretary of State, and shall continue until December 31, 2032,
unless earlier terminated pursuant to the provisions of this Agreement or by
operation of law.
2.8 Power of Attorney. Each of the Limited Partners irrevocably constitutes
and appoints the General Partners, and each of them, any one of them acting
alone, as his true and lawful attorney-in-fact, with full power and authority
for him, and in his name, place and stead, to execute, acknowledge, publish and
file:
(a) This Agreement, the Certificate of Limited Partnership and any
amendments or conciliation thereof required under the laws of the State of
California;
(b) Any certificates, instruments and documents, including, without
limitation, Fictitious Business Name Statements, as may be required by, or may
be appropriate under, the laws of any state or other jurisdiction in which the
Partnership is doing or intends to do business; and
(c) Any documents which may be required to effect the continuation of the
Partnership, the admission of an additional or substituted Partner, or the
dissolution and termination of the Partnership.
Each Limited Partner hereby agrees to execute and deliver to the General
Partners within five (5) days after receipt of the General Partners' written
request therefore, such other and further statements of interest and holdings,
designations, and further statements of interest and holdings, designations,
powers of attorney and other instruments that the General Partners deem
necessary to comply with any laws, rules or regulations relating to the
Partnership's activities.
2.9 Nature of Power of Attorney. The foregoing grant of authority is a
special power of attorney coupled with an interest, is irrevocable, and survives
the death of the undersigned or the delivery of an assignment by the undersigned
of a Limited Partnership Interest; provided, that where the assignee thereof has
been approved by the General Partners for admission to the Partnership as a
substituted Limited Partner, the Power of Attorney survives the delivery of such
assignment for the sole purpose of enabling the General Partners to execute,
acknowledge and file any instrument necessary to effect such substitution.
ARTICLE 3
THE GENERAL PARTNERS
3.1 Authority of the General Partners. The General Partners shall have all
of the rights and powers of a partner in a general partnership, except as
otherwise provided herein.
3.2 General Management Authority of the General Partners. Except as
expressly provided herein, the General Partners shall have sole and complete
charge of the affairs of the Partnership and shall operate its business for the
benefit of all Partners. Each of the General Partners, acting alone or together,
shall have the authority to act on behalf of the Partnership as to any matter
for which the action or consent of the General Partners is required or
permitted. Without limitation upon the generality of the foregoing, the General
Partners shall have the specific authority:
(a) To expend Partnership funds in furtherance of the business of the
Partnership and to acquire and deal with assets upon such terms as they deem
advisable, from affiliates and other persons;
(b) To determine the terms of the offering of Units, including the right to
increase the size of the offering or offer additional securities, the amount for
discounts allowable or commissions to be paid and the manner of complying with
applicable law;
(c) To employ, at the expense of the Partnership, such agents, employees,
independent contractors, attorneys and accountants as they deem reasonable and
necessary;
(d) To effect necessary insurance for the proper protection of the
Partnership, the General Partners or Limited Partners;
(e) To pay, collect, compromise, arbitrate, or otherwise adjust any and all
claims or demands against the Partnership;
(f) To bind the Partnership in all transactions involving the Partnership's
property or business affairs, including the execution of all loan documents and
the sale of notes and to change the Partnership's investment objectives,
notwithstanding any other provision of this Agreement; provided, however, the
General Partners may not, without the consent of a Majority of the Limited
Partners, sell or exchange all or substantially all of the Partnership's assets,
as those terms are defined in Section 9.1 below;
(g) To amend this Agreement with respect to the matters described in
Subsections 12.4(a) through (k) below;
(h) To determine the accounting method or methods to be used by the
Partnership, which methods may be changed at any time by written notice to all
Limited Partners;
(i) To open accounts in the name of the Partnership in one or more banks,
savings and loan associations or other financial institutions, and to deposit
Partnership funds therein, subject to withdrawal upon the signature of the
General Partners or any person authorized by him;
(j) To borrow funds for the purpose of making Mortgage Investments,
provided that the amount of borrowed funds does not exceed fifty percent (50%)
of the Partnership's Mortgage Investment portfolio and in connection with such
borrowings, to pledge or hypothecate all or a portion of the assets of the
Partnership as security for such loans; and
(k) To invest the reserve funds of the Partnership in cash, bank accounts,
certificates of deposits, money market accounts, short-term bankers acceptances,
publicly traded bond funds or any other liquid assets.
3.3 Limitations. Without a written consent of or ratification by all
Limited Partners, the General Partners shall have no authority to do any act
prohibited by law; or to admit a person as a Limited Partner other than in
accordance with the terms of this Agreement.
3.4 No Personal Liability. The General Partners shall have no personal
liability for the original invested capital or any Limited Partner or to repay
the Partnership any portion or all of any negative balance in their capital
accounts, except as otherwise provided in Article 4.
3.5 Compensation to General Partners. The General Partners shall be
entitled to be compensated and reimbursed for expenses incurred in performing
its management functions in accordance with the provisions of Article 10
thereof, and may receive compensation from parties other than the Partnership.
3.6 Fiduciary Duty. The General Partners shall have the fiduciary
responsibility for the safekeeping and use of all funds and assets of the
Partnership, and they shall not employ such funds or assets in any manner except
for the exclusive benefit of the Partnership.
3.7 Allocation of Time to Partnership Business. The General Partner shall
not be required to devote full time to the affairs of the Partnership, but shall
devote whatever time, effort and skill they deem to be reasonably necessary for
the conduct of the Partnership's business. The General Partners may engage in
any other businesses or activities, including businesses related to or
competitive with the Partnership.
3.8 Assignment by a General Partner. A General Partner's interest in
income, losses and distributions of the Partnership shall be assignable at the
discretion of a General Partner, which, if made, may be converted, at a General
Partner's option, into a limited partnership interest to the extent of the
assignment.
3.9 Partnership Interest of General Partners. The General Partners shall be
allocated a total of one percent (1%) of all items of Partnership income, gains,
losses, deductions and credits as described in Section 5.1 below, which shall be
shared equally among them.
3.10 Removal of General Partners. A General Partner may be removed upon the
following conditions:
(a) By written consent of a majority of the Limited Partners. Limited
Partners may exercise such right by presenting to the General Partner a notice,
with their acknowledge signatures thereon, to the effect that the General
Partner is removed; the notice shall set forth the grounds for removal and the
date on which removal is become effective;
(b) Concurrently with such notice or within thirty (30) days thereafter by
notice similarly given, a majority of the Limited Partners may also designate a
successor as General Partner;
(c) Substitution of a new General Partner, if any, shall be effective upon
written acceptance of the duties and responsibilities of a general partner by
the new General Partner. Upon effective substitution of a new General Partner,
this Agreement shall remain in full force and effect, except for the change in
the General Partner, and business of the Partnership shall be continued by the
new General Partner. The new General Partner shall thereupon execute, file and
record an amendment to the Certificate of Limited Partnership in the manner
required by law.
(d) Failure of the Limited Partners giving notice of removal to designate a
new General Partner within the time specified herein or failure of the new
General Partner so designated to execute written acceptance of the duties and
responsibilities of a General Partner hereunder within ten (10) days after such
designation shall dissolve and terminate the Partnership, unless the business of
the Partnership is continued by the remaining General Partners, if any.
In the event that all of the General Partners are removed, no other General
Partners are elected, the Partnership is liquidated and Redwood Mortgage is no
longer receiving payments for services rendered, the debt on the Formation Loan
shall be forgiven by the Partnership and Redwood Mortgage will be immediately
released from any further obligation under the Formation Loan.
3.11 Commingling of Funds. The funds of the Partnership shall not be
commingled with funds of any other person or entity.
3.12 Right to Rely on General Partners. Any person dealing with the
Partnership may rely (without duty of further inquiry) upon a certificate signed
by the General Partners as to:
(a) The identity of any General Partner or Limited Partner;
(b) The existence or nonexistence of any fact or facts which constitute a
condition precedent to acts by a General Partner or which are in any further
manner germane to the affairs of the Partnership;
(c) The persons who are authorized to execute and deliver any instrument or
document of the Partnership; or
(d) Any act or failure to act by the Partnership or any other matter
whatsoever involving the Partnership or any Partner.
3.13 Sole and Absolute Discretion. Except as otherwise provided in this
Agreement, all actions which any General Partner may take and all determinations
which any General Partner may take and all determinations which any General
Partners may make pursuant to this Agreement may be taken and made at the sole
and absolute discretion of such General Partner.
3.14 Merger or Reorganization of the General Partners. The following is not
prohibited and will not cause a dissolution of the Partnership: (a) a merger or
reorganization of the General Partners or the transfer of the ownership interest
of the General Partners; and (b) the assumption of the rights and duties of the
General Partners by the transferee of the rights and duties of the General
Partners by the transferee entity so long as such transferee is an affiliate
under the control of the General Partners.
3.15 Dissenting Limited Partners' Rights. If the Partnership participates
in any acquisition of the Partnership by another entity, any combination of the
Partnership with another entity through a merger or consolidation, or any
conversion of the Partnership into another form of business entity through (such
as a corporation) that requires the approval of the outstanding limited
partnership interest, the result of which would cause the other entity to issue
securities to the Limited Partners, then each Limited Partner who does not
approve of such reorganization (the "Dissenting Limited Partner") may require
the Partnership to purchase for cash, at its fair market value, the interest of
the Dissenting Limited Partner in the Partnership in accordance with Section
15679.2 of the California Corporations Code. The Partnership, however, may
itself convert to another form of business entity (such as a corporation, trust
or association) if the conversion will not result in a significant adverse
change in (i) the voting rights of the Limited Partners, (ii) the termination
date of the Partnership (currently, December 31, 2032, unless terminated earlier
in accordance with the Partnership Agreement), (iii) the compensation payable to
the General Partners or their Affiliates, or (iv) the Partnership's investment
objectives.
