10-Q 1 omif10q033113.htm OMIF 10-Q AT 3/31/13 omif10q033113.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2013

OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to __________

Commission file number 000-17248

OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
(Exact Name of Registrant as Specified In Its Charter)

California
  
68-0023931
(State or Other Jurisdiction
  
(I.R.S. Employer Identification No.)
of Incorporation or Organization)
    
     
2221 Olympic Boulevard
    
Walnut Creek, California
  
94595
(Address of Principal Executive Offices)
  
(Zip Code)
     
(925) 935-3840
    
Registrant’s Telephone Number, Including Area Code
    

NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 
1
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

             Large accelerated filer [   ]
        Accelerated filer [   ]
 
             Non-accelerated filer [   ]
       (Do not check if a smaller reporting company)
        Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [   ] No [X]

 
2
 

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
 
    Page
     
Item 1. Financial Statements 4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
     
Item 4. Controls and Procedures 50
 
PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings 51
     
Item 6. Exhibits 51
     
 
Exhibit 31.1
Exhibit 31.2
Exhibit 32
Exhibit 101

 
3
 


PART I. FINANCIAL INFORMATION

OWENS MORTGAGE INVESTMENT FUND,
 a California Limited Partnership

Consolidated Balance Sheets

March 31, 2013 and December 31, 2012

   
(UNAUDITED)
      
   
March 31
  
December 31
  
   
2013
  
2012
  
ASSETS
              
Cash and cash equivalents
  
$
20,107,220
  
$
21,131,505
  
Restricted cash
    
3,946,000
    
6,264,110
  
Loans secured by trust deeds, net of allowance for losses of $24,160,684 in 2013 and $24,417,897 in 2012
    
44,137,700
    
45,844,365
  
Interest and other receivables
    
2,333,881
    
3,485,061
  
Other assets, net of accumulated depreciation and amortization of $905,173 in 2013 and $877,589 in 2012
    
2,229,326
    
1,835,187
  
Investment in limited liability company
    
2,182,779
    
2,141,777
  
Real estate held for sale
    
56,135,028
    
56,173,094
  
Real estate held for investment, net of accumulated depreciation and amortization of $6,888,593 in 2013 and $6,518,160 in 2012
    
76,457,151
    
71,600,255
  
   Total Assets
  
$
207,529,085
  
$
208,475,354
  
               
LIABILITIES AND PARTNERS’ CAPITAL
              
LIABILITIES:
              
Accrued distributions payable
  
$
—
  
$
1,234,352
  
Due to general partner
    
453,048
    
298,349
  
Accounts payable and accrued liabilities
    
2,820,016
    
4,012,650
  
Deferred gain
    
1,327,406
    
1,327,406
  
Notes payable
    
13,342,122
    
13,384,902
  
Total Liabilities
    
17,942,592
    
20,257,659
  
               
Commitments and Contingencies (Note 11)
              
PARTNERS’ CAPITAL (units subject to redemption):
              
General partner
    
1,854,317
    
1,840,030
  
Limited partners
    
179,712,986
    
178,328,365
  
Total Owens Mortgage Investment Fund partners’ capital
    
181,567,303
    
180,168,395
  
Noncontrolling interests
    
8,019,190
    
8,049,300
  
   Total partners’ capital
    
189,586,493
    
188,217,695
  
   Total Liabilities and Partners’ Capital
  
$
207,529,085
  
$
208,475,354
  

The accompanying notes are an integral part of these consolidated financial statements.


 
4
 

OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Consolidated Statements of Operations

For the Three Months Ended March 31, 2013 and 2012
(UNAUDITED)

   
For the Three Months Ended
  
   
March 31
  
March 31
  
   
2013
  
2012
  
REVENUES:
              
Interest income on loans secured by trust deeds
  
$
887,229
  
$
614,120
  
Gain on foreclosure of loan
    
952,357
    
—
  
Gain on sale of real estate, net
    
30,337
    
—
  
Recognition of deferred gain on sale of real estate
    
—
    
804,929
  
Rental and other income from real estate properties
    
2,723,417
    
3,317,381
  
Income from investment in limited liability company
    
41,002
    
38,296
  
Other income
    
793
    
2,014
  
Total revenues
    
4,635,135
    
4,776,740
  
               
EXPENSES:
              
Management fees to general partner
    
439,772
    
441,107
  
Servicing fees to general partner
    
43,455
    
40,982
  
Administrative
    
78,653
    
49,939
  
Professional fees
    
168,375
    
416,081
  
Rental and other expenses on real estate properties
    
2,594,933
    
3,282,986
  
Interest expense
    
127,482
    
130,941
  
Reversal of provision for loan losses
    
(257,213
)
  
(389,214
)
Other
    
35,986
    
17,389
  
Total expenses
    
3,231,443
    
3,990,211
  
               
Net income
  
$
1,403,692
  
$
786,529
  
               
Less: Net loss (income) attributable to noncontrolling interests
    
26,240
    
(624,016
)
               
Net income attributable to Owens Mortgage
   Investment Fund
  
$
1,429,932
  
$
162,513
  
               
Net income allocated to general partner
  
$
14,603
  
$
1,695
  
               
Net income allocated to limited partners
  
$
1,415,329
  
$
160,818
  
               
Net income allocated to limited partners per weighted average limited partnership unit (278,606,000 average units in 2013 and 2012)
  
$
0.005
  
$
0.001
  

The accompanying notes are an integral part of these consolidated financial statements.

 
5
 



OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Consolidated Statements of Partners’ Capital

For the Three Months Ended March 31, 2013 and 2012
(UNAUDITED)


   
General
  
Limited partners
  
Total OMIF
        
Total
  
Partners’
    
Noncontrolling
  
Partners'
  
   
partner
  
Units
  
Amount
  
capital
    
interests
  
capital
  
                                       
Balances, December 31, 2011
  
$
1,848,993
    
278,605,524
  
$
179,196,966
  
$
181,045,959
  
$
        17,519,828
    
    198,565,787
  
                                       
Net income
    
1,695
    
—
    
160,818
    
162,513
    
624,016
    
786,529
  
Change in ownership interests in consolidated LLC (Note 6)
    
28,150
    
—
    
2,731,617
    
2,759,767
    
(9,959,767
)
  
(7,200,000
)
Partners’ distributions
    
(1,365
)
  
—
    
(132,285
)
  
(133,650
)
  
(4,362
)
  
(138,012
)
                                       
Balances, March 31, 2012
  
$
1,877,473
    
278,605,524
  
$
181,957,116
  
$
183,834,589
  
$
8,179,715
  
$
  192,014,304
  
                                       
Balances, December 31, 2012
  
$
1,840,030
    
278,605,524
  
$
178,328,365
  
$
180,168,395
  
$
            8,049,300
  
$
    188,217,695
  
Net income (loss)
    
14,603
    
—
    
1,415,329
    
1,429,932
    
(26,240
)
  
1,403,692
  
Partners’ distributions
    
(316
)
  
—
    
(30,708
)
  
(31,024
)
  
(3,870
)
  
(34,894
)
                                       
Balances, March 31, 2013
  
  $
1,854,317
    
278,605,524
  
  $
179,712,986
  
  $
181,567,303
  
$
8,019,190
  
$
189,586,493
  
                                       


The accompanying notes are an integral part of these consolidated financial statements.

 
6
 
 


OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2013 and 2012
(UNAUDITED)

   
March 31
  
March 31
  
   
2013
  
2012
  
CASH FLOWS FROM OPERATING ACTIVITIES:
              
Net income
  
$
1,403,692
  
$
786,529
  
Adjustments to reconcile net income to net cash used in operating activities:
              
Gain on sale of real estate, net
    
(30,337
)
  
—
  
Gain on foreclosure of loan
    
(952,357
)
  
—
  
Recognition of deferred gain on sale of real estate
    
—
    
(804,929
)
Income from investment in limited liability company
    
(41,002
)
  
(38,296
)
Reversal of provision for loan losses
    
(257,213
)
  
(389,214
)
Bad debt expense
    
9,906
    
1,500
  
Depreciation and amortization
    
398,017
    
753,017
  
Changes in operating assets and liabilities:
              
Interest and other receivables
    
666,778
    
(3,557
)
Other assets
    
(421,723
)
  
(316,380
)
Accounts payable and accrued liabilities
    
(1,192,634
)
  
(228,175
)
Due to general partner
    
154,699
    
(5,590
)
Net cash used in operating activities
    
(262,174
)
  
(245,095
)
               
CASH FLOWS FROM INVESTING ACTIVITIES:
              
Principal collected on loans
    
100,878
    
5,148,274
  
Purchases of loans secured by trust deeds
    
(1,400,672
)
  
—
  
Investment in real estate properties
    
(541,804
)
  
(725,413
)
Net proceeds from disposition of real estate properties
    
73,403
    
270,838
  
Purchases of vehicles, equipment and furniture
    
—
    
(12,870
)
Transfer from restricted to unrestricted cash
    
2,318,110
    
—
  
Maturity of certificates of deposit
    
—
    
995,678
  
Net cash provided by investing activities
    
549,915
    
5,676,507
  
               
CASH FLOWS FROM FINANCING ACTIVITIES:
              
Repayments on note payable
    
(42,780
)
  
(39,335
)
Distributions to noncontrolling interests
    
(3,870
)
  
(4,362
)
Purchase of members’ interest in consolidated LLC
    
—
    
(7,200,000
)
Partners’ cash distributions
    
(1,265,376
)
  
(162,684
)
Net cash used in financing activities
    
(1,312,026
)
  
(7,406,381
)
               
Net decrease in cash and cash equivalents
    
(1,024,285
)
  
(1,974,969
)
               
Cash and cash equivalents at beginning of period
    
21,131,505
    
16,201,121
  
               
Cash and cash equivalents at end of period
  
$
20,107,220
  
$
14,226,152
  
               
Supplemental Disclosures of Cash Flow Information
              
Cash paid during the period for interest
  
$
127,669
  
$
131,113
  

See notes 2, 3, 5 and 6 for supplemental disclosure of non-cash investing activities.
The accompanying notes are an integral part of these consolidated financial statements.

 
7
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In the opinion of the management of Owens Mortgage Investment Fund, a California Limited Partnership (the “Partnership”), the accompanying unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial information included therein. Certain information and footnote disclosures presented in the Partnership’s annual consolidated financial statements are not included in these interim financial statements.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Partnership’s Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three month period ended March 31, 2013 are not necessarily indicative of the operating results to be expected for the full year ending December 31, 2013. The Partnership evaluates subsequent events up to the date it files its Form 10-Q with the SEC.