The General Partners will make the determination as to whether or not any
such conversion will result in a significant adverse change in any of the
provisions listed in the preceding paragraph based on various factors relevant
at the time of the proposed conversion, including an analysis of the historic
and projected operations of the Partnership; the tax consequences (from the
standpoint of the Limited Partners) of the conversion of the Partnership to
another form of business entity and of an investment in a limited partnership as
compared to an investment in the type of business entity into which the
Partnership would be converted; the historic and projected operating results of
the Partnership's Mortgage Investments, and the then-current value and
marketability of the Partnership's Mortgage Investments. In general, the General
Partners would consider any material limitation on the voting rights of the
Limited Partners or any substantial increase in the compensation payable to the
General Partners or their Affiliates to be a significant adverse change in the
listed provisions.
3.16 Exculpation and Indemnification. The General Partners shall have no
liability whatsoever to the Partnership or to any Limited Partner, so long as a
General Partner determined in good faith, that the course of conduct which
caused the loss or liability was in the best interests of the Partnership, and
such loss or liability did not result from the gross negligence or gross
misconduct of the General Partner being held harmless. The General Partners or
any Partnership employee or agent shall be entitled to be indemnified by the
Partnership, at the expense of the Partnership, against any loss or liability
(including attorneys' fees, which shall be paid as incurred) resulting from
assertion of any claim or legal proceeding relating to the activities of the
Partnership, including claims, or legal proceedings brought by a third party or
by Limited Partners, on their own behalf or as a Partnership derivative suit, so
long as the party to be indemnified determined in good faith that the course of
conduct which gave rise to such claim or proceeding was in the best interests of
the Partnership and such course of conduct did not constitute gross negligence
or gross misconduct; provided, however, any such indemnification shall only be
recoverable out of the assets of the Partnership and not from Limited Partners.
Nothing herein shall prohibit the Partnership from paying in whole or in part
the premiums or other charge for any type of indemnity insurance by which the
General Partners or other agents or employees of the Partnership are indemnified
or insured against liability or loss arising out of their actual or asserted
misfeasance or nonfeasance in the performance of their duties or out of any
actual or asserted wrongful act against the Partnership including, but not
limited to judgments, fines, settlements and expenses incurred in the defense of
actions, proceedings and appeals therefrom. Notwithstanding the foregoing,
neither the General Partners nor their affiliates shall be indemnified for any
liability imposed by judgment (including costs and attorneys' fees) arising from
or out of a violation of state or federal securities laws associated with the
offer and sale of Units offered hereby. However, indemnification will be allowed
for settlements and related expenses of lawsuits alleging securities law
violations and for expenses incurred in successfully defending such lawsuits
provided that (a) a court either approves indemnification of litigation costs if
the General Partners are successful in defending the action; or (b) the
settlement and indemnification is specifically approved by the court of law
which shall have been advised as to the current position of the Securities and
Exchange Commission (as to any claim involving allegations that the Securities
Act of 1933 was violated) and California Commissioner of Corporations or the
applicable state authority (as to any claim involving allegations that the
applicable state's securities laws were violated).
ARTICLE 4
CAPITAL CONTRIBUTIONS; THE LIMITED PARTNERS
4.1 Capital Contribution by General Partners. The General Partners,
collectively, shall contribute to the Partnership an amount in cash equal to
1/10 of 1% of the aggregate capital contributions of the Limited Partners.
4.2 Other Contributions.
(a) Capital Contribution by Initial Limited Partner. Upon the execution of
this Agreement, the Initial Limited Partner made a cash capital contribution to
the Partnership of $1,000. Upon the admission of additional Limited Partners to
the Partnership pursuant to Section 4.2(b) of this Agreement, the Partnership
promptly refunded to the Initial Limited Partner its $1,000 capital contribution
and upon receipt of such sum the Initial Limited Partner was withdrawn from the
Partnership as its Initial Limited Partner.
(b) Capital Contributions of Existing Limited Partners. The Existing
Limited Partners have contributed in the aggregate to the capital of the
Partnership an amount equal to $12,350,741 as of June 30, 1996.
(c) Capital Contributions of New Limited Partners. The New Limited Partners
shall contribute to the capital of the Partnership an amount equal to one
hundred dollars ($100) for each Unit subscribed for by each such New Limited
Partners, with a minimum subscription of twenty (20) Units per Limited Partner
(including subscriptions from entities of which such limited partner is the sole
beneficial owner). The total additional capital contributions of the New Limited
Partners will not exceed $30,000,000.
(d) Escrow Account. No escrow account will be established and all proceeds
from the sale of Units will be remitted directly to the Partnership.
Subscription Agreements shall be accepted or rejected within 30 days of
their receipt. All subscription monies deposited by persons whose subscriptions
are rejected shall be returned to such subscribers forthwith after such
rejection without interest. The public offering of Units shall terminate one
year from the effective date of the Prospectus unless fully subscribed at an
earlier date or terminated on an earlier date by the General Partners, or unless
extended by the General Partners for two additional one year periods.
(e) Subscription Account. Subscriptions received after the activation of
the Partnership will be deposited into a subscription account at a federally
insured commercial bank or other depository and invested in short-term
certificates of deposit, a money market or other liquid asset account.
Prospective investors whose subscriptions are accepted will be admitted into the
Partnership only when their subscription funds are required by the Partnership
to fund a Mortgage Investment, or the Formation Loan, to create appropriate
reserves or to pay organizational expenses or other proper Partnership purposes.
During the period prior to admittance of investors as Limited Partners, proceeds
from the sale of Units are irrevocable, and will be held by the General Partners
for the account of Limited Partners in the subscription account. Investors'
funds will be transferred from the subscription account into the Partnership on
a first-in, first-out basis. Upon admission to the Partnership, subscription
funds will be released to the Partnership and Units will be issued at the rate
of $100 per unit or fraction thereof. Interest earned on subscription funds
while in the subscription account will be returned to the subscriber, or if the
subscriber elects to compound earnings, the amount equal to such interest will
be added to his investment in the Partnership, and the number of Units actually
issued shall be increased accordingly. In the event only a portion of a
subscribing Limited Partner's funds are required, then all funds invested by
such subscribing Limited Partners at the same time shall be transferred. Any
subscription funds remaining in the subscription account after the expiration of
one (1) year from the date any such subscription funds were first received by
the General Partners shall be returned to the subscriber.
(f) Admission of Limited Partners. Subscribers shall be admitted as Limited
Partners when their subscription funds are required by the Partnership to fund a
Mortgage Investment, or the Formation Loan, to create appropriate reserves or to
pay organizational expenses, as described in the Prospectus. Subscriptions shall
be accepted or rejected by the General Partners on behalf of the Partnership
within 30 days of their receipt. Rejected subscriptions and monies shall be
returned to subscribers forthwith.
The Partnership shall amend Schedule A to the Limited Partnership Agreement
from time to time to effect the substitution of substituted Limited Partners in
the case of assignments, where the assignee does not become a substituted
Limited Partner, the Partnership shall recognize the assignment not later than
the last day of the calendar month following acceptance of the assignment by the
General Partners.
No person shall be admitted as a Limited Partner who has not executed and
filed with the Partnership the subscription form specified in the Prospectus
used in connection with the public offering, together with such other documents
and instruments as the General Partners may deem necessary or desirable to
effect such admission, including, but not limited to, the execution,
acknowledgment and delivery to the General Partners of a power of attorney in
form and substance as described in Section 2.8 hereof.
(g) Names, Addresses, Date of Admissions, and Contributions of Limited
Partners. The names, addresses, date of admissions and Capital Contributions of
the Limited Partners shall be set forth in Schedule A attached hereto, as
amended from time to time, and incorporate herein by reference.
4.3 Election to Receive Monthly, Quarterly or Annual Cash Distributions.
Upon subscription for Units, a subscribing Limited Partner must elect whether to
receive monthly, quarterly or annual cash distributions from the Partnership or
to receive additional Units in lieu of cash distributions. If the Limited
Partner initially elects to receive monthly, quarterly or annual distributions,
such election, once made, is irrevocable. However, a Limited Partner may change
his election regarding whether he wants to receive such distributions on a
monthly, quarterly or annual basis. If the Limited Partner initially elects to
receive additional Units in lieu of cash distributions, he may after three (3)
years, change his election and receive monthly, quarterly or annual cash
distributions. Earnings allocable to Limited Partners who elect to receive
additional Units will be retained by the Partnership for making further Mortgage
Investments or for other proper Partnership purposes, and such amounts will be
added to such Limited Partners' Capital Accounts. The Earnings from such further
Mortgage Investments will be allocated among all Partners; however, Limited
Partners who elect to receive additional Units will be credited with an
increasingly larger proportionate share of such Earnings than Limited Partners
who receive monthly, quarterly or annual distributions since, Limited Partners'
Capital Accounts who elect to receive additional Units will increase over time.
Annual distributions will be made after the calendar year.
4.4 Interest. No interest shall be paid on, or in respect of, any
contribution to Partnership Capital by any Partner, nor shall any Partner have
the right to demand or receive cash or other property in return for the
Partner's Capital Contribution.
4.5 Loans. Any Partner or Affiliate of a Partner may, with the written
consent of the General Partners, lend or advance money to the Partnership. If
the General Partners or, with the written consent of the General Partners, any
Limited Partner shall make any loans to the Partnership or advance money on its
behalf, the amount of any such loan or advance shall not be treated as a
contribution to the capital of the Partnership, but shall be a debt due from the
Partnership. The amount of any such loan or advance by a lending Partner or an
Affiliate of a Partner shall be repayable out of the Partnership's cash and
shall bear interest at a rate of not in excess of the greater of (i) the prime
rate established, from time to time, by any major bank selected by the General
Partners for loans to the bank's most creditworthy commercial borrowers, plus 5%
per annum, or (ii) the maximum rate permitted by law. None of the Partners or
their Affiliates shall be obligated to make any loan or advance to the
Partnership.
4.6 No Participation in Management. Except as expressly provided herein,
the Limited Partners shall take no part in the conduct or control of the
Partnership business and shall have no right or authority to act for or bind the
Partnership;
4.7 Rights and Powers of Limited Partners. In addition to the matters
described in Section 3.10 above, the Limited Partners shall have the right to
vote upon and take any of the following actions upon the approval of a Majority
of the Limited Partners, without the concurrence of the General Partners.
(a) Dissolution and termination of the Partnership prior to the expiration
of the term of the Partnership as stated in Section 2.7 above
(b) Amendment of this Agreement, subject to the limitations set forth in
Section 12.4;
(c) Disapproval of the sale of all or substantially all the assets of the
Partnership (as defined in Subsection 9.1(c) below); or
(d) Removal of the General Partners and election of a successor, in the
manner and subject to the conditions described in Section 3.10 above.
Except as expressly set forth above or otherwise provided for in this
Agreement, the Limited Partners shall have no other rights as set forth in the
California Act.
4.8 Meetings. The General Partners, or Limited Partners representing ten
percent (10%) of the outstanding Limited Partnership Interests, may call a
meeting of the Partnership and, if desired, propose an amendment to this
Agreement to be considered at such meeting. If Limited Partners representing the
requisite Limited Partnership Interests present to the General Partners a
statement requesting a Partnership meeting, the General Partners shall fix a
date for such meeting and shall, within twenty (20) days after receipt of such
statement, notify all of the Limited Partners of the date of such meeting and
the purpose for which it has been called. Unless otherwise specified, all
meetings of the Partnership shall be held at 2:00 P.M. at the office of the
Partnership, upon not less than ten (10) and not more than sixty (60) days
written notice. At any meeting of the Partnership, Limited Partners may vote in
person or by proxy. A majority of the Limited Partners, present in person or by
proxy, shall constitute a quorum at any Partnership meeting. Any question
relating to the Partnership which may be considered and acted upon by the
Limited Partners hereunder may be considered and acted upon by vote at a
Partnership meeting, and any consent required to be in writing shall be deemed
given by a vote by written ballot. Except as expressly provided above,
additional meeting and voting procedures shall be in conformity with Section
1563 of the California Corporations Code, as amended.
4.9 Limited Liability of Limited Partners. Units are non-assessable, and no
Limited Partner shall be personally liable for any of the expenses, liabilities,
or obligations of the Partnership or for any of the losses thereof beyond the
amount of such Limited Partners' capital contribution to the Partnership and
such Limited Partners' share of any undistributed net income and gains of the
Partnership, provided, that any return of capital to Limited Partners (plus
interest at the legal rate on any such amount from the date of its return) will
remain liable for the payment of Partnership debts existing on the date of such
return of capital; and, provided further, that such Limited Partner shall be
obligated upon demand by the General Partners to pay the Partnership cash equal
to the amount of any deficit remaining in his Capital Account upon winding up
and termination of the Partnership.
4.10 Representation of Partnership. Each of the Limited Partners hereby
acknowledges and agrees that the attorneys representing the Partnership and the
General Partners and their Affiliates do not represent and shall not be deemed
under the applicable codes of professional responsibility to have represented or
be representing any or all of the Limited Partners in any respect at any time.
Each of the Limited Partners further acknowledges and agrees that such attorneys
shall have no obligation to furnish the Limited Partners with any information or
documents obtained, received or created in connection with the representation of
the Partnership, the General Partners and/or their Affiliates.
ARTICLE 5
PROFITS AND LOSSES; CASH DISTRIBUTIONS
5.1 Income and Losses. All Income and Losses of the Partnership shall be
credited to and charged against the Partners in proportion to their respective
"Partnership Interests", as hereafter defined. The Partnership Interest of the
General Partners shall at all times be a total of one percent (1%), to be shared
equally among them and the Partnership Interest of the Limited Partners
collectively shall be ninety-nine percent (99%), which shall be allocated among
them according to their respective Limited Partnership Interests. Income and
Losses realized by the Partnership during any month shall be allocated to the
Partners as of the close of business on the last day of each calendar month, in
accordance with their respective Limited Partnership Interests and in proportion
to the number of days during such month that they owned such Limited Partnership
Interests, without regard to Income and Losses realized with respect to time
periods within such month.
5.2 Cash Earnings. Earnings as of the close of business on the last day of
each calendar month shall be allocated among the Partners in the same proportion
as Income and Losses as described in Section 5.1 above. Earnings allocable to
those Limited Partners who elect to receive cash distributions as described
below shall be distributed to them in cash as soon as practicable after the end
of each calendar month. The General Partners' allocable share of Earnings shall
also be distributed concurrently with cash distributions to Limited Partners.
Earnings allocable to those Limited Partners who elected to receive additional
Units shall be retained by the Partnership and credited to their respective
Capital Accounts as of the first day of the succeeding calendar month. Earnings
to Limited Partners shall be distributed only to those Limited Partners who
elect in writing, upon their initial subscription for the purchase of Units or
after three (3) years to receive such distributions during the term of the
Partnership. Each Limited Partner's decision whether to receive such
distributions shall be irrevocable, except as set forth in paragraph 4.3 above.
5.3 Cash Distributions Upon Termination. Upon dissolution and termination
of the Partnership, Cash Available for Distribution shall thereafter be
distributed to Partners in accordance with the provisions of Section 9.3 below.
5.4 Special Allocation Rules.
(a) For purposes of this Agreement, a loss or allocation (or item thereof)
is attributable to non-recourse debt which is secured by Partnership property to
the extent of the excess of the outstanding principal balance of such debt
(excluding any portion of such principal balance which would not be treated as
an amount realized under Internal Revenue Code Section 1001 and Paragraph (a) of
Section 1.1001-2 if such debt were foreclosed upon over the adjusted basis of
such property. This excess is herein defined as "Minimum Gain (whether taxable
as capital gain or as ordinary income) as more explicitly set forth in Treasury
Regulation T.704 l(b)(4)(iv)(c). Notwithstanding any other provision of Article
V, the allocation of loss or deduction (or item thereof, attributable to
non-recourse debt which is secured by Partnership property will be allowed only
to the extent that such allocation does not cause the sum of the deficit capital
account balances of the Limited Partners receiving such allocations to exceed
the minimum gain determined at the end of the Partnership able year to which the
allocations relate. The balance of such losses shall be allocated to the General
Partners. Any Limited Partner with a deficit capital account balance resulting
in whole or in part from allocations of loss or deduction (or item thereof)
attributable to non-recourse debt which is secured by Partnership property
shall, to the extent possible, be allocated income or gain (or item thereof) in
an amount not less than the minimum gain at a time no later than the time at
which the minimum gain is reduced below the sum if such deficit capital account
balances. This section is intended and shall be interpreted to comply with the
requirements of Treasury Regulation Section 1.704-l(b)(4)(iv)(e).
(b) In the event any Limited Partner receives any adjustments, allocations
or distributions, not covered by Section 75.4(a), so as to result in a deficit
capital account, items of Partnership income and gain shall be specially
allocated to such Limited Partners in an amount and manner sufficient to
eliminate the deficit balances in their Capital Accounts created by such
adjustments, allocations or distributions as quickly as possible. This Section
shall operate a qualified income offset as utilized in Treasury Regulation
Section 1.704-1(b)(23)(ii)(d).
(c) Syndication expenses for any fiscal year or other period shall be
specially allocated to the Limited Partners in proportion to their Units,
provided that if additional Limited Partners are admitted to the Partnership on
different dates, all Syndication Expenses shall be divided among the Persons who
own Units from time to time so that, to the extent possible, the cumulative
Syndication Expenses allocated with respect to each Unit at any time is the same
amount. In the event the General Partners shall determine that such result is
not likely to be achieved through future allocations of Syndication Expenses,
the General Partners may allocate a portion of Net Income or Losses so as to
achieve the same effect on the Capital Accounts of the Unit Holders,
notwithstanding any other provision of this Agreement.
(d) For purposes of determining the Net Income, Net Losses, or any other
items allocable to any period, Net Income, Net Losses, and any such other items
shall be determined on a daily, monthly, or other basis, as determined by the
General Partners using any permissible method under Code Section 706 and the
Treasury Regulations thereunder.
(e) Notwithstanding Section 5.1 and 5.2 hereof, (i) Net Losses allocable to
the period prior to the admission of any additional Limited Partners pursuant to
Section 4.2(b) and (e) hereof shall be allocated 99% to the General Partners and
1% to the Initial Limited Partner and Net Income during that same period, if
any, shall be allocated to the General Partners, and (ii) Profits or Losses
allocable to the period commencing with the admission of any additional such
Limited Partners and all subsequent periods shall be allocated pursuant to
Section 5.1.
(f) Except as otherwise provided in this Agreement, all items of
Partnership income, gain, loss, deduction, and any other allocations not
otherwise provided for shall be divided among the Partners in the same
proportions as they share Net Income or Net Losses, as the case may be, for the
year.
5.5 704(c) Allocations. In accordance with Code 704(c) and the Treasury
Regulations thereunder income, gain, loss, and deduction with respect to any
property contributed to the capital of the Partnership shall, solely for tax
purposes, be allocated among the Partners so as to take account of any variation
between the adjusted basis of such property to the Partnership for federal
income tax purposes and its initial fair market value.
Any elections or other decisions relating to such allocations shall be made
by the General Partners in any manner that reasonably reflects the purpose and
intention of this Agreement. Allocations pursuant to this Section 5.5 are solely
for purposes of federal, state, and local taxes and shall not affect, or in any
way be taken into account in computing, any Person's Capital Account or share of
Profits, Losses, other items, or distributions pursuant to any provision of this
Agreement.