Basis of Presentation

Principles of Consolidation

The consolidated financial statements include the accounts of the Partnership and its majority- and wholly-owned limited liability companies (see notes 5 and 6). All significant inter-company transactions and balances have been eliminated in consolidation.  The Partnership is in the business of providing mortgage lending services and manages its business as one operating segment. Due to foreclosure activity, the Partnership also owns and manages real estate assets.
 
Certain reclassifications, not affecting previously reported net income or total partner capital, have been made to the previously issued consolidated financial statements to conform to the current year presentation.

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans, the valuation of real estate held for sale and investment, and the estimate of the environmental remediation liability (see notes 4 and 11).  Fair value estimates are derived from information available in the real estate markets including similar property and often require the experience and judgment of third parties such as real estate appraisers and brokers. The estimates figure materially in calculating the value of the property at acquisition, the level of charge to the allowance for loan losses and any subsequent valuation reserves or write-downs. Such estimates are inherently imprecise and actual results could differ significantly from such estimates.

Significant Accounting Policies

Loans Secured by Trust Deeds

Loans secured by trust deeds are stated at the principal amount outstanding. The Partnership’s portfolio consists primarily of commercial real estate loans generally collateralized by first, second and third deeds of trust.  Interest income on loans is accrued by the simple interest method. Loans are generally placed on nonaccrual status when the borrowers are past due greater than ninety days or when full payment of principal and interest is not expected. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest remains accrued until the loan becomes current, is paid off or is foreclosed upon. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Cash receipts on nonaccrual loans are used to reduce any outstanding accrued interest, and then are recorded as interest income, except when such payments are specifically designated as principal reduction or when management does not believe the Partnership’s investment in the loan is fully recoverable.
 
8
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



Allowance for Loan Losses
 
Loans and the related accrued interest and advances are analyzed by management on a periodic basis for ultimate recovery. The allowance for loan losses is an estimate of credit losses inherent in the Partnership’s loan portfolio that have been incurred as of the balance sheet date.  The allowance is established through a provision for loan losses which is charged to expense.  Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth.  Credit exposures determined to be uncollectible are charged against the allowance.  Cash received on previously charged off amounts is recorded as a recovery to the allowance.  The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable inherent losses related to loans that are not impaired.

Regardless of a loan type, a loan is considered impaired when, based on current information and events, it is probable that the Partnership will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement.  All loans determined to be impaired are individually evaluated for impairment.  When a loan is impaired, management estimates impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan's observable market price, or estimates of the fair value of the collateral if the loan is collateral dependent.  A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. These valuations are generally updated during the fourth quarter but may be updated during interim periods if deemed appropriate by management.

A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Partnership for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider.  Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms.  Loans that are reported as TDR’s are considered impaired and measured for impairment as described above.

The determination of the general reserve for loans that are not impaired is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Partnership’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Partnership’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

The Partnership maintains a separate allowance for each portfolio segment (loan type).  These portfolio segments include commercial real estate, improved and unimproved land, condominium, and single-family (1-4 units) loans.   The allowance for loan losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Partnership’s overall allowance, which is included on the consolidated balance sheet. The reserve for loans that are not impaired consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses, and (3) other qualitative factors.  These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below.

Improved and Unimproved Land – These loans generally possess a higher inherent risk of loss than other real estate portfolio segments.  A major risk arises from the necessity to complete projects within specified costs and time lines.  Trends in the construction industry significantly impact the credit quality of these loans as demand drives construction activity.  In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial Real Estate and Condominiums – These loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except improved and unimproved land.  Adverse economic developments or an overbuilt market impact commercial and condominium real estate projects and may result in troubled loans.  Trends in vacancy rates of properties impact the credit quality of these loans.  High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
 
9
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



Real Estate Operations

Revenue Recognition

The Partnership leases multifamily rental units under operating leases with terms of generally one year or less. Rental revenue is recognized, net of rental concessions, on a straight-line method over the related lease term. Rental income on commercial property is recognized on a straight-line basis over the term of each operating lease.
Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.

Real Estate Held for Sale

Real estate held for sale includes real estate acquired in full or partial settlement of loan obligations generally through foreclosure that is being marketed for sale. Real estate held for sale is recorded at acquisition at the property’s estimated fair value less estimated costs to sell. Any excess of the recorded investment in the loan over the net realizable value is charged against the allowance for loan losses.

After acquisition, costs incurred relating to the development and improvement of property are capitalized to the extent they do not cause the recorded value to exceed the net realizable value, whereas costs relating to holding and disposition of the property are expensed as incurred. After acquisition, real estate held for sale is analyzed periodically for changes in fair values and any subsequent write down is charged to impairment losses on real estate properties. Any recovery in the fair value subsequent to such a write down is recorded (not to exceed the net realizable value at acquisition) as an offset to impairment losses on real estate properties. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.

Real Estate Held for Investment

Real estate held for investment includes real estate acquired in full or partial settlement of loan obligations generally through foreclosure that is not being marketed for sale and is either being operated, such as rental properties; is being managed through the development process, including obtaining appropriate and necessary entitlements, permits and construction; or are idle properties awaiting more favorable market conditions. Real estate held for investment is recorded at acquisition at the property’s estimated fair value, less estimated costs to sell.

After acquisition, costs incurred relating to the development and improvement of the property are capitalized, whereas costs relating to operating or holding the property are expensed. Subsequent to acquisition, management periodically compares the carrying value of real estate to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value.

Depreciation of real estate properties held for investment is provided on the straight-line method over the estimated remaining useful lives of buildings and improvements (5-39 years). Depreciation of tenant improvements is provided on the straight-line method over the lives of the related leases.
 
The Partnership reclassifies real estate properties from held for investment to held for sale in the period in which all of the following criteria are met: 1) Management commits to a plan to sell the property; 2) The property is available for immediate sale in its present condition; 3) An active program to locate a buyer has been initiated; 4) The sale of the property is probable and the transfer of the property is expected to qualify for recognition as a completed sale, within one year; and 5) Actions required to complete the plan indicate it is unlikely that significant changes to the plan will be made or the plan will be withdrawn.
 
10
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)


If circumstances arise that previously were considered unlikely, and, as a result, the Partnership decides not to sell a real estate property classified as held for sale, the property is reclassified to held for investment. The property is then measured individually at the lower of its carrying amount, adjusted for depreciation or amortization expense that would have been recognized had the property been continuously classified as held for investment or its fair value at the date of the subsequent decision not to sell.
 
Environmental Remediation Liability
 
Liabilities related to future environmental remediation costs are recorded when remediation or monitoring or both are probable and the costs can be reasonably estimated. The Partnership’s environmental remediation liability related to the property located in Santa Clara, California (held within 1850 De La Cruz, LLC – see Notes 4 and 11) was recorded based on a third party consultant’s estimate of the costs required to remediate and monitor the contamination.
 
Income Taxes
 
No provision for federal and state income taxes is made in the consolidated financial statements since the Partnership is not a taxable entity.  Accordingly, any income or loss is included in the tax returns of the partners.
 
In accordance with the provisions of ASC 740-10, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Partnership has elected to record interest and penalties related to unrecognized tax benefits, if any, in other expenses. The total amount of unrecognized tax benefits, including interest and penalties, at March 31, 2013 and 2012 is zero. The amount of tax benefits that would impact the effective rate, if recognized, is expected to be zero. The Partnership does not anticipate any significant changes with respect to unrecognized tax benefits within the next twelve months. With few exceptions, the Partnership is no longer subject to federal and state income tax examinations by tax authorities for years before 2008.
 
NOTE 2 - LOANS SECURED BY TRUST DEEDS

Loans secured by trust deeds as of March 31, 2013 and December 31, 2012 are as follows:

   
2013
  
2012
  
By Property Type:
              
Commercial
  
$
21,989,203
  
$
23,953,081
  
Condominiums
    
17,629,631
    
17,629,631
  
Single family homes (1-4 Units)
    
250,000
    
250,000
  
Improved and unimproved land
    
28,429,550
    
28,429,550
  
   
$
68,298,384
  
$
70,262,262
  
By Deed Order:
              
First mortgages
  
$
51,681,038
  
$
53,544,038
  
Second and third mortgages
    
16,617,346
    
16,718,224
  
   
$
68,298,384
  
$
70,262,262
  

 
11
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



NOTE 3 – ALLOWANCE FOR LOAN LOSSES
 
The following table shows the allocation of the allowance for loan losses as of and for the three months ended March 31, 2013 by portfolio segment and by impairment methodology:

   
Commercial
Real Estate
  
Condominiums
  
Single Family
Homes
  
Improved and
Unimproved Land
    
2013
          
Total
                     
Allowance for loan losses:
                
 
Three Months Ended March 31, 2013
 
Beginning balance
 
$
1,606,925
$
        4,288,108
$
 —
$
18,522,864
$
24,417,897 
 
Reversal of provision
  
            (42,483
 )
           (24,615
 )
 —
  
(190,115
 )
             (257,213)
 
Ending balance
 
$
1,564,442
$
 4,263,493
$
 —
$
18,332,749
$
       24,160,684 
                     
 
As of March 31, 2013
 
Ending balance: individually evaluated for impairment
 
$
448,790
$
   3,644,145
$
  —
$
18,332,749
$
  22,425,684 
                     
Ending balance: collectively evaluated for impairment
$
1,115,652
$
619,348
$
 —
$
—
$
1,735,000 
                     
Loans:
                    
 
Ending balance
 
$
21,989,203
$
 17,629,631
$
  250,000
$
28,429,550
$
68,298,384 
                     
Ending balance: individually evaluated for impairment
$
8,479,203
$
      10,129,631
$
  250,000
$
           28,429,550
$
47,288,384 
                     
Ending balance: collectively evaluated for impairment
$
13,510,000
$
7,500,000
$
 —
$
     —
$
21,010,000 

 
12
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)




The following table shows the allocation of the allowance for loan losses for the three months ended March 31, 2012 and as of December 31, 2012 by portfolio segment and by impairment methodology:

   
Commercial
Real Estate
  
Condominiums
  
Single Family
Homes
  
Improved and
Unimproved Land
    
2012
          
Total
                     
Allowance for loan losses:
                