5.6 Intent of Allocations. It is the intent of the Partnership that this
Agreement comply with the safe harbor test set out in Treasury Regulation
Sections 1.704-1(b)(2)(ii)(D) and 1.704-l(b)(4)(iv)(D) and the requirements of
those Sections, including the qualified income offset and minimum gain
chargeback, which are hereby incorporated by reference. If, for whatever
reasons, the Partnership is advised by counsel or its accountants that the
allocation provisions of this Agreement are unlikely to be respected for federal
income tax purposes, the General Partners are granted the authority to amend the
allocation provisions of this Agreement, to the minimum extent deemed necessary
by counsel or its accountants to effect the plan of Allocations and
Distributions provided in this Agreement. The General Partners shall have the
discretion to adopt and revise rules, conventions and procedures as it believes
appropriate with respect to the admission of Limited Partners to reflect
Partners' interests in the Partnership at the close of the years.
5.7 Guaranteed Payment for Offering Period. The Limited Partners shall
receive a guaranteed payment from the Earnings of the Partnership during the
Guaranteed Payment Period. The Guaranteed Payment for Offering Period,
calculated on a monthly basis, shall be equal to the greater of (i) the
Partnership's Earnings or (ii) the interest rate established by the Monthly
Weighted Average Cost of Funds for the 11th District Savings Institutions, as
announced by the Federal Home Loan Bank of San Francisco during the last week of
the preceding month, plus two points, up to a maximum interest rate of 12%. The
Weighted Average Cost of Funds is derived from the interest paid on savings
accounts, Federal Home Loan Bank advances, and other borrowed money adjusted for
valuation in the number of days in each month. The adjustment factors are 1.086
for February, 1.024 for 30 day months and 0.981 for 31 day months. As of the
date of the Prospectus the Monthly Weighted Average Cost of Funds for the 11th
District as announced August 30, 1996 for the period ended May 30, 1996 and in
effect until September 30, 1996 is 4.819%. The Guaranteed Payment Period is the
period commencing on the day a Limited Partner is admitted to the Partnership
and ending three months after the Offering Termination Date. To the extent the
interest rate to be paid is in excess of the Partnership's Earnings, the
Guaranteed Payment for Offering Period shall be payable by the General Partners
out of a Capital Contribution, to the Partnership and/or fees payable to the
General Partners or Redwood Mortgage which are lowered or waived. Amounts paid
pursuant to this Section 5.7 are intended to constitute guaranteed payments
within the meaning of I.R.C. Code Section 707(c) and shall not be treated as
distributions for purposes of computing the recipient's Capital Accounts. In the
event the Partnership is unable to make any payments required to be made
pursuant to this Section 5.7, the General Partners shall promptly make
additional Capital Contributions sufficient to enable the Partnership to make
such payments on a timely basis; provided however, that the General Partners
shall not be obligated to make such Capital Contribution if such amounts would
be subject to claims of creditors such that the guaranteed payments would not be
available to be made to the Limited Partners. In such event, the General
Partners shall pay the interest out of its fees as set forth above.
ARTICLE 6
BOOKS AND RECORDS, REPORTS AND RETURNS
6.1 Books and Records. The General Partners shall cause the Partnership to
keep the following:
(a) Complete books and records of account in which shall be entered fully
and accurately all transactions and other matters relating to the Partnership.
(b) A current list setting forth the full name and last known business or
residence address of each Partner which shall be listed in alphabetical order
and stating his respective Capital Contribution to the Partnership and share in
Profits and Losses.
(c) A copy of the Certificate of Limited Partnership and all amendments
thereto.
(d) Copies of the Partnership's federal, state and local income tax returns
and reports, if any, for the six (6) most recent years.
(e) Copies of this Agreement, including all amendments thereto, and the
financial statements of the Partnership for the three (3) most recent years.
All such books and records shall be maintained at the Partnership's
principal place of business and shall be available for inspection and copying
by, and at the sole expense of, any Partner, or any Partner's duly authorized
representatives, during reasonable business hours.
6.2 Annual Statements. The General Partners shall cause to be prepared at
least annually, at Partnership expense, financial statements prepared in
accordance with generally accepted accounting principles and accompanied by a
report thereon containing an opinion of an independent certified public
accounting firm. The financial statements will include a balance sheet,
statements of income or loss, partners' equity, and changes in financial
position. The General Partners shall have prepared at least annually, at
Partnership expense: (i) a statement of Cash Flow; (ii) Partnership information
necessary in the preparation of the Limited Partners' federal and state income
tax returns; (iii) a report of the business of the Partnership; (iv) a statement
as to the compensation received by the General Partners and their Affiliates,
during the year from the Partnership which shall set forth the services rendered
or to be rendered by the General Partners and their Affiliates and the amount of
fees received; and (v) a report identifying distributions from (a) Earnings of
that year, (b) Earnings of prior years, (c) Working Capital Reserves and other
sources, and (d) a report on the costs reimbursed to the General Partners, which
allocation shall be verified by independent public accountants in accordance
with generally accepted auditing standards. Copies of the financial statements
and reports shall be distributed to each Limited Partner within 120 days after
the close of each taxable year of the Partnership; provided, however, all
Partnership information necessary in the preparation of the Limited Partners'
federal income tax returns shall be distributed to each Limited Partner not
later than 90 days after the close of each fiscal year of the Partnership.
6.3 Semi-Annual Report. Until the Partnership is registered under Section
12(g) of the Securities Exchange Act of 1934, the General Partners shall have
prepared, at Partnership expense, a semi-annual report covering the first six
months of each fiscal year, commencing with the six-month period ending after
the Initial Closing Date, and containing unaudited financial statements (balance
sheet, statement of income or loss and statement of Cash Flow) and a statement
of other pertinent information regarding the Partnership and its activities
during the six-month period. Copies of this report shall be distributed to each
Limited Partner within 60 days after the close of the six-month period.
6.4 Quarterly Reports. The General Partners shall cause to be prepared
quarterly, at Partnership Expense: (i) a statement of the compensation received
by the General Partners and Affiliates during the quarter from the Partnership,
which statement shall set forth the services rendered by the General Partners
and Affiliates and the amount of fees received, and (ii) other relevant
information. Copies of the statements shall be distributed to each Limited
Partner within 60 days after the end of each quarterly period. The information
required by Form 10-Q (if required to be filed with the Securities and Exchange
Commission) will be supplied to each Limited Partner within 60 days of each
quarterly period. If the Partnership is registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended, the General Partners shall cause to
be prepared, at Partnership expense, a quarterly report for each of the first
three quarters in each fiscal year containing unaudited financial statements
(consisting of a balance sheet, a statement of income or loss and a statement of
Cash Flow) and a statement of other pertinent information regarding the
Partnership and its activities during the period covered by the report. Copies
of the statements and other pertinent information shall be distributed to each
Limited Partner within 60 days after the close of the quarter covered by the
report of the Partnership. The quarterly financial statements shall be
accompanied by the report thereon, if any, of the independent accountants
engaged by the Partnership or, if there is no such report, the certificate of
the General Partners that the financial statements were prepared without audit
from the books and records of the Partnership. Copies of the financial
statements, if any, filed with the Securities and Exchange Commission shall be
distributed to each Limited Partner within 60 days after the close of the
quarterly period covered by the report of the Partnership.
6.5 Filings. The General Partners, at Partnership expense, shall cause the
income tax returns for the Partnership to be prepared and timely filed with the
appropriate authorities. The General Partners, at Partnership expense, shall
also cause to be prepared and timely filed, with appropriate federal and state
regulatory and administrative bodies, all reports required to be filed with
those entities under then current applicable laws, rules and regulations. The
reports shall be prepared by the accounting or reporting basis required by the
regulatory bodies. Any Limited Partner shall be provided with a copy of any of
the reports upon request without expense to him. The General Partners, at
Partnership expense, shall file, with the securities administrators for the
various states in which this Partnership is registered, as required by such
states, a copy of each report referred to this Article VI.
6.6 Suitability Requirements. The General Partners, at Partnership expense,
shall maintain for a period of at least four years a record of the information
obtained to indicate that a Limited Partner complies with the suitability
standards set forth in the Prospectus.
6.7 Fiscal Matters.
(a) Fiscal Year. The Partnership shall adopt a fiscal year beginning on the
first day of January of each year and ending on the last day of December;
provided, however, that the General Partners in their sole discretion may,
subject to approval by the Internal Revenue Service and the applicable state
taxing authorities at any time without the approval of the Limited Partners
change the Partnership's fiscal year to a period to be determined by the General
Partners.
(b) Method of Accounting. The accrual method of accounting shall be used
for both income tax purposes and financial reporting purposes.
(c) Adjustment of Tax Basis. Upon the transfer of an interest in the
Partnership, the Partnership may, at the sole discretion of the General
Partners, elect pursuant to Section 754 of the Internal Revenue Code of 1986, as
amended, to adjust the basis of the Partnership property as allowed by Sections
734(b) and 743(b) thereof.
6.8 Tax Matters Partner. In the event the Partnership is subject to
administrative or judicial proceedings for the assessment or collection of
deficiencies for federal taxes for the refund of overpayments of federal taxes
arising out of a Partner's distributive share of profits, Michael R. Burwell,
for so long as he is a General Partner, shall act as the Tax-Matters Partner
("TMP") and shall have all the powers and duties assigned to the TMP under
Sections 6221 through 6232 of the Code and the Treasury Regulations thereunder.
The Partners agree to perform all acts necessary under Section 6231 of the Code
and Treasury Regulations thereunder to designate Michael R. Burwell as the TMP.
ARTICLE 7
TRANSFER OF PARTNERSHIP INTERESTS
7.1 Interest of General Partners. A successor or additional General Partner
may be admitted to the Partnership as follows:
(a) With the consent of all General Partners and a Majority of the Limited
Partners, any General Partner may at any time designate one or more Persons to
be successors to such General Partner or to be additional General Partners, in
each case with such participation in such General Partner's Partnership Interest
as they may agree upon, provided that the Limited Partnership Interests shall
not affected thereby; provided, however, that the foregoing shall be subject to
the provisions of Section 9.1(d) below, which shall be controlling in any
situation to which such provisions are applicable.