 
Three Months Ended March 31, 2012
 
Beginning balance
 
$
2,951,543
$
           3,855,281
$
 —
$
 17,735,073
$
24,541,897 
 
 Reversal of provision
  
(474,083
 )
           —
  
 —
  
 84,869
  
(389,214)
 
Ending balance
 
$
2,477,460
$
   3,855,281
$
 —
$
 17,819,942
$
          24,152,683 
                     
 
As of December 31, 2012
 
Ending balance: individually evaluated for impairment
 
$
446,904
$
   3,644,129
$
  —
$
18,522,864
$
  22,613,897 
                     
Ending balance: collectively evaluated for impairment
$
1,160,021
$
643,979
$
 —
$
 —
$
1,804,000 
                     
Loans:
                    
 
Ending balance
 
$
23,953,081
$
 17,629,631
$
  250,000
$
28,429,550
$
70,262,262 
                     
Ending balance: individually evaluated for impairment
$
10,443,081
$
      10,129,631
$
  250,000
$
           28,429,550
$
49,252,262 
                     
Ending balance: collectively evaluated for impairment
$
  13,510,000
$
7,500,000
$
 —
$
               —
$
  21,010,000 
                     

 
13
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)


 
The following tables show an aging analysis of the loan portfolio by the time past due at March 31, 2013 and December 31, 2012:
   
Loans
30-59 Days
Past Due
  
Loans
60-89 Days
Past Due
  
Loans
90 or More Days
Past Due
            
         
Total Past
Due Loans
  
Current Loans
  
Total Loans
March 31, 2013
            
                         
Commercial
 real estate
$
1,100,000
$
—
$
       8,479,203
$
       9,579,203
$
       12,410,000  
$
21,989,203
Condominiums
  
—
  
—
  
        10,129,631
  
        10,129,631
  
7,500,000  
 
17,629,631
Single family homes
  
—
  
—
  
                       250,000
  
                       250,000
  
—
  
250,000
Improved and unimproved land
  
—
  
—
  
        28,429,550
  
        28,429,550
  
        —
  
28,429,550
 
$
1,100,000
$
—
$
 47,288,384
$
   48,388,384
$
      19,910,000  
$
68,298,384

   
Loans
30-59 Days
Past Due
  
Loans
60-89 Days
Past Due
  
Loans
90 or More Days
Past Due
            
         
Total Past
Due Loans
  
Current Loans
  
Total Loans
December 31, 2012
            
                         
Commercial
 real estate
$
         —
$
      —
$
       10,443,081
$
        10,443,081
$
       13,510,000  
$
23,953,081
Condominiums
  
—
  
—
  
        10,129,631
  
        10,129,631
  
       7,500,000  
 
17,629,631
Single family homes
  
           —
  
            —
  
                       250,000
  
       250,000
  
—
  
250,000
Improved and unimproved land
  
 —
  
 —
  
        28,429,550
  
        28,429,550
  
—
  
28,429,550
 
$
         —
$
      —
$
   49,252,262
$
49,252,262
$
      21,010,000  
$
70,262,262

All of the loans that are 90 or more days past due as listed above were on non-accrual status as of March 31, 2013 and December 31, 2012.

 
14
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



The following table shows information related to impaired loans as of and for the three months ended March 31, 2013:
 
 
   
 
As of March 31, 2013
 
Three Months Ended March 31, 2013
 
 
 
Recorded
Investment
  
 
Unpaid
Principal
Balance
  
 
 
Related
Allowance
  
 
Average
Recorded
Investment
  
 
Interest
Income
Recognized
With no related allowance recorded:
                    
 
Commercial Real Estate
 
$
       
7,895,739
  
$
    
     7,400,451
 
  $
 
 —
 
$
 
7,957,687
 
$
 
282,783
 
Condominiums
  
       
  2,645,311
  
   
       2,594,632
  
 
 —
  
 
        2,642,914
  
 
            30,000
 
Single family homes
  
   
        272,865
  
   
          250,000
  
 
  —
  
 
           257,752
  
 
            6,876
 
Improved and unimproved land
  
   
    4,228,140
  
  
       4,226,713
  
 
  —
  
 
4,695,031
  
 
            82,320
                     
With an allowance recorded:
                    
 
Commercial Real Estate
  
       
  1,079,699
  
 
          1,078,752
  
 
448,790
  
 
         1,079,699
  
 
3,000
 
Condominiums
  
 
       7,983,345
  
      
   7,535,000
  
 
3,644,145
  
 
 7,983,334
  
 
           64,100
 
Single family homes
  
 
 —
  
 
 —
  
 
 —
  
 
  —
  
 
 —
 
Improved and unimproved land
  
   
    25,110,349
  
    
     24,202,837
  
 
18,332,749
  
 
       25,058,537
  
 
 —
                     
Total:
                    
 
Commercial Real Estate
 
$
 
8,975,438
  
$
 
         8,479,203
  
$
 
448,790
  
$
 
 9,037,386
  
$
 
285,783
 
Condominiums
 
$
 
10,628,656
  
$
  
       10,129,632
 
  $
 
3,644,145
 
 $
 
      10,626,248
  
$
 
 94,100
 
Single family homes
 
$
      
     272,865
  
$
     
        250,000
 
  $
 
 —
  
$
  
          257,752
  
$
           
 6,876
 
Improved and unimproved land
 
$
     
  29,338,489
 
 $
       
  28,429,550
 
  $
 
18,332,749
 
 $
     
  29,753,568
  
$
       
    82,320

 
15
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



The following table shows information related to impaired loans as of December 31, 2012 and for the three months ended March 31, 2012:
 
 
   
As of December 31, 2012
Three Months Ended March 31, 2012
 
 
 
Recorded
Investment
  
 
Unpaid
Principal
Balance
  
 
 
Related
Allowance
  
 
Average
Recorded
Investment
  
 
Interest
Income
Recognized
With no related allowance recorded:
                    
 
Commercial Real Estate
 
$
     
  9,925,007
 
 $
   
      9,364,329
 
  $
 
 —
 
$
 
       11,647,961
 
$
 
             54,519
 
Condominiums
  
 
         2,639,843
  
    
      2,594,631
  
 
 —
  
 
         2,798,815
  
 
            30,000
 
Single family homes
  
 
           250,195
  
    
         250,000
  
 
  —
  
 
            250,195
  
 
            6,876
 
Improved and unimproved land
  
 
       4,228,140
  
   
      4,226,713
  
 
  —
  
 
5,048,329
  
 
            88,410
                     
With an allowance recorded:
                    
 
Commercial Real Estate
  
      
   1,079,699
  
 
          1,078,752
  
 
446,904
  
   
      1,191,996
  
 
2,489
 
Condominiums
  
    
   7,983,329
  
 
         7,535,000
  
 
3,644,129
  
 
 7,983,281
  
        
   63,957
 
Improved and unimproved land
  
      
 24,707,709
  
  
       24,202,837
  
 
18,522,864
  
   
    24,352,647
  
 
 —
                     
Total:
                    
 
Commercial Real Estate
 
$
 
11,004,706
 
 $
 
         10,443,081
 
  $
 
446,904
  
$
 
      12,839,957
 
 $
 
57,008
 
Condominiums
 
$
 
10,623,172
  
$
 
         10,129,631
 
  $
 
3,644,129
  
$
 
      10,782,096
  
$
 
 93,957
 
Single family homes
 
$
   
        250,195
  
$
 
            250,000
  
$
 
 —
 
 $
 
           250,195
  
$
  
          6,876
 
Improved and unimproved land
 
$
    
   28,935,849
  
$
  
       28,429,550
 
  $
 
18,522,864
 
 $
 
      29,400,976
  
$
    
       88,410

Interest income recognized on a cash basis for impaired loans approximates the interest income recognized as reflected in the tables above.

Troubled Debt Restructurings

The Partnership has allocated approximately $449,000 and $447,000 of specific reserves to borrowers whose loan terms have been modified in troubled debt restructurings as of March 31, 2013 and December 31, 2012, respectively.  The Partnership has not committed to lend additional amounts to any of these borrowers.

During the three months ended March 31, 2013, the terms of one loan were modified as a troubled debt restructuring. The modification of the terms of such loan included a reduction in the monthly interest payments due under the loan with all deferred interest due at the extended maturity date of a six month period. No loans were modified as troubled debt restructurings during the quarter ended March 31, 2012.
 
16
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)




The following table shows information related to loan modifications made by the Partnership during the quarter ended March 31, 2013:

 
Modifications
During the Three Months Ended March 31, 2013
  
   
 
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded Investment
  
Post-Modification
Outstanding
Recorded Investment
 
 
Troubled Debt Restructurings That Occurred During the Quarter
            
Commercial real estate
  
1
 $
 1,100,000
 $
 1,100,000
             

There were no troubled debt restructurings that subsequently defaulted during the quarters ended March 31, 2013 and 2012.

NOTE 4 – INVESTMENT IN LIMITED LIABILITY COMPANY

During 2008, the Partnership entered into an Operating Agreement of 1850 De La Cruz LLC, a California limited liability company (“1850”), with Nanook Ventures LLC (“Nanook”), an unrelated party.  The purpose of the joint venture is to acquire, own and operate certain industrial land and buildings located in Santa Clara, California that was owned by the Partnership. The property was subject to a Purchase and Sale Agreement dated July 24, 2007 (the “Sale Agreement”), as amended, between the Partnership, as seller, and Nanook, as buyer.  During the course of due diligence under the Sale Agreement, it was discovered that the property is contaminated and that remediation and monitoring may be required.  The parties agreed to enter into the Operating Agreement to restructure the arrangement as a joint venture.  At the time of closing in July 2008, the two properties were separately contributed to two new limited liability companies, Nanook Ventures One LLC and Nanook Ventures Two LLC that are wholly owned by 1850.  The Partnership and Nanook are the Members of 1850 and NV Manager, LLC is the Manager. (See Note 11 for further discussion of the Partnership’s environmental remediation obligation with respect to the properties owned by 1850.)

The net income to the Partnership from its investment in 1850 De La Cruz was approximately $41,000 and $38,000 during the three months ended March 31, 2013 and 2012, respectively.

 
17
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



NOTE 5 - REAL ESTATE HELD FOR SALE

Real estate properties held for sale as of March 31, 2013 and December 31, 2012 consists of the following properties acquired through foreclosure:
   
2013
  
2012
  
Manufactured home subdivision development (6 lots), Ione, California
  
$
35,464
  
$
78,530
  
Manufactured home subdivision development (undeveloped land), Lake Charles, Louisiana (held within Dation, LLC)
    
256,107
    
256,107
  
Undeveloped land, Auburn, California (held within DarkHorse Golf Club, LLC)
    
103,198
    
103,198
  
Marina with 30 boat slips and 11 RV spaces, Oakley, California (held within The Last Resort and Marina, LLC)
    
408,000
    
408,000
  
Commercial buildings, Sacramento, California
    
3,890,968
    
3,890,968
  
45 condominium and 2 commercial units, Oakland, California (held within 1401 on Jackson, LLC)
    
8,517,932
    
8,517,932
  
169 condominium units and 160 unit unoccupied apartment building, Miami, Florida (held within TOTB Miami, LLC)
    
33,860,211
    
33,855,211
  
1/7th interest in single family home, Lincoln City, Oregon
    
85,259
    
85,259
  
Industrial land, Pomona, California (held within 1875 West Mission Blvd., LLC)
    
7,315,000
    
7,315,000
  
Office/retail complex, Hilo, Hawaii
    
1,662,889
    
1,662,889
  
   
$
56,135,028
  
$
56,173,094
  

During the three months ended March 31, 2013, the Partnership sold four lots (one including a manufactured home) in the manufactured home subdivision development located in Ione, California for aggregate net sales proceeds of approximately $73,000 resulting in a net gain to the Partnership of approximately $30,000.

During the three months ended March 31, 2012, all of the improved lots and manufactured rental homes owned by Dation, LLC (“Dation”) were sold for $1,650,000 (comprised of cash of $330,000 and a note from the buyer of $1,320,000) resulting in no gain or loss to the Partnership. In addition, during the three months ended March 31, 2012, the Partnership paid its joint venture partner a portion of its accrued management fees owed of approximately $147,000 in the form of $50,000 cash and two model homes with a book value of $97,000 as part of a settlement agreement to remove the joint venture partner as a member of Dation. The $1,320,000 note receivable from the sale was assigned to the Partnership during the quarter. Dation continues to own 40 acres of unimproved land which it has marketed for sale and expects to sell within the next year.

In May 2013 (subsequent to quarter end), the Partnership sold the 45 residential and 2 commercial units located in Oakland, California and held within 1401 on Jackson, LLC via a land sales contract for $11,000,000 ($1,000,000 down with payments of $37,500 due monthly including 4% interest with all remaining principal and interest due in one year).

In addition, in May 2013, the Partnership sold the office/retail complex located in Hilo, Hawaii for $1,950,000 with a $250,000 cash down payment and a $1,700,000 carryback note due in three years with monthly payments of interest only at a starting rate of 5% per annum. The note calls for principal paydowns of $125,000 each within 30 and 60 days of issuance of the title policy on the property.
 
18
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



 
TOTB Miami, LLC

During 2011, the Partnership and two co-lenders (which included Owens Financial Group, Inc., or the General Partner, and PRC Treasures, LLC, or PRC) foreclosed on a participated, first mortgage loan secured by a condominium complex located in Miami, Florida with a principal balance to the Partnership of approximately $26,257,000 and obtained an undivided interest in the properties via the trustee’s sale. The Partnership and other lenders formed a Florida limited liability company, TOTB Miami, LLC (“TOTB”), to own and operate the complex. The complex consists of three buildings and an undeveloped parcel of land, two buildings of which have been renovated and the units are being leased, and in which 169 units remain unsold and one building which contains 160 vacant units that have not been renovated. Based on an appraisal obtained, it was determined that the fair value of the property was lower than the Partnership’s total investment in the loan (including a previously established loan loss allowance of $10,188,000) and an additional charge to provision for loan losses of approximately $450,000 was recorded at the time of foreclosure during the first quarter of 2011 (total charge-off of $10,638,000).
 
In March 2012, the Partnership made a priority capital contribution to TOTB in the amount of $7,200,000. TOTB then purchased PRC’s member interest in TOTB for $7,200,000. Thus, the remaining members in TOTB are now the Partnership and the General Partner.  On the same date, the Partnership and the General Partner executed an amendment to the TOTB operating agreement to set the percentage of capital held by each at 80.74% for the Partnership and 19.26% for the General Partner based on the dollar amount of capital invested in the properties/TOTB (excluding the Preferred Class A Units discussed below). Income and loss allocations are now made based on these percentages after a 15% preferred return to the Partnership based on its $2,583,000 contribution to TOTB in 2011 (represented by its Preferred Class A Units). The change in capital as a result of the PRC buyout and the amended agreement resulted in an increase to the Partnership’s capital of approximately $2,760,000. Per the PRC redemption agreement, in the event the TOTB real estate assets are sold in the future for proceeds in excess of the Partnership’s and General Partner’s investments in TOTB, including all capital contributions, loans, protective advances and accrued and unpaid interest under the operating agreement, PRC is to receive 25% of such excess. The assets, liabilities, income and expenses of TOTB have been consolidated into the accompanying consolidated balance sheets and statements of operations of the Partnership. The noncontrolling interest of the General Partner was approximately $6,073,000 and $6,055,000 as of March 31, 2013 and December 31, 2012, respectively.

The net income (loss) to the Partnership from TOTB was approximately $174,000 and $(432,000) during the three months ended March 31, 2013 and 2012, respectively.

1875 West Mission Blvd., LLC

1875 West Mission Blvd., LLC (“1875”) is a California limited liability company formed for the purpose of owning 22.41 acres of industrial land located in Pomona, California which was acquired by the Partnership and PNL Company (who were co-lenders in the subject loan) via foreclosure in August 2011. Pursuant to the Operating Agreement, the Partnership has a 60% membership interest in 1875 and is entitled to collect approximately $5,078,000 upon the sale of the property after PNL collects any unreimbursed LLC expenses it has paid and $1,019,000 in its default interest at the time of foreclosure. The assets, liabilities, income and expenses of 1875 have been consolidated into the accompanying consolidated balance sheets and statements of operations of the Partnership. The noncontrolling interest of PNL was approximately $1,955,000 and $2,001,000 as of March 31, 2013 and December 31, 2012, respectively.

There was no net income or loss to the Partnership from 1875 for the three months ended March 31, 2013 and 2012.
 
19
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



NOTE 6 - REAL ESTATE HELD FOR INVESTMENT

Real estate held for investment is comprised of the following properties as of March 31, 2013 and December 31, 2012:

   
2013
  
2012
  
Light industrial building, Paso Robles, California
  
$
1,444,994
  
$
1,451,089
  
Commercial buildings, Roseville, California
    
782,888
    
777,366
  
Retail complex, Greeley, Colorado (held within 720 University, LLC)
    
11,884,089
    
11,974,751
  
Undeveloped, residential land, Madera County, California
    
726,580
    
726,580
  
Undeveloped, residential land, Marysville, California
    
403,200
    
403,200
  
75 improved, residential lots, Auburn, California (held within Baldwin Ranch Subdivision, LLC)
    
3,878,544
    
3,878,544
  
Undeveloped, industrial land, San Jose, California
    
1,958,400
    
1,958,400
  
Undeveloped, commercial land, Half Moon Bay, California
    
1,468,800
    
1,468,800
  
Storage facility/business, Stockton, California
    
4,013,616
    
4,037,575
  
Two improved residential lots, West Sacramento, California
    
130,560
    
130,560
  
Undeveloped, residential land, Coolidge, Arizona
    
1,017,600
    
1,017,600
  
Office condominium complex (16 units), Roseville, California
    
4,088,520
    
4,019,876
  
Golf course, Auburn, California (held within Lone Star Golf, LLC)
    
1,954,957
    
1,959,492
  
Industrial building, Sunnyvale, California (held within Wolfe Central, LLC)
    
3,183,583
    
3,205,847
  
133 condominium units, Phoenix, Arizona (held within 54th Street Condos, LLC)
    
7,369,849
    
7,459,609
  
Medical office condominium complex, Gilbert, Arizona (held within AMFU, LLC)
    
4,833,388
    
4,860,573
  
61 condominium units, Lakewood, Washington (held within Phillips Road, LLC)
    
4,618,643
    
4,654,914
  
12 condominium and 3 commercial units, Tacoma, Washington (held within Broadway & Commerce, LLC)
    
2,427,990
    
2,432,883
  
6 improved residential lots, Coeur D’Alene, Idaho
    
969,600
    
969,600
  
Unimproved, residential and commercial land, Gypsum, Colorado
    
5,745,042
    
5,760,000
  
Unimproved, commercial land, South Lake Tahoe, California (held within Tahoe Stateline Venture, LLC)
    
11,558,033
    
8,452,996
  
Marina and yacht club with 179 boat slips, Isleton, California (held within Brannan Island, LLC)
    
1,998,275
    
—
  
   
$
76,457,151
  
$
71,600,255
  


The balances of land and the major classes of depreciable property for real estate held for investment as of
March 31, 2013 and December 31, 2012 are as follows:
   
2013
    
2012
  
Land
  
$
42,389,158
    
$
37,381,547
  
Buildings and improvements
    
40,956,586
      
40,736,868
  
     
83,345,744
      
78,118,415
  
Less: Accumulated depreciation
    
(6,888,593
)
 
  
(6,518,160
)
   
$
76,457,151
    
$
71,600,255
  

 
20
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)




The acquisition of certain real estate properties through foreclosure (including real estate held for sale – see Note 5) resulted in the following non-cash activity for the three months ended March 31, 2013 and 2012, respectively:
   
2013
    
2012
  
Increases:
                
Real estate held for sale and investment
  
$
3,738,168
    
$
—
  
                 
Decreases:
                
Loans secured by trust deeds, net of allowance for loan losses
    
3,263,672
      
—
  
Interest and other receivables
    
474,496
 
    
—
  

It is the Partnership’s intent to sell the majority of its real estate properties held for investment, but expected sales are not probable to occur within the next year.
 
Depreciation expense was approximately $370,000 and $694,000 for the quarters ended March 31, 2013 and 2012, respectively.
 