(b) Upon any sale or transfer of a General Partner's Partnership Interest,
the successor General Partner shall succeed to all the powers, rights, duties
and obligations of the assigning General Partner hereunder, and the assigning
General Partner shall thereupon be irrevocably released and discharged from any
further liabilities or obligations of or to the Partnership or the Limited
Partners accruing after the date of such transfer. The sale, assignment or
transfer of all or any portion of the outstanding stock of a corporate General
Partner, or of any interest therein, or an assignment of a General Partner's
Partnership Interest for security purposes only, shall not be deemed to be a
sale or transfer of such General Partner's Partnership interest subject to the
provisions of this Section 7.1.
(c) In the event that all or any one of the initial General Partners are
removed by the vote of a majority of Limited Partners and a successor or
additional General Partner(s) is designated pursuant to Section 3.10, prior to a
Person's admission as a successor or additional General Partner pursuant to this
Section 7.1, such Person shall execute a writing (i) acknowledging that Redwood
Mortgage, an Affiliate of the General Partners, has been repaying the Formation
Loans, which is discussed in Section 10.9, with the proceeds it receives from
loan brokerage commissions on Mortgage Investments, fees received from the early
withdrawal penalties and fees for other services paid by the Partnership, and
(ii) agreeing that if such successor or additional General Partner(s) begins
using the services of another mortgage loan broker or, loan servicing agent then
Redwood Mortgage shall immediately be released from all further obligations
under the Formation Loans (except for a proportionate share of the principal
installment due at the end of that year, prorated according to the days
elapsed).
7.2 Transfer of Limited Partnership Interest. No assignee of the whole or
any portion of a Limited Partnership Interest in the Partnership shall have the
right to become a substituted Limited Partner in place of his assignor, unless
the following conditions are first met.
(a) The assignor shall designate such intention in a written instrument of
assignment, which shall be in a form and substance reasonably satisfactory to
the General Partners;
(b) The written consent of the General Partners to such substitution shall
be obtained, which consent shall not be unreasonably withheld, but which, in any
event, shall not be given if the General Partners determine that such sale or
transfer may jeopardize the continued ability of the Partnership to qualify as a
"partnership" for federal income tax purposes or that such sale or transfer may
violate any applicable securities laws (including any investment suitability
standards);
(c) The assignor and assignee named therein shall execute and acknowledge
such other instruments as the General Partners may deem necessary to effectuate
such substitution, including, but not limited to, a power of attorney with
provisions more fully described in Sections 2.8 and 2.9 above;
(d) The assignee shall accept, adopt and approve in writing all of the
terms and provisions of this Agreement as the same may have been amended;
(e) Such assignee shall pay or, at the election of the General Partners,
obligate himself to pay all reasonable expenses connected with such
substitution, including but not limited to reasonable attorneys' fees associated
therewith; and
The Partnership has received, if required by the General Partners, a legal
opinion satisfactory to the General Partners that such transfer will not violate
the registration provisions of the Securities Act of 1933, as amended, which
opinion shall be furnished at the Limited Partner's expense.
7.3 Further Restrictions on Transfers. Notwithstanding any provision to the
contrary contained herein, the following restrictions shall also apply to any
and all proposed sales, assignments and transfer of Limited Partnership
Interests, and any proposed sale, assignment or transfer in violation of same to
void ab initio.
(a) No Limited Partner shall make any transfer or assignment of all or any
part of his Limited Partnership Interest if said transfer or assignment would,
when considered with all other transfers during the same applicable twelve month
period, cause a termination of the Partnership for federal or California state
income tax purposes.
(b) Instruments evidencing a Limited Partnership Interest shall bear and be
subject to legend conditions in substantially the following forms:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OR CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
(c) No Limited Partner shall make any transfer or assignment of all or any
of his Limited Partnership Interest if the General Partners determine such
transfer or assignment would result in the Partnership being classified as a
"publicly traded partnership" with the meaning of Section 7704(b) of the Code or
any regulations or rules promulgated thereunder.
ARTICLE 8
WITHDRAWAL FROM PARTNERSHIP
8.1 Withdrawal by Limited Partners. No Limited Partner shall have the right
to withdraw from the Partnership, receive cash distributions or otherwise obtain
the return of all or any portion of his Capital Account balance for a period of
one year after such Limited Partner's initial purchase of Units, except for
monthly, quarterly or annual distributions of Cash Available for Distribution,
if any, to which such Limited Partner may be entitled pursuant to Section 5.2
above. Withdrawal after a minimum one year holding period and before the five
year holding period as set forth below shall be permitted in accordance with
subsection (a) below. If a Limited Partner elects to withdraw either after the
one (1) year holding period or the five (5) year withholding period, he will
continue to receive distributions or have those Earnings compounded depending
upon his initial election, based upon the balance of his capital account during
the withdrawal period. Limited Partners may also withdraw after a five year
holding period in accordance with subsection b(i) and (ii). A Limited Partner
may withdraw or partially withdraw from the Partnership upon the following
terms:
(a) A Limited Partner who desires to withdraw from the Partnership after
the expiration of the above referenced one year period shall give written notice
of withdrawal ("Notice of Withdrawal") to the General Partners, which Notice of
Withdrawal shall state the sum or percentage interests to be withdrawn. Subject
to the provisions of subsections (e) and (f) below, such Limited Partner may
liquidate part or all of his entire Capital Account in four equal quarterly
installments beginning the quarter following the quarter in which the Notice of
Withdrawal is given, provided that such notice was received thirty (30) days
prior to the end of the quarter. An early withdrawal under this subsection (a)
shall be subject to a 10% early withdrawal penalty applicable to the sum
withdrawn as stated in the Notice of Withdrawal. The 10% penalty shall be
subject to and payable upon the terms set forth in subsection (c) below.
(b) A Limited Partner who desires to withdraw from the Partnership after
the expiration of the above referenced five year period shall give written
notice of withdrawal ("Notice of Withdrawal") to the General Partners, and
subject to the provisions of subsections (e) and (f) below such Limited
Partner's Capital Account shall be liquidated as follows:
(i) Except as provided in subsection (b)(ii) below, the Limited Partner's
Capital Account shall be liquidated in twenty (20) equal quarterly installments
each equal to 5% of the total Capital Account beginning the calendar quarter
following the quarter in which the Notice of Withdrawal is given, provided that
such notice is received thirty (30) days prior to the end of the preceding
quarter. Upon approval by the General Partners, the Limited Partner's Capital
Account may be liquidated upon similar terms over a period longer than twenty
(20) equal quarterly installments.
(ii) Notwithstanding subsection (b)(i) above, any Limited Partner may
liquidate part or all of his entire outstanding Capital Account in four equal
quarterly installments beginning of the calendar quarter following the preceding
quarter in which Notice of Withdrawal is given, provided that such notice was
received thirty (30) days prior to the end of the preceding quarter. An early
withdrawal under this subsection 8.1(b)(ii) shall be subject to a 10% early
withdrawal penalty applicable to any sums prior to the time when such sums could
have been withdrawn pursuant to the withdrawal provisions set forth in
subsection (a)(i) above.
(c) The 10% early withdrawal penalty will be deducted pro rata from the
Limited Partner's Capital Account. The 10% early withdrawal penalty will be
received by the Partnership, and a portion of the sums collected as such early
withdrawal penalty shall be applied by the Partnership toward the next
installment(s) of principal under the Formation Loan owed to the Partnership by
Redwood Mortgage, an Affiliate of the General Partners and any successor firm,
as described in Section 10.9 below. This portion shall be determined by the
ratio between the initial amount of the Formation Loan and the total amount of
the organizational and syndication costs incurred by the Partnership in this
offering of Units. The balance of such early withdrawal penalties shall be
retained by the Partnership for its own account. After the Formation Loan has
been paid, the 10% early withdrawal penalty will be used to pay the Continuing
Servicing Fee, as set forth in Section 10.13 below. The balance of such early
withdrawal penalties shall be returned by the Partnership for its own account.
(d) Commencing with the end of the calendar month in which such Notice of
Withdrawal is given, and continuing on or before the twentieth day after the end
of each month thereafter, any Cash Available for Distribution allocable to the
Capital Account (or portion thereof) with respect to which Notice of Withdrawal
has been given shall also be distributed in cash to the withdrawing Limited
Partner in the manner provided in Section 5.2 above.
(e) During the liquidation period described in subsections 8.1(a) and (b),
the Capital Account of a withdrawing Limited Partner shall remain subject to
adjustment as described in Section 1.3 above. Any reduction in said Capital
Account by reason of an allocation of Losses, if any, or otherwise shall reduce
all subsequent liquidation payments proportionately. In no event shall any
Limited Partner receive cash distributions upon withdrawal from the Partnership
if the effect of such distribution would be to create a deficit in such Limited
Partner's Capital Account.
(f) Payments to withdrawing Limited Partners shall at all times be subject
to the availability of sufficient cash flow generated in the ordinary course of
the Partnership's business, and the Partnership shall not be required to
liquidate outstanding Mortgage Investments prior to their maturity dates for the
purposes of meeting the withdrawal requests of Limited Partners. For this
purpose, cash flow is considered to be available only after all current
Partnership expenses have been paid (including compensation to the General
Partners and Affiliates) and adequate provision has been made for the payment of
all monthly or annual cash distributions on a pro rata basis which must be paid
to Limited Partners who elected to receive such distributions upon subscription
for Units pursuant to Section 4.3 or who changed their initial election to
compound Earnings as set forth in Section 4.3. Furthermore, no more than 20% of
the total Limited Partners' Capital Accounts outstanding for the beginning of
any calendar year shall be liquidated during any calendar year. Notwithstanding
the 20% limitation, the General Partners shall have the discretion to further
limit the percentage of the total Limited Partners' Capital Accounts that may be
withdrawn in order to comply with any Regulations to be enacted pursuant to
Section 7704 of the Code and the safe harbor provisions set forth in Notice
88-75 to avoid the Partnership being taxed as a corporation. If Notices of
Withdrawal in excess of these limitations are received by the General Partners,
the priority of distributions among Limited Partners shall be determined as
follows: first, to those Limited Partners withdrawing Capital Accounts according
to the 20 quarter or longer installment liquidation period described under
subsection (b)(i) above, then to ERISA plan Limited Partners withdrawing Capital
Accounts under subsection (b)(ii) above, then to all other Limited Partners
withdrawing Capital Accounts under subsection (b)(ii) above, and finally to all
other Limited Partners withdrawing Capital Accounts under subsection (a) above.
8.2 Retirement by General Partners. Any one or all of the General Partners
may withdraw ("retire") from the Partnership upon not less than six (6) months
written notice of the same to all Limited Partners. Any retiring General Partner
shall not be liable for any debts, obligations or other responsibilities of the
Partnership or this Agreement arising after the effective date of such
retirement.
8.3 Payment to Terminated General Partner. If the business of the
Partnership is continued as provided in Section 9.1(d) or 9.1(e) below upon the
removal, retirement, death, insanity, dissolution, or bankruptcy of a General
Partner, then the Partnership shall pay to such General Partner, or his/its
estate, a sum equal to such General Partner's outstanding Capital Account as of
the date of such removal, retirement, death, insanity, dissolution or
bankruptcy, payable in cash within thirty (30) days after such date. If the
business of the Partnership is not so continued, then such General Partner shall
receive from the Partnership such sums as he may be entitled to receive in the
course of terminating the Partnership and winding up its affairs, as provided in
Section 9.3 below. ARTICLE 9 DISSOLUTION OF THIS PARTNERSHIP; MERGER OF THE
PARTNERSHIP
9.1 Events Causing Dissolution. The Partnership shall dissolve upon
occurrence of the earlier of the following events:
(a) Expiration of the term of the Partnership as stated in Section 2.7
above.
(b) The affirmative vote of a majority of the Limited Partners.
(c) The sale of all or substantially all of the Partnership's assets;
provided, for purposes of this Agreement the term "substantially all of the
Partnership's assets" shall mean assets comprising not less than seventy percent
(70%) of the aggregate fair market value of the Partnership's total assets as of
the time of sale.
(d) The retirement, death, insanity, dissolution or bankruptcy of a General
Partner unless, within ninety (90) days after any such event (i) the remaining
General Partners, if any, elect to continue the business of the Partnership, or
(ii) if there are no remaining General Partners, all of the Limited Partners
agree to continue the business of the Partnership and to the appointment of a
successor General Partner who executes a written acceptance of the duties and
responsibilities of a General Partner hereunder.
(e) The removal of a General Partner, unless within ninety (90) days after
the effective date of such removal (i) the remaining General Partners, if any,
elect to continue the business of the Partnership, or (ii) if there are no
remaining General Partners, a successor General Partner is approved by a
majority of the Limited Partners as provided in Section 3.7 above, which
successor executes a written acceptance as provided therein and elects to
continue the business of the Partnership.
(f) Any other event causing the dissolution of the Partnership under the
laws of the State of California.
9.2 Winding Up and Termination. Upon the occurrence of an event of
dissolution, the Partnership shall immediately be terminated, but shall continue
until its affairs have been wound up. Upon dissolution of the Partnership,
unless the business of the Partnership is continued as provided above, the
General Partners will wind up the Partnership's affairs as follows:
(a) No new loans shall be made or purchased;
(b) Except as may be agreed upon by a majority of the Limited Partners in
connection with a merger or consolidation described in Sections 9.5, 9.6 or 9.7,
the General Partners shall liquidate the assets of the Partnership as promptly
as is consistent with recovering the fair market value thereof, either by sale
to third parties or by servicing the Partnership's outstanding Mortgage
Investments in accordance with their terms; provided, however, the General
Partners shall liquidate all Partnership assets for the best price reasonably
obtainable in order to completely wind up the Partnership's affairs within five
(5) years after the date of dissolution;
(c) Except as may be agreed upon by a majority of the Limited Partners in
connection with a merger or consolidation described in Sections 9.5, 9.6 or 9.7,
all sums of cash held by the Partnership as of the date of dissolution, together
with all sums of cash received by the Partnership during the winding up process
from any source whatsoever, shall be distributed in accordance with Section 9.3
below.
9.3 Order of Distribution of Assets. In the event of dissolution as
provided in Section 9.1 above, the cash of the Partnership shall be distributed
as follows:
(a) All of the Partnership's debts and liabilities to persons other than
Partners shall be paid and discharged;
(b) All of the Partnership's debts and liabilities to Partners shall be
paid and discharged;
(c) The balance of the cash of the Partnership shall be distributed to the
Partners in proportion to their respective outstanding Capital Accounts.
Upon dissolution, each Limited Partner shall look solely to the assets of
the Partnership for the return of his Capital Contribution, and if the
Partnership assets remaining after the payment or discharge of the debts and
liabilities of the Partnership is insufficient to return the Capital
Contribution of each Limited Partner, such Limited Partner shall have no
recourse against the General Partners or any other Limited Partner. The
winding-up of the affairs of the Partnership and the distribution of its assets
shall be conducted exclusively by the General Partners. It is hereby authorized
to do any and all acts and things authorized by law for these purposes. In the
event of insolvency, dissolution, bankruptcy or resignation of all of the
General Partners or removal of the General Partners by the Limited Partners, the
winding up of the affairs of the Partnership and the distribution of its assets
shall be conducted by such person or entity as may be selected by a vote of a
majority of the outstanding Units, which person or entity is hereby authorized
to do any and all acts and things authorized by law for such purposes.
9.4 Compliance With Timing Requirements of Regulations. In the event the
Partnership is "liquidated" within the meaning of Treasury Regulation Section
1.704-1(b)(2)(ii)(g), (a) distributions shall be made pursuant to this Article 9
(if such liquidation constitutes a dissolution of the Partnership) or Article 5
hereof (if it does not) to the General Partners and Limited Partners who have
positive Capital Accounts in compliance with Treasury Regulation Section
1.704-1(b)(2)(ii)(b)(2) and (b) if the General Partners' Capital Accounts have a
deficit balance (after giving effect to all contributions, distributions, and
allocations for all taxable years, including the year during which such
liquidation occurs), such General Partners shall contribute to the capital of
the Partnership the amount necessary to restore such deficit balance to zero in
compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(3);
9.5 Merger or Consolidation of the Partnership. The Partnership's business
may be merged or consolidated with one or more limited partnerships that are
Affiliates of the Partnership, provided the approval of the required percentage
in interest of Partners is obtained pursuant to Section 9.6. Any such merger or
consolidation may be effected by way of a sale of the assets of, or units in,
the Partnership or purchase of the assets of, or units in, another limited
partnership(s), or by any other method approved pursuant to Section 9.6. In any
such merger or consolidation, the Partnership may be either a disappearing or
surviving entity.
9.6 Vote Required. The principal terms of any merger or consolidation
described in Section 9.5 must be approved by the General Partners and by the
affirmative vote of a Majority of the Limited Partners.
9.7 Sections Not Exclusive. Sections 9.5 and 9.6 shall not be interpreted
as setting forth the exclusive means of merging or consolidating the Partnership
in the event that the California Revised Limited Partnership Act, or any
successor statute, is amended to provide a statutory method by which the
Partnership may be merged or consolidated.
ARTICLE 10
TRANSACTIONS BETWEEN THE PARTNERSHIP,
THE GENERAL PARTNERS AND AFFILIATES
10.1 Loan Brokerage Commissions. The Partnership will enter into Mortgage
Investment transactions where the borrower has employed and agreed to compensate
the General Partners or an Affiliate of the General Partners to act as a broker
in arranging the loan. The exact amount of the Loan Brokerage Commissions are
negotiated with prospective borrowers on a case by case basis. It is estimated
that such commissions will be approximately three percent (3%) to six percent
(6%) of the principal amount of each Mortgage Investment made during that year.
The Loan Brokerage Commissions shall be capped at 4% of the Partnership's total
assets per year.
10.2 Loan Servicing Fees. A General Partner or an Affiliate of a General
Partner may act as servicing agent with respect to all Mortgage Investments, and
in consideration for such collection efforts he/it shall be entitled to receive
a monthly servicing fee up to one-eighth of one percent (.125%) of the total
unpaid principal balance of each Mortgage Investment serviced, or such higher
amount as shall be customary and reasonable between unrelated Persons in the
geographical area where the property securing the Mortgage Investment is
located. The General Partners or an Affiliate may lower such fee for any period
of time and thereafter raise it up to the limit set forth above.
10.3 Escrow and Other Loan Processing Fees. The General Partners or an
Affiliate of a General Partner may act as escrow agent for Mortgage Investments
made by the Partnership, and may also provide certain document preparation,
notarial and credit investigation services, for which services the General
Partners shall be entitled to receive such fees as are permitted by law and as
are generally prevailing in the geographical area where the property securing
the Mortgage Investment is located.
10.4 Asset Management Fee. The General Partners shall receive a monthly fee
for managing the Partnership's Mortgage Investment portfolio and general
business operations in an amount up to 1/32 of one percent (.03125%) of the
total "net asset value" of all Partnership assets (as hereafter defined),
payable on the first day of each calendar month until the Partnership is finally
wound up and terminated. "Net asset value" shall mean total Partner's capital,
determined in accordance with generally accepted accounting principles as of the
last day of the preceding calendar month. The General Partners, in their
discretion, may lower such fee for any period of time and thereafter raise it up
to the limit set forth above.