2013 Foreclosure Activity

During the quarter ended March 31, 2013, Brannan Island, LLC (wholly owned by the Partnership) foreclosed on two first mortgage loans secured by a marina with 179 boat slips located in Isleton, California with an aggregate principal balance of $1,863,000 and obtained the property via the trustee’s sale. In addition, advances made on the loan or incurred as part of the foreclosure (such as legal fees and delinquent property taxes) in the total amount of approximately $140,000 were capitalized to the basis of the property. The amount capitalized at the time of foreclosure approximated the net fair market value of the property.  The property has been classified as held for investment as a sale is not expected within one year.

During the quarter ended March 31, 2013, Tahoe Stateline Venture, LLC (“TSV”) (wholly owned by the Partnership) foreclosed on a first mortgage loan secured by undeveloped parcels of land located in South Lake Tahoe, California that was purchased at a discount during the same quarter with a principal balance of approximately $1,401,000 and obtained the property via the trustee’s sale. In addition, advances made on the loan or incurred as part of the foreclosure (including delinquent property taxes) in the total amount of approximately $335,000 were capitalized to the basis of the property. The fair market value of the land acquired was estimated to be higher than TSV’s basis in the subject loan, and, thus, a gain on foreclosure in the amount of approximately $952,000 was recorded. The property has been classified as held for investment along with several other parcels purchased by TSV during 2012 as a sale is not expected within one year. See below under “Tahoe Stateline Venture, LLC”.

720 University, LLC

The Partnership has an investment in a limited liability company, 720 University, LLC (720 University), which owns a commercial retail property located in Greeley, Colorado. The Partnership receives 65% of the profits and losses in 720 University after priority return on partner contributions is allocated at the rate of 10% per annum. The assets, liabilities, income and expenses of 720 University have been consolidated into the accompanying consolidated balance sheets and statements of operations of the Partnership.

The net income to the Partnership from 720 University was approximately $27,000 and $39,000 (including depreciation and amortization of $107,000 and $113,000) for the three months ended March 31, 2013 and 2012, respectively. The non-controlling interest of the joint venture partner of approximately $(9,000) and $(7,000) as of March 31, 2013 and December 31, 2012, respectively, is reported in the accompanying consolidated balance sheets. The Partnership’s investment in 720 University real property and improvements was approximately $11,884,000 and $11,975,000 as of March 31, 2013 and December 31, 2012, respectively.
 
21
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)


Tahoe Stateline Venture, LLC

The Partnership has four delinquent loans with aggregate principal balances totaling approximately $24,203,000 that were originally secured by first, second and third deeds of trust on 29 parcels of land with entitlements for a 502,267 square foot resort development located in South Lake Tahoe, California known as Chateau at Lake Tahoe, or the Project. In July 2012, the Partnership signed purchase agreements totaling $6,600,000 to acquire seven parcels in the Project that are contiguous to parcels securing the Partnership’s loans. These seven parcels had provided partial security for the Partnership’s existing loans which were junior to loans held by senior lenders that foreclosed on the property in 2010 and early 2011.  While these parcels were originally part of the security for the Partnership’s loans, management chose not to advance the funds to acquire the parcels at the foreclosure sales due to the bankruptcy of the borrower and the uncertainty surrounding the Project. As a result, there are multiple owners of the contiguous parcels.  For similar reasons, in July 2012, the Partnership also signed a letter of intent to acquire the senior note for $1,400,000 secured by two parcels on which OMIF holds second and third deeds of trust. In addition, the Partnership agreed to advance $200,000 to obtain a release of the deed of trust that is senior to the Partnership’s loan on a single parcel in the second phase of the Project, and advance $100,000 for the option to acquire a note for $700,000 which is senior to the Partnership’s loan.

The parcel purchases were closed in December 2012 through a new wholly-owned subsidiary of the Partnership, TSV. The Partnership paid approximately $5,697,000 out of cash reserves for the parcel purchases, including approximately $2,316,000 held by the title company to pay delinquent property taxes on the parcels until property reassessments were completed ($1,691,000 in delinquent property taxes paid and $625,000 in excess funds remitted back to TSV in February 2013). The sellers of the parcels also provided financing for the balance of the purchase prices which total $3,300,000 at 5% interest only, semi-annual payments due in four years from the close of escrow. One of the note purchases in the amount of $1,400,000 closed in February 2013 through TSV, and TSV foreclosed on this loan and obtained the parcels via the trustee’s sale in March 2013. In February 2013, the Partnership’s beneficial interest in the four delinquent loans discussed above was transferred to TSV. In May 2013 (subsequent to quarter end) TSV foreclosed on all of the remaining deeds of trust and gained ownership of the related parcels. Because the second note purchase discussed above was not completed prior to the foreclosure, TSV became subject to the existing first deed of trust on one of the parcels in the amount of $1,000,000. TSV now owns a total of 19 parcels which includes all of the parcels necessary to complete the first phase of the Project. Management made the decision to purchase these parcels and notes in order to protect the Partnership’s existing investment in the loans by securing controlling ownership of the first phase of the Project, which will enable the Partnership to move ahead with the sale or the development of the Project.  As of March 31, 2013 and December 31, 2012, the Partnership had recorded a specific loan allowance on the delinquent loans discussed above of approximately $18,333,000 and $18,523,000, respectively.

TSV has commenced pre-construction development activities and has incurred and capitalized approximately $540,000 in design, engineering and related costs as of March 31, 2013.
 
22
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



The approximate net income (loss) from Partnership real estate properties held within wholly-owned limited liability companies and other investment properties with significant operating results for the three months ended March 31, 2013 and 2012 were as follows:
   
2013
  
2012
  
Anacapa Villas, LLC
  
$
(1,000
)
$
(2,000
)
DarkHorse Golf Club, LLC
    
(104,000
)
  
(154,000
)
Lone Star Golf, LLC
    
(52,000
)
  
(42,000
)
Baldwin Ranch Subdivision, LLC
    
(26,000
)
  
(29,000
)
The Last Resort and Marina, LLC
    
(7,000
)
  
(7,000
)
33rd Street Terrace, LLC
    
—
    
23,000
  
54th Street Condos, LLC
    
(25,000
)
  
(105,000
)
Wolfe Central, LLC
    
99,000
    
101,000
  
AMFU, LLC
    
(3,000
)
  
33,000
  
Phillips Road, LLC
    
7,000
    
29,000
  
550 Sandy Lane, LLC
    
2,000
    
46,000
  
1401 on Jackson, LLC
    
52,000
    
(13,000
)
Broadway & Commerce, LLC
    
15,000
    
18,000
  
Brannan Island, LLC
    
(36,000
)
  
—
  
Light industrial building, Paso Robles, California
    
49,000
    
49,000
  
Undeveloped land, San Jose, California
    
(38,000
)
  
(38,000
)
Office condominium complex, Roseville, California
    
(25,000
)
  
(14,000
)
Storage facility/business, Stockton, California
    
78,000
    
59,000
  
Industrial building, Chico, California
    
—
    
(93,000
)
Undeveloped land, Gypsum, Colorado
    
(60,000
)
  
(107,000
)
Office/retail complex, Hilo, Hawaii
    
(26,000
)
  
—
  

Certain of the Partnership’s real estate properties held for sale and investment are leased to tenants under noncancellable leases with remaining terms ranging from one to thirteen years. Certain of the leases require the tenant to pay all or some operating expenses of the properties. The future minimum rental income from noncancellable operating leases due within the five years subsequent to March 31, 2013 and thereafter is as follows:
 
Year ending March 31:
        
2014
  
$
5,394,108
  
2015
    
2,403,674
  
2016
    
1,908,186
  
2017
    
1,528,900
  
2018
    
1,140,986
  
Thereafter (through 2026)
    
2,427,494
  
         
   
$
14,803,348
  

 
23
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)




NOTE 7 - TRANSACTIONS WITH AFFILIATES

In consideration of the management services rendered to the Partnership, the General Partner is entitled to receive from the Partnership a management fee payable monthly, subject to a maximum of 2.75% per annum of the average unpaid balance of the Partnership’s mortgage loans.

All of the Partnership’s loans are serviced by the General Partner, in consideration for which the General Partner receives up to 0.25% per annum of the unpaid principal balance of the loans.

The General Partner may, at its sole discretion, on a monthly basis, adjust the management and servicing fees as long as they do not exceed the allowable limits calculated on an annual basis. Even though the fees for a month may exceed 1/12 of the maximum limits, at the end of the calendar year the sum of the fees collected for each of the 12 months must be equal to or less than the stated limits. Management fees amounted to approximately $440,000 and $441,000 for the quarters ended March 31, 2013 and 2012, respectively, and are included in the accompanying consolidated statements of operations. Servicing fees amounted to approximately $43,000 and $41,000 for the quarters ended March 31, 2013 and 2012, respectively, and are included in the accompanying consolidated statements of operations. As of March 31, 2013 and December 31, 2012, the Partnership owed management and servicing fees to the General Partner in the amount of approximately $453,000 and $298,000, respectively.
 
The maximum servicing fees were paid to the General Partner during the three months ended March 31, 2013 and 2012. If the maximum management fees had been paid to the General Partner during the three months ended March 31, 2013, the management fees would have been $478,000 (increase of $38,000), which would have decreased net income allocated to limited partners by approximately 2.7% and net income allocated to limited partners per weighted average limited partner unit by the same percentage to income of $.0049 from income of $.0051. If the maximum management fees had been paid to the General Partner during the three months ended March 31, 2012, the management fees would have been $451,000 (increase of $10,000), which would have decreased net income allocated to limited partners by approximately 5.96% and net income allocated to limited partners per weighted average limited partner unit by the same percentage to income of $0.0005 from income of $0.0006.
 
In determining the yield to the partners and hence the management fees, the General Partner may consider a number of factors, including current market yields, delinquency experience, un-invested cash and real estate activities. The General Partner expects that the management fees it receives from the Partnership will vary in amount and percentage from period to period. However, due to reduced levels of mortgage investments held by the Partnership, during the three months ended March 31, 2013, the General Partner has chosen to take close to the maximum compensation that it is able to take pursuant to the Partnership Agreement and will likely continue to take the maximum compensation for the foreseeable future.

Pursuant to the Partnership Agreement, the General Partner receives all late payment charges from borrowers on loans owned by the Partnership, with the exception of loans participated with outside entities. The amounts paid to or collected by the General Partner for such charges totaled approximately $1,000 and $2,000 for the three months ended March 31, 2013 and 2012, respectively. In addition, the Partnership remits other miscellaneous fees to the General Partner, which are collected from loan payments, loan payoffs or advances from loan principal (i.e. funding, demand and partial release fees). There were no such fees remitted to the General Partner during the three months ended March 31, 2013 and 2012.

The General Partner originates all loans the Partnership invests in and receives loan origination and extension fees from borrowers. The General Partner received no loan origination or extension fees during the three months ended March 31, 2013 and 2012. However, the General Partner earned $24,000 in fees on an $800,000 Partnership loan that was extended during the three months ended March 31, 2012, which will be paid to the General Partner only upon the full payoff of the subject loan.
 
24
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)


The General Partner is reimbursed by the Partnership for the actual cost of goods, services and materials used for or by the Partnership and obtained from unaffiliated entities and the salary and related salary expense of the General Partner’s non-management and non-supervisory personnel performing services for the Partnership which could be performed by independent parties (subject to certain limitations in the Partnership Agreement). The amounts reimbursed to the General Partner by the Partnership during the three months ended March 31, 2013 and 2012 were $158,000 and $165,000, respectively.

The General Partner is required to contribute capital to the Partnership in the amount of 0.5% of the limited partners’ aggregate capital accounts (the “GP Contribution Interest”) and, together with its carried interest (the “Carried Interest”), the General Partner has an interest at least equal to 1% of the limited partners’ capital accounts. The Carried Interest of the General Partner of up to 1/2 of 1% is recorded as an expense of the Partnership and credited as a contribution to the General Partner’s capital account as additional compensation. As of March 31, 2013, the General Partner had made cash capital contributions of $1,496,000 to the Partnership ($118,000 of which was distributed to the General Partner along with limited partner capital distributions during 2011). The General Partner is required to continue cash capital contributions to the Partnership in order to maintain the minimum required capital balance. There was no Carried Interest expense charged to the Partnership for the three months ended March 31, 2013 and 2012.

NOTE 8 - NOTES PAYABLE

The Partnership has a note payable with a bank through its investment in 720 University (see Note 6), which is secured by the retail development located in Greeley, Colorado. The remaining principal balance on the note was approximately $10,042,000 and $10,085,000 as of March 31, 2013 and December 31, 2012, respectively. The note required monthly interest-only payments until March 1, 2010 at a fixed rate of 5.07% per annum. Commencing April 1, 2010, the note became amortizing and monthly payments of $56,816 are now required, with the balance of unpaid principal due on March 1, 2015. Interest expense was approximately $127,000 and $131,000 for the three months ended March 31, 2013 and 2012.
 
The Partnership also has two notes payable in the aggregate amount of $3,300,000 as of March 31, 2013 and December 31, 2012 related to the purchase of seven parcels by Tahoe Stateline Venture, LLC in December 2012. The notes require semi-annual interest-only payments of 5% per annum and are due in December 2016. As of March 31, 2013 and December 31, 2012, the Partnership has accrued approximately $54,000 and $12,000, respectively, in interest payable that has been capitalized to the basis of the land now under development.
 
The following table shows maturities by year on these notes payable as of March 31, 2013:
 
Year ending March 31:
        
2014
  
$
169,446
  
2015
    
9,872,676
  
2016
    
—
  
2017
    
3,300,000
  
   
$
13,342,122
  
 
NOTE 9 – PARTNERS’ CAPITAL
 
The Partnership originally registered 200,000,000 Units under Registration No. 333-69272 of which 90,241,162 Units remained available for sale, at a purchase price of $1.00 per Unit, as of March 31, 2008. The Partnership filed a registration statement with the SEC on Form S-11, file number 333-150248, that was declared effective on April 30, 2008.  Subsequently, the Partnership filed a new registration statement with the SEC on Form S-11, file number 333-173249, that was declared effective on May 2, 2011. The new registration statement registered 80,043,274 Units that were previously registered and unsold pursuant to registration statement No. 333-150248. The Partnership intends to amend its registration statement to withdraw the remaining registered Units as it no longer intends to sell Units under this registration statement or pursuant to the Distribution Reinvestment Plan.
 
25
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



The Partnership has experienced a significant increase in limited partner capital withdrawal requests since late 2008. As of March 31, 2013, the Partnership has received requests for withdrawal from limited partners holding approximately 109,648,000 Units, which represents approximately 39% of all outstanding limited partner units and units represented by the Carried Interest and GP Contribution Interest. All scheduled withdrawals from January 1, 2009 through March 31, 2013 were not made because the Partnership has not had sufficient available cash to honor such withdrawal requests, needed to have funds in reserve for operations, needed to protect its interest in certain delinquent loans, needed to make improvements to real estate properties and, until its bank line of credit was repaid in December 2010, was restricted from making withdrawals under the terms of the line of credit. When funds become available for distribution from net proceeds, the General Partner is permitted to make a pro rata distribution to all partners of up to 10% of the aggregate capital accounts of all outstanding limited partner Units in any calendar year, which would prevent any limited partner withdrawals during the same year. However, there can be no assurance that 10% of the aggregate capital accounts of all outstanding limited partner Units will be distributed in any calendar year. No pro rata capital distributions were made during 2012 or during the three months ended March 31, 2013.

In April 2011, the General Partner suspended the Distribution Reinvestment Plan for all limited partners in an effort to ensure the Partnership’s ability to continue to operate in compliance with the requirements of the Partnership Agreement.  The Partnership Agreement requires that 86.5% of capital contributions to the Partnership be committed to mortgage loan investments but also limits the Partnership’s ability to make additional investments in mortgage loans while the Partnership has qualifying withdrawal requests from limited partners that are pending and unpaid.  In recent years, Partnership liquidity issues have limited the Partnership’s ability to honor withdrawal requests and/or make pro rata capital distributions at the maximum level (10%), which has restricted the Partnership’s additional mortgage lending activities.

NOTE 10 – RESTRICTED CASH
 
Contingency Reserves
 
In accordance with the Partnership Agreement, the Partnership is required to maintain cash, cash equivalents and marketable securities as contingency reserves in an aggregate amount of at least 1-1/2% of the tax basis capital accounts of the limited partners. The cash capital contributions of the General Partner, up to a maximum of 1/2 of 1% of the limited partners’ capital accounts, may be maintained as additional contingency reserves, if considered necessary by the General Partner.  Although the General Partner believes the contingency reserves are adequate, it could become necessary for the Partnership to sell or otherwise liquidate certain of its investments or other assets to cover such contingencies on terms which might not be favorable to the Partnership, which could lead to unanticipated losses upon sale of such assets.
 
The 1-1/2% contingency reserves required per the Partnership Agreement as of March 31, 2013 and December 31, 2012 were approximately $3,946,000 and $3,948,000 and are reported as restricted cash in the accompanying consolidated balance sheets. Cash, cash equivalents and/or certificates of deposit as of the same dates were accordingly maintained as reserves.
 
Escrow Deposits
 
As part of the parcel purchases by TSV in December 2012, the Partnership deposited approximately $2,316,000 into an escrow account to pay delinquent property taxes on the parcels purchased once property reassessments were completed. The reassessments were completed in February 2013 and approximately $1,691,000 in delinquent taxes was paid out of the escrow account.  The remaining escrow funds of approximately $625,000 were remitted back to the Partnership during the quarter.
 
26
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



 
NOTE 11 – FAIR VALUE
 
The Partnership measures its financial and nonfinancial assets and liabilities pursuant to ASC 820 – Fair Value Measurements and Disclosures.  ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
 
Fair value is defined in ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
 
Level 1       Quoted prices in active markets for identical assets or liabilities
 
Level 2       Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in active markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities

Level 3       Unobservable inputs that are supported by little or no market activity, such as the
Partnership’s own data or assumptions

Level 3 inputs include unobservable inputs that are used when there is little, if any, market activity for the asset or liability measured at fair value. In certain cases, the inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level in which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another.  In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

The following is a description of the Partnership’s valuation methodologies used to measure and disclose the fair values of its financial and nonfinancial assets and liabilities on a recurring and nonrecurring basis.
 
Impaired Loans
 
The Partnership does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established.  A loan is considered impaired when, based on current information and events, it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement or when monthly payments are delinquent greater than ninety days. Once a loan is identified as impaired, management measures impairment in accordance with ASC 310-10-35.  The fair value of impaired loans is estimated by either an observable market price (if available) or the fair value of the underlying collateral, if collateral dependent.  The fair value of the loan’s collateral is determined by licensed third party appraisals, broker price opinions, comparable properties or other indications of value. Those impaired loans not requiring an allowance represent loans for which the fair value of the collateral exceed the recorded investments in such loans. At March 31, 2013 and December 31, 2012, the majority of the total impaired loans were evaluated based on the fair value of the collateral by obtaining third party appraisals that valued the collateral primarily by utilizing an income or market approach or some combination of the two.  In accordance with ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is
 
27
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)


based on an observable market price or is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data, the Partnership records the impaired loan as nonrecurring Level 2.  When an appraised value is not available, management determines the fair value of the collateral is further impaired below the appraised value or there is no observable market data included in a current appraisal, the Partnership records the impaired loan as nonrecurring Level 3. Unobservable market data included in appraisals often includes adjustments to comparable property sales for such items as location, size and quality to estimate fair values using a sales comparison approach.  Unobservable market data also includes cash flow assumptions and capitalization rates used to estimate fair values under an income approach.

Real Estate Held for Sale and Investment
 
Real estate held for sale and investment includes properties acquired through foreclosure of the related loans. When property is acquired, any excess of the Partnership’s recorded investment in the loan and accrued interest income over the estimated fair market value of the property, net of estimated selling costs, is charged against the allowance for credit losses. Subsequently, real estate properties are carried at the lower of carrying value or fair value less costs to sell. The Partnership periodically compares the carrying value of real estate held for investment to expected future cash flows as determined by internally or third party generated valuations (including third party appraisals that primarily utilize an income or market approach or some combination of the two) for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to fair value. As fair value is generally based upon the future undiscounted cash flows, the Partnership records the impairment on real estate properties as nonrecurring Level 3.  Unobservable market data included in appraisals often includes adjustments to comparable property sales for such items as location, size and quality to estimate fair values using a sales comparison approach.  Unobservable market data also includes cash flow assumptions and capitalization rates used to estimate fair values under an income approach.