10.5 Reconveyance Fees. The General Partners may receive a fee from a
borrower for reconveyance of a property upon full payment of a loan in an amount
as is generally prevailing in the geographical area where the property is
located.
10.6 Assumption Fees. An Affiliate of the General Partners may receive a
fee payable by a borrower for assuming a loan in an amount equal to a percentage
of the loan or a set fee.
10.7 Extension Fee. An Affiliate of the General Partners may receive a fee
payable by a borrower for extending the loan period in an amount equal to a
percentage of the loan.
10.8 Prepayment and Late Fees. Any prepayment and late fees collected by an
Affiliate of the General Partners in connection with Mortgage Investments shall
be paid by the Affiliate to the Partnership.
10.9 Formation Loans to Affiliate of General Partners. The Partnership may
lend to Redwood Mortgage, an Affiliate of the General Partners, a sum not to
exceed 10% of the total amount of Capital Contributions to the Partnership by
the Limited Partners, the proceeds of which shall be used solely for the purpose
of paying selling commissions (not including the Continuing Servicing Fee) and
all amounts payable in connection with unsolicited orders received by the
General Partners. The Formation Loans shall be unsecured and shall be evidenced
by a non-interest bearing promissory note executed by Redwood Mortgage in favor
of the Partnership. The First Formation Loan will be repaid in ten (10) equal
annual installments of principal without interest, commencing on December 31 of
the year in which the offering terminates. The Second Formation Loan will be
repaid as follows: Upon the commencement of this offering, Redwood Mortgage
shall make annual installments of one-tenth of the principal balance of the
Formation loan as of December 31 of each year. Such payment shall be due and
payable by December 31 of the following year with the first payment due by
December 31, 1997 assuming this offering commences in 1996. The principal
balance of the Second Formation Loan will increase as additional sales of Units
are made each year. The amount of the annual installment payment to be made by
Redwood Mortgage during the offering stage, will be determined by the principal
balance of the Second Formation Loan on December 31 of each year. Upon the
completion of this offering the balance of the Second Formation Loan will be
repaid in ten (10) equal annual installments of principal, without interest,
commencing on December 31 of the year following the year the offering
terminates. Redwood Mortgage at its option may prepay all or any part of the
Formation Loans. Redwood Mortgage will repay the Formation Loans principally
from loan brokerage commissions earned on Mortgage Investments, early withdrawal
penalties and other fees paid by the Partnership. Since Redwood Mortgage will
use the proceeds from loan brokerage commissions on Mortgage Investments to
repay the Formation Loans, if all or any one of the initial General Partners is
removed as a General Partner by the vote thereafter designated, and if such
successor or additional General Partner(s) begins using any other loan brokerage
firm for the placement of Mortgage Investments, Redwood Mortgage will be
immediately released from any further obligation under the Formation Loans
(except for a proportionate share of the principal installment due at the end of
that year, pro rated according to the days elapsed.) In addition, if all of the
General Partners are removed, no successor General Partners are elected, the
Partnership is liquidated and Redwood Mortgage is no longer receiving any
payments for services rendered, the debt on the Formation Loans shall be
forgiven and Redwood Mortgage will be immediately released from any further
obligations under the Formation Loans.
10.10 Sale of Mortgage Investments and Loans Made to General Partners or
Affiliates. The Partnership may sell existing Mortgage Investments to the
General Partners or their Affiliates, but only so long as the Partnership
receives net sales proceeds from such sales in an amount equal to the total
unpaid balance of principal, accrued interest and other charges owing under such
Mortgage Investment, or the fair market value of such Mortgage Investment,
whichever is greater. Notwithstanding the foregoing, the General Partners shall
be under no obligation to purchase any Mortgage Investment from the Partnership
or to guarantee any payments under any Mortgage Investment. Generally, Mortgage
Investments will not be made to the General Partners or their Affiliates.
However, the Partnership may make the Formation Loans to Redwood Mortgage and
may in certain limited circumstances, loan funds to Affiliates to purchase real
estate owned by the Partnership as a result of foreclosure.
10.11 Purchase of Mortgage Investments from General Partners or Affiliates.
The Partnership may purchase existing Mortgage Investments from the General
Partners or Affiliates, provided that the following conditions are met:
(a) At the time of purchase the borrower shall not be in default under the
Mortgage Investment;
(b) No brokerage commissions or other compensation by way of premiums or
discounts shall be paid to the General Partners or their Affiliates by reason of
such purchase; and
(c) If such Mortgage Investment was held by the seller for more than 180
days, the seller shall retain a ten percent (10%) interest in such Mortgage
Investment.
10.12 Interest. Redwood Mortgage shall be entitled to keep interest if any,
earned on the Mortgage Investments between the date of deposit of borrower's
funds into Redwood Mortgage's trust account and date of payment of such funds by
Redwood Mortgage.
10.13 Sales Commissions; Continuing Servicing Fee. The Units are being
offered to the public on a best efforts basis through the Participating
Broker-Dealers. The Participating Broker-Dealers may receive commissions under
one of the two following options: (i) at the rate of either 5% or 9% (depending
upon the investor's election to receive cash distributions or to compound
earnings in the Partnership) of the Gross Proceeds on all of their sales; or
(ii) at the rate of 4% or 7% (depending upon the investor's election to receive
cash distributions or to compound earnings in the Partnership) of the Gross
Proceeds on all of their sales together with the Continuing Servicing Fee. The
Continuing Servicing Fee is equal to one quarter of one percent (0.25% payable
annually in quarterly installments) of a Partner's Capital Account. In the event
the Partnership receives any unsolicited orders directly from an investor who
did not utilize the services of a Participating Broker Dealer, Redwood Mortgage
through the Formation Loans will pay to the Partnership an amount equal to the
amount of the sales commissions otherwise attributable to a sale of a Unit
through a Participating Broker Dealer assuming no Continuing Servicing Fee is
paid. The Partnership will in turn credit such amounts received from Redwood
Mortgage to the account of the Investor who placed the unsolicited order.
Sales commissions will not be paid by the Partnership out of the offering
proceeds. All sales commissions will be paid by Redwood Mortgage, an affiliate
of the General Partners, which will also act as the mortgage loan broker for all
Mortgage Investments as set forth in Section 10.7 above. The Continuing
Servicing Fee will be paid by Redwood Mortgage, but will not be included in the
Formation Loans. The Partnership will loan to Redwood Mortgage funds in an
amount equal to the sales commissions (not including any Continuing Servicing
Fees) and all amounts payable in connection with unsolicited sales by the
General Partners, as a Formation Loan. Units may also be offered or sold
directly by the General Partners for which they will receive no sales
commissions. The Partnership shall reimburse Participating Broker-Dealers for
bona fide due diligence expenses in an amount up to .5% of the Gross Proceeds.
10.14 Reimbursement. The Partnership shall reimburse the General Partners
or their Affiliates for the actual cost to the General Partners or their
Affiliates (or pay directly the cost) of goods and materials used for or by the
Partnership and obtained from entities unaffiliated with the General Partners or
their Affiliates. The Partnership shall also pay or reimburse the General
Partners or their Affiliates for the cost of administrative services necessary
to the prudent operation of the Partnership, provided that such reimbursement
will be at the lower of (A) the actual cost to the General Partners or their
Affiliates of providing such services, or (B) 90% of the amount the Partnership
would be required to pay to non affiliated persons rendering similar services in
the same or comparable geographical location. The cost of administrative
services as used in this subsection shall mean the pro rata cost of personnel,
including an allocation of overhead directly attributable to such personnel,
based on the amount of time such personnel spent on such services, or other
method of allocation acceptable to the program's independent certified public
accountant.
10.15 Non-reimbursable Expenses. The General Partners will pay and will not
be reimbursed by the Partnership for any general or administrative overhead
incurred by the General Partners in connection with the administration of the
Partnership which is not directly attributable to services authorized by
Sections 10.15 or 10.17.
10.16 Operating Expenses. Subject to Sections 10.15 and 10.16 all expenses
of the Partnership shall be billed directly to and paid by the Partnership which
may include, but are not limited to: (i) all salaries, compensation, travel
expenses and fringe benefits of personnel employed by the Partnership and
involved in the business of the Partnership. including persons who may also be
employees of the General Partners or Affiliates of the General Partners, but
excluding control persons of either the General Partners or Affiliates of the
General Partners, (ii) all costs of borrowed money, taxes and assessments on
Partnership properties foreclosed upon and other taxes applicable to the
Partnership, (iii) legal, audit, accounting, and brokerage fees, (iv) printing,
engraving and other expenses and taxes incurred in connection with the issuance,
distribution, transfer, registration and recording of documents evidencing
ownership of an interest in the Partnership or in connection with the business
of the Partnership, (v) fees and expenses paid to leasing agents, consultants,
real estate brokers, insurance brokers, and other agents, (vi) costs and
expenses of foreclosures, insurance premiums, real estate brokerage and leasing
commissions and of maintenance of such property, (vii) the cost of insurance as
required in connection with the business of the Partnership, (viii) expenses of
organizing, revising, amending, modifying or terminating the Partnership, (ix)
expenses in connection with Distributions made by the Partnership, and
communications, bookkeeping and clerical work necessary in maintaining relations
with the Limited Partners and outside parties, including the cost of printing
and mailing to such persons certificates for Units and reports of meetings of
the Partnership, and of preparation of proxy statements and solicitations of
proxies in connection therewith, (x) expenses in connection with preparing and
mailing reports required to be furnished to the Limited Partners for investor,
tax reporting or other purposes, or other reports to the Limited Partners which
the General Partners deem to be in the best interests of the Partnership, (xi)
costs of any accounting, statistical or bookkeeping equipment and services
necessary for the maintenance of the books and records of the Partnership
including, but not limited to, computer services and time, (xii) the cost of
preparation and dissemination of the information relating to potential sale,
refinancing or other disposition of Partnership property, (xiii) costs incurred
in connection with any litigation in which the Partnership is involved, as well
as in the examination, investigation or other proceedings conducted by any
regulatory agency with jurisdiction over the Partnership including legal and
accounting fees incurred in connection therewith. (xiv) costs of any computer
services used for or by the Partnership, (xv) expenses of professionals employed
by the Partnership in connection with any of the foregoing, including attorneys,
accountants and appraisers. For the purposes of Sections 10.17(i), a control
person is someone holding a 5% or greater equity interest in the General
Partners or affiliate or a person having the power to direct or cause the
direction of the General Partners or Affiliate, whether.through the ownership of
voting securities, by contract or otherwise.
10.17 Deferral of Fees and Expense Reimbursement. The General Partners may
defer payment of any fee or expense reimbursement provided for herein. The
amount so deferred shall be treated as a non-interest bearing debt of the
Partnership and shall be paid from any source of funds available to the
Partnership, including cash available for Distribution prior to the
distributions to Limited Partners provided for in Article 5.
10.18 Payment upon Termination. Upon the occurrence of a terminating event
specified in Article 9 of the termination of an affiliate's agreement, any
portion of any reimbursement or interest in the Partnership payable according to
the provisions of this Agreement if accrued, but not yet paid, shall be paid by
the Partnership to the General Partners or Affiliates in cash, within thirty
(30) days of the terminating event or termination date set forth in the written
notice of termination.
ARTICLE 11
ARBITRATION
11.1 Arbitration. As between the parties hereto, all questions as to rights
and obligations arising under the terms of this Agreement are subJect to
arbitration, including any question concerning any right or duty under the
Securities Act of 1933, the Securities Exchange Act of 1934 and the securities
laws of any state in which Units are offered, and such arbitration shall be
governed by the rules of the American Arbitration Association.
11.2 Demand for Arbitration. If a dispute should arise under this
Agreement, any Partner may within 60 days make a demand for arbitration by
filing a demand in writing for the other.
11.3 Appointment of Arbitrators. The parties may agree upon one arbitrator,
but in the event that they cannot agree) there shall be three, one named in
writing by each of the parties within five (5) days after demand for arbitration
is given and a third chosen by the two appointed. Should either party refuse or
neglect to join in the appointment of the arbitrator(s) or to furnish the
arbitrator(s) with any papers or information demanded, the arbitrator(s) are
empowered by both parties to proceed ex parte.
11.4 Hearing. Arbitration shall take place in San Mateo, California, and
the hearing before the arbitrator(s) of the matter to be arbitrated shall be at
the time and place within said city as is selected by the arbitrator(s). The
arbitrator(s) shall select such time and place promptly after his (or their)
appointment and shall give written notice thereof to each party at least sixty
(60) days prior to the date so fixed. At the hearing any relevant evidence may
be presented by either party, and the formal rules of evidence applicable to
judicial proceedings shall not govern. Evidence may be admitted or excluded in
the sole discretion of the arbitrator(s). Said arbitrator(s) shall hear and
determine the matter and shall execute and acknowledge their award in writing
and cause a copy thereof to be delivered to each of the parties.
11.5 Arbitration Award. If there is only one arbitrator, his decision shall
be binding and conclusive on the parties, and if there are three arbitrators the
decision of any two shall be binding and conclusive. The submission of a dispute
to the arbitrator(s) and the rendering of his (or their) decision shall be a
condition precedent to any right of legal action on the dispute. A judgment
confirming the award of the arbitrator(s) may be rendered by any Court having
Jurisdiction; or such Court may vacate, modify, or correct the award in
accordance with the prevailing sections of California State Law.
11.6 New Arbitrators. If three arbitrators are selected under the foregoing
procedure but two of the three fail to reach an Agreement in the determination
of the matter in question, the matter shall be decided by three new arbitrators
who shall be appointed and shall proceed in the same manner, and the process
shall be repeated until a decision is finally reached by two of the three
arbitrators selected.
11.7 Costs of Arbitration. The costs of such arbitration shall be borne by
the losing party or in such proportions as the arbitrators shall determine.
ARTICLE 12
MISCELLANEOUS
12.1 Covenant to Sign Documents. Without limiting the power granted by
Sections 2.8 and 2.9, each Partner covenants, for himself and his successors and
assigns, to execute, with acknowledgment or verification, if required, any and
all certificates, documents and other writings which may be necessary or
expedient to form the Partnership and to achieve its purposes, including,
without limitation, the Certificate of Limited Partnership and all amendments
thereto, and all such filings, records or publications necessary or appropriate
laws of any jurisdiction in which the Partnership shall conduct its business.
12.2 Notices. Except as otherwise expressly provided for in this Agreement,
all notices which any Partner may desire or may be required to give any other
Partners shall be in writing and shall be deemed duly given when delivered
personally or when deposited in the United States mail, first-class postage
pre-paid. Notices to Limited Partners shall be addressed to the Limited Partners
at the last address shown on the Partnership records. Notices to the General
Partners or to the Partnership shall be delivered to the Partnership's principal
place of business, as set forth in Section 2.3 above or as hereafter charged as
provided herein. Notice to any General Partner shall constitute notice to all
General Partners.
12.3 Right to Engage in Competing Business. Nothing contained herein shall
preclude any Partner from purchasing or lending money upon the security of any
other property or rights therein, or in any manner investing in, participating
in, developing or managing any other venture of any kind, without notice to the
other Partners, without participation by the other Partners, and without
liability to them or any of them. Each Limited Partner waives any right he may
have against the General Partners for capitalizing on information received as a
consequence of the General Partners management of the affairs of this
Partnership.
12.4 Amendment. This Agreement is subject to amendment by the affirmative
vote of a Majority of the Limited Partners in accordance with Section 4.5;
provided, however, that no such amendment shall be permitted if the effect of
such amendment would be to increase the duties or liabilities of any Partner or
materially change any Partner's interest in Profits, Losses, Partnership assets,
distributions, management rights or voting rights, except as agreed by that
Partner. In addition, and notwithstanding anything to the contrary contained in
this Agreement the General Partners shall have the right to amend this
Agreement, without the vote or consent of any of the Limited Partnership, when:
(a) There is a change in the name of the Partnership or the amount of the
contribution of any Limited Partner;
(b) A Person is substituted as a Limited Partner;
(c) An Additional Limited Partner is admitted;
(d) A Person is admitted as a successor or additional General Partner in
accordance with the terms of this Agreement;
(e) A General Partner retires, dies, files a petition in bankruptcy,
becomes insane or is removed, and the Partnership business is continued by a
remaining or replacement General Partner;
(f) There is a change in the character of the business of the Partnership;
(g) There is a change in the time as stated in the Agreement for the
dissolution of the Partnership, or the return of a Partnership contribution;
(h) To cure any ambiguity, to correct or supplement any provision which may
be inconsistent with any other provision, or to make any other provisions with
respect to matters or questions arising under this Agreement which will not be
inconsistent with the provisions of this Agreement;
(i) To delete or add any provision of this Agreement required to be so
deleted or added by the Staff of the Securities and Exchange Commission or by a
State "Blue Sky" Administrator or similar official, which addition or deletion
is deemed by the Administrator or official to be for the benefit or protection
of the Limited Partners;
(j) To elect for the Partnership to be governed by any successor California
statute governing limited partnerships; and
(k) To modify provisions of this Agreement as noted in Sections 1.3 and 5.6
to cause this Agreement to comply with Treasury Regulation Section 1.704-1(b).
The General Partners shall notify the Limited Partners within a reasonable
time of the adoption of any such amendment.
12.5 Entire Agreement. This Agreement constitutes the entire Agreement
between the parties and supersedes any and all prior agreements and
representations, either oral or in writing, between the parties hereto with
respect to the subject matter contained herein.
12.6 Waiver. No waiver by any party hereto of any breach of, or default
under, this Agreement by any other party shall be construed or deemed a waiver
of any other breach of or default under this Agreement, and shall not preclude
any party from exercising or asserting any rights under this Agreement with
respect to any other.
12.7 Severability. If any term, provision, covenant or condition of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the provisions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
12.8 Application of California law; Venue. This Agreement and the
application or interpretation thereof shall be governed, construed, and enforced
exclusively by its terms and by the law of the State of California and the
appropriate Courts in the County of San Mateo, State of California shall be the
appropriate forum for any litigation arising hereunder.
12.9 Captions. Section titles or captions contained in this Agreement are
inserted only as a matter of convenience and for reference and in no way define,
limit, extend or describe the scope of this Agreement.
12.10 Number and Gender. Whenever the singular number is used in this
Agreement and when required by the context, the same shall include the plural,
and the masculine gender shall include the feminine and neuter genders.
12.11 Counterparts. This Agreement may be executed in counterparts, any or
all of which may be signed by a General Partner on behalf of the Limited
Partners as their attorney-in-fact.
12.13 Waiver of Action for Partition. Each of the parties hereto
irrevocably waives during the term of the Partnership any right that it may have
to maintain any action for partition with respect to any property of the
Partnership.
12.14 Defined Terms. All terms used in this Agreement which are defined in
the Prospectus of Redwood Mortgage Investors VIII, dated _______________, 1996
shall have the meanings assigned to them in said Prospectus, unless this
Agreement shall provide for a specific definition in Article 2.
12.15 Assignability. Each and all of the covenants, terms, provisions and
arguments herein contained shall be binding upon and inure to the benefit of the
successors and assigns of the respective parties hereto, subject to the
requirements of Article 7.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hand the day
and year first above written.
GENERAL PARTNERS:
____________________________________________
D. Russell Burwell
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Michael R. Burwell
GYMNO CORPORATION
A California Corporation
By:
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D. Russell Burwell, President
LIMITED PARTNERS:
By: Gymno Corporation,
(General Partner and Attorney-in-Fact)
By:
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D. Russell Burwell, President
SCHEDULE A
LIMITED PARTNERS OF
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Name and Address Date of Admission Capital Contribution