 
28
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



The following table presents information about the Partnership’s assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2013 and December 31, 2012:
 
   
Fair Value Measurements Using
 
Carrying Value
Quoted Prices In Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
2013
        
Nonrecurring:
        
Impaired loans:
    
 
 
  Commercial real estate
$       630,909
—
—
$         630,909
  Condominiums
4,339,200
—
—
        4,339,200
  Improved and
    unimproved land
 
6,777,600
 
—
 
—
 
        6,777,600
 
 Total
 
$   11,747,709
 
—
 
—
 
$    11,747,709
         
Real estate properties:
  
 
 
 
  Commercial
$   2,174,087
—
—
$     2,174,087
  Condominiums
8,517,932
    
8,517,932
  Single family homes
       35,465
—
—
          35,465
  Improved and
    unimproved land
 
     15,168,546
 
—
 
—
 
     15,168,546
 
Total
 
$   25,896,030
 
—
 
—
 
$   25,896,030
         
2012
        
Nonrecurring:
        
Impaired loans:
        
  Commercial real estate
$        632,795
—
—
   $         632,795
  Condominiums
4,339,200
—
—
        4,339,200
  Improved and
    unimproved land
 
6,184,845
 
—
 
—
 
        6,184,845
 
Total
 
$   11,156,840
 
—
 
—
 
   $    11,156,840
         
Real estate properties:
        
  Commercial
$      2,174,087
—
—
$      2,174,087
  Condominiums
8,517,932
    
8,517,932
  Single family homes
     78,531
—
—
          78,531
  Improved and
    unimproved land
 
15,183,504
 
—
 
—
 
    15,183,504
 
Total
 
$    25,954,054
 
—
 
      —
 
   $     25,954,054

The (reversal) provision for loan losses based on the fair value of loan collateral less estimated selling costs for the impaired loans above totaled $(188,213) and $86,334 during the three months ended March 31, 2013 and 2012, respectively. No impairment losses were recorded on real estate properties during the three months ended March 31, 2013 and 2012.
 
29
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)


During the three months ended March 31, 2013 and 2012, there were no transfers in or out of Levels 1 and 2.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2013:

Description
  
Fair Value
  
Valuation Technique
  
Significant Unobservable Inputs
  
Range (Weighted Average)
                 
Impaired Loans:
                
                 
Commercial
$
    630,909
  
Appraisal
  
Estimate of Future Improvements
  
13.9%
           
Discount Rate
  
9.5%
Condominiums
$
 4,339,200
  
Appraisal
  
Capitalization Rate
  
6%
Improved and unimproved land
$
 6,777,600
  
Appraisal
  
Comparable Sales Adjustment Range
  
-23% to 33% (-23% to 33%)
           
Discounts on Land improvements
  
66.7%
Real Estate Properties:
                
                 
Commercial
$
 2,174,087
  
Appraisal
  
Comparable Sales Adjustment Range
  
-58% to 10% (-24.6% to 0.6%)
           
Capitalization Rate
  
8.2%
           
Estimate of Future Improvements
  
17.8%
Condominiums
$
 8,517,932
  
Appraisal
  
Capitalization Rates
  
4.5%
           
Estimate of Future Improvements
  
1.6%
Single Family Homes
$
      35,465
  
Appraisal
  
Comparable Sales Adjustment Range
  
 -23.4% to 0% (-23.4% to 0%)
           
Discount Rate
  
25%
Improved and unimproved land
$
15,168,546
  
Appraisal
  
Comparable Sales Adjustment Range
  
-70.3% to 62.7% (-23.3% to 25%)
           
Estimate of Future Improvements
  
26.6%

Where only one percentage is presented in the above table there was only one unobservable input of that type for one loan or property. Adjustments to comparable sales included items such as market conditions, location, size, condition, access/frontage and intended use.

 
30
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)



The approximate carrying amounts and estimated fair values of financial instruments at March 31, 2013 and December 31, 2012 are as follows:
 
         
Fair Value Measurements at March 31, 2013
     
Carrying Value
  
Level 1
  
Level 2
  
Level 3
  
Total
Financial assets
                    
 
Cash and cash equivalents
$
20,107,000
$
20,107,000
$
—
$
—
$
20,107,000
 
Restricted cash
  
3,946,000
  
3,946,000
  
—
  
—
  
3,946,000
 
Loans secured by trust deeds
  
44,138,000
  
—
  
—
  
44,138,000
  
44,138,000
 
Investment in limited liability company
  
2,183,000
  
—
  
—
  
2,183,000
  
2,183,000
 
Interest and other receivables
  
2,334,000
  
—
  
374,000
  
1,960,000
  
2,334,000
                       
Financial liabilities
                    
 
Due to general partner
$
453,000
$
—
$
453,000
$
—
$
453,000
 
Accrued interest payable
  
97,000
  
—
  
97,000
  
—
  
97,000
 
Notes payable
  
13,342,000
  
—
  
—
  
13,411,000
  
13,411,000
                       

 
         
Fair Value Measurements at December 31, 2012
     
Carrying Value
  
Level 1
  
Level 2
  
Level 3
  
Total
Financial assets
                    
 
Cash and cash equivalents
$
21,132,000
$
21,132,000
$
—
$
—
$
21,132,000
 
Restricted cash
  
6,264,000
  
6,264,000
  
—
  
—
  
6,264,000
 
Loans secured by trust deeds
  
45,844,000
  
—
  
—
  
45,844,000
  
45,844,000
 
Investment in limited liability company
  
2,142,000
  
—
  
—
  
2,142,000
  
2,142,000
 
Interest and other receivables
  
3,485,000
  
—
  
1,890,000
  
1,595,000
  
3,485,000
                       
Financial liabilities
                    
 
Due to general partner
$
298,000
$
—
$
298,000
$
—
$
298,000
 
Accrued interest payable
  
56,000
  
—
  
56,000
  
—
  
56,000
 
Notes payable
  
13,385,000
  
—
  
—
  
13,461,000
  
13,461,000

The carrying value of cash and cash equivalents and restricted cash approximates the fair value because of the relatively short maturity of these instruments and are classified as Level 1.  The carrying value of loans secured by trust deeds (net of allowance for loan losses), other than those analyzed under ASC 310-10-35 and ASC 820 above, approximates the fair value. The fair value is estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made by the Partnership resulting in a Level 3 classification. The applicable amount of accrued interest receivable and advances related thereto has also been considered in evaluating the fair value versus the carrying value of loans. The fair value of the Partnership’s investment in limited liability company is estimated based on an appraisal obtained, approximates the carrying value and is classified as Level 3. The fair values of the Partnership’s notes payable are estimated based upon comparable market indicators of current pricing for the same or similar issues or on the current rates offered to the Partnership for debt of the same remaining maturities resulting in a Level 3 classification. The carrying values of interest and other receivables, due to general partner and accrued interest payable are estimated to approximate fair values due to the short term nature of these instruments and are classified as Level 2 (except for advances related to loans which are classified as Level 3).
 
31
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)


NOTE 11 - COMMITMENTS AND CONTINGENCIES

Environmental Remediation Obligation

The Partnership has an obligation to pay all required costs to remediate and monitor contamination of the real properties owned by 1850. As part of the Operating Agreement executed by the Partnership and its joint venture partner in 1850, Nanook, the Partnership has indemnified Nanook against all obligations related to the expected costs to monitor and remediate the contamination. In 2008, the Partnership had accrued an amount that a third party consultant had estimated will need to be paid to monitor and remediate the site. The majority of clean-up activities were completed during 2012 as part of the tenant’s construction of a new building on the site. Thus, approximately $460,000 was paid by the Partnership from the previously established liability, and an additional $100,000 was accrued during the year ended December 31, 2012 as a result of an updated estimate of future costs to be incurred. If additional amounts are required, it will be an obligation of the Partnership. As of March 31, 2013 and December 31, 2012, approximately $68,000 and $70,000 of this obligation remains accrued on the Partnership’s books. All costs for this remediation will be paid from cash reserves.

During the course of due diligence performed by a potential buyer of TOTB in the year ended December 31, 2012, a low level of arsenic was found in the ground water of a monitoring well located on the property owned by TOTB. While the level of arsenic exceeds the minimum level acceptable for drinking water standards, the water under this property is subject to tidal influence and is not used for domestic consumption.  The Partnership and the General Partner have retained an environmental consultant to perform additional testing and analysis with the goal of petitioning the appropriate governmental agency to issue a no further action letter for this property due to the low level of contamination and the low quality of the ground water under the property.  At this time, the costs of any potential remediation and/or monitoring are unknown and cannot be estimated. Approximately $30,000 has been accrued and/or paid as an estimate of the environmental consultant’s costs to perform testing and analysis.

Contractual Obligations

The Partnership has entered into various contracts for the preliminary design, engineering and permit approval process for the land owned by TSV (see Note 2). The aggregate amount of these contracts as of the date of this filing is approximately $1,712,000. All costs for this project will be paid from cash reserves and/or construction financing to be obtained in the future.

Legal Proceedings

The Partnership is involved in various legal actions arising in the normal course of business.  In the opinion of management, such matters will not have a material effect upon the financial position of the Partnership.

NOTE 12 – SUBSEQUENT EVENT

The board of directors of the General Partner, as the sole general partner of the Partnership, has initiated a restructuring of the Partnership’s business operations to allow the Partnership to qualify as a real estate investment trust, or a REIT, for U.S. federal income tax purposes. The merger that is anticipated to effect the restructuring, the related restructuring transactions, and the election of REIT status is referred to as the “REIT conversion”. On January 23, 2013, the Partnership entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Owens Realty Mortgage, Inc. providing for, among other things, the merger of the Partnership with and into Owens Realty Mortgage, Inc. (the “Merger”). The Merger is subject to certain conditions, including limited partner approval. On April 16, 2013, at a special meeting, the limited partners approved the Merger Agreement, and the transactions contemplated thereby which will effect the REIT conversion.  The General Partner believes that the REIT conversion will provide limited partners with increased opportunity for liquidity for their investment, while maintaining the business operations and assets of the Partnership. Subject to compliance with applicable REIT
 
32
 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)


rules and regulations, the General Partner intends to operate the business of the new REIT after the REIT conversion substantially as the Partnership’s business is currently conducted, while leaving substantially intact the current management structure and operating policies of the Partnership and substantially replicating the limited partners’ existing rights in the Partnership in the REIT. The General Partner does not expect a significant change in the Partnership’s business operations as a result of the REIT conversion. The REIT conversion is not expected to change the Partnership’s investment objectives.

The Partnership is working to close the Merger and complete the REIT conversion as soon as possible.  Shortly after closing of the Merger, Owens Realty Mortgage, Inc., as the surviving corporation in the Merger, will elect to be taxed as a REIT under the U.S. Internal Revenue Code. In the Merger, limited partners are expected to receive one share of common stock, par value $0.01 per share, of Owens Realty Mortgage, Inc., or Common Stock, for every 25 limited partner units of the Partnership that they own. Owens Realty Mortgage, Inc. currently intends to seek to have its Common Stock listed on the NYSE MKT, LLC.

As of March 31, 2013 and December 31, 2012, the Partnership has incurred approximately $1,148,000 and $708,000, respectively, in legal and other related costs related to the REIT conversion and offering, which are included in Other Assets in the accompanying consolidated balance sheets.
 
33
 


 

Forward Looking Statements

Some of the information in this Form 10-Q may contain forward-looking statements. Such statements can be identified by the use of forward-looking words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. These statements discuss expectations, hopes, intentions, beliefs and strategies regarding the future, contain projections of results of operations or of financial conditions or state other forward-looking information. When considering such forward-looking statements, you should keep in mind the risk factors and other cautionary statements in the Partnership’s Form 10-Q and in the most recent Form 10-K. Forward-looking statements include, among others, statements regarding future interest rates and economic conditions and their effect on the Partnership and its assets, trends in real estate markets in which the Partnership does business, effects of competition, estimates as to the allowance for loan losses and the valuation of real estate held for sale and investment, estimates of future limited partner withdrawals, additional foreclosures in 2013 and their effects on liquidity, and recovering certain values for properties through sale. Although management of the Partnership believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there are certain factors, in addition to these risk factors and cautioning statements, such as unexpected changes in general economic conditions or interest rates, local real estate conditions, including a downturn in the real estate markets where the Partnership has made loans, adequacy of reserves, the impact of competition and competitive pricing, or weather and other natural occurrences that might cause a difference between actual results and those forward-looking statements.  All forward-looking statements and reasons why results may differ included in this Form 10-Q are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ.

Critical Accounting Policies

In preparing the consolidated financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and revenues and expenses for the reporting periods. Such estimates relate principally to the determination of (1) the allowance for loan losses including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the fair value of the property as collateral; (2) the valuation of real estate held for sale and investment (at acquisition and subsequently); and (3) the estimate of environmental remediation liabilities. At March 31, 2013, the Partnership owned thirty-two real estate properties, including sixteen within majority- or wholly-owned limited liability companies. The limited liability companies not wholly owned by the Partnership are held as follows: a 80.74% ownership interest in a limited liability company that owns property located in Miami, Florida (the General Partner holds the remaining ownership interests), a 60% ownership interest in a limited liability company that owns property located in Pomona, California (a third party holds the remaining ownership interest), and a 65% ownership interest in a limited liability company that owns property located in Greeley, Colorado (a third party holds the remaining ownership interests). The Partnership also has a 50% ownership interest in a limited liability company accounted for under the equity method that owns property located in Santa Clara, California (a third party holds the remaining ownership interest).

Loans secured by trust deeds are stated at the principal amount outstanding. The Partnership’s portfolio consists primarily of commercial real estate loans generally collateralized by first, second and third deeds of trust.  Interest income on loans is accrued by the simple interest method. Loans are generally placed on nonaccrual status when the borrowers are past due greater than ninety days or when full payment of principal and interest is not expected. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest remains accrued until the loan becomes current, is paid off or is foreclosed upon. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Cash receipts on nonaccrual loans are used to reduce any outstanding accrued interest, and then are recorded as interest income, except when such payments are specifically designated as principal reduction or when management does not believe the Partnership’s investment in the loan is fully recoverable.

 
34
 
Loans and related accrued interest and advances are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. Provisions are made to adjust the allowance for loan losses to an amount considered by management to be adequate, with consideration to original collateral values at loan inception and to provide for unrecoverable accounts receivable, including impaired and other loans, accrued interest, and advances on loans.

Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan losses. Actual results could vary from the aforementioned provisions for losses. If the probable ultimate recovery of the carrying amount of a loan is less than amounts due according to the contractual terms of the loan agreement, the carrying amount of the loan is reduced to the present value of future cash flows discounted at the loan’s effective interest rate. If a loan is collateral dependent, it is valued by management at the estimated fair value of the related collateral, less estimated selling costs. Estimated collateral fair values are determined based on third party appraisals, opinions of fair value from third party real estate brokers and/or comparable third party sales.

If events and/or changes in circumstances cause management to have serious doubts about the collectability of the contractual payments or when monthly payments are delinquent greater than ninety days, a loan is categorized as impaired and interest is no longer accrued. Any subsequent payments received on impaired loans are first applied to reduce any outstanding accrued interest, and then are recognized as interest income, except when such payments are specifically designated principal reduction or when management does not believe the Partnership’s investment in the loan is fully recoverable.

The Partnership leases multifamily rental units under operating leases with terms of generally one year or less. Rental revenue is recognized, net of rental concessions, on a straight-line method over the related lease term. Rental income on commercial property is recognized on a straight-line basis over the term of each operating lease.
Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.

Real estate held for sale (including six properties within consolidated limited liability companies) includes real estate acquired in full or partial settlement of loan obligations generally through foreclosure that is being marketed for sale. Real estate held for sale is recorded at acquisition at the lower of the recorded investment in the loan, inclusive of any senior indebtedness, or at the property’s estimated fair value, less estimated costs to sell, as applicable.  After acquisition, real estate held for sale is analyzed periodically for changes in fair values.

Real estate held for investment includes real estate purchased or acquired in full or partial settlement of loan obligations generally through foreclosure (including ten properties within consolidated limited liability companies) that is not being marketed for sale and is either being operated, such as rental properties; is being managed through the development process, including obtaining appropriate and necessary entitlements, permits and construction; or are idle properties awaiting more favorable market conditions. Real estate held for investment is recorded at acquisition at the lower of the recorded investment in the loan, inclusive of any senior indebtedness, or at the property’s estimated fair value, less estimated costs to sell, as applicable.  Depreciation of buildings and improvements is provided on the straight-line method over the estimated remaining useful lives of buildings and improvements.  Depreciation of tenant improvements is provided on the straight-line method over the lives of the related leases.  Costs related to the improvement of real estate held for sale and investment are capitalized, whereas those related to holding the property are expensed.

The Partnership periodically compares the carrying value of real estate held for investment to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value.

The Partnership’s environmental remediation liability related to the property located in Santa Clara, California was estimated based on a third party consultant’s estimate of the costs required to remediate and monitor the contamination.

 
35
 

Recent Activities

The board of directors of the General Partner, as the sole general partner of the Partnership, has initiated a restructuring of the Partnership’s business operations to allow the Partnership to qualify as a real estate investment trust, or a REIT, for U.S. federal income tax purposes. The merger that is anticipated to effect the restructuring, the related restructuring transactions, and the election of REIT status is referred to as the “REIT conversion”. On January 23, 2013, the Partnership entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Owens Realty Mortgage, Inc. providing for, among other things, the merger of the Partnership with and into Owens Realty Mortgage, Inc. (the “Merger”). The Merger is subject to certain conditions, including limited partner approval. On April 16, 2013, at a special meeting, the limited partners approved the Merger Agreement, and the transactions contemplated thereby which will effect the REIT conversion.  The General Partner believes that the REIT conversion will provide limited partners with increased opportunity for liquidity for their investment, while maintaining the business operations and assets of the Partnership. Subject to compliance with applicable REIT rules and regulations, the General Partner intends to operate the business of the new REIT after the REIT conversion substantially as the Partnership’s business is currently conducted, while leaving substantially intact the current management structure and operating policies of the Partnership and substantially replicating the limited partners’ existing rights in the Partnership in the REIT. The General Partner does not expect a significant change in the Partnership’s business operations as a result of the REIT conversion. The REIT conversion is not expected to change the Partnership’s investment objectives.

The Partnership is working to close the Merger and complete the REIT conversion as soon as possible.  Shortly after closing of the Merger, Owens Realty Mortgage, Inc., as the surviving corporation in the Merger, will elect to be taxed as a REIT under the U.S. Internal Revenue Code. In the Merger, limited partners are expected to receive one share of common stock, par value $0.01 per share, of Owens Realty Mortgage, Inc., or Common Stock, for every 25 limited partner units of the Partnership that they own. Owens Realty Mortgage, Inc. currently intends to seek to have its Common Stock listed on the NYSE MKT, LLC. For a more detailed discussion of the contemplated REIT conversion, including a discussion of some of the potential risks associated with the REIT conversion, please see the current proxy statement/prospectus filed with the SEC by Owens Realty Mortgage, Inc., available to the public and over the Internet at the SEC’s website at http://www.sec.gov.

Related Parties

The General Partner of the Partnership is Owens Financial Group, Inc. (the “General Partner”).  All Partnership business is conducted through the General Partner, which arranges, services, and maintains the loan portfolio for the benefit of the Partnership.  The fees received by the General Partner are paid pursuant to the Partnership Agreement and are determined at the sole discretion of the General Partner, subject to the limitations imposed by the Partnership Agreement. The General Partner is expected to continue to provide these services following the REIT conversion and is expected to be compensated for its services as set forth in the Owens Realty Mortgage, Inc.’s charter and management agreement between the General Partner and Owens Realty Mortgage, Inc. In the past, the General Partner has elected not to take the maximum compensation in order to maintain return to the limited partners at historical levels.  However, due to reduced levels of mortgage investments held by the Partnership, the General Partner may choose to take the maximum compensation for the foreseeable future. The following is a list of various Partnership activities for which related parties are compensated.

·  
Management Fees - In consideration of the management services rendered to the Partnership, the General Partner is entitled to receive from the Partnership a management fee payable monthly, subject to a maximum of 2.75% per annum of the average unpaid balance of the Partnership’s mortgage loans at the end of each month in the calendar year. Management fees amounted to approximately $440,000 and $441,000 for the three months ended March 31, 2013 and 2012, respectively.

·  
Servicing Fees – All of the Partnership’s loans are serviced by the General Partner, in consideration for which the General Partner is entitled to receive from the Partnership a monthly fee, which, when added to all other fees paid in connection with the servicing of a particular loan, does not exceed the lesser of the customary, competitive fee in the community where the loan is placed or up to 0.25% per annum of the unpaid principal balance of the loans at the end of each month. Servicing fees amounted to approximately $43,000 and $41,000 for the three months ended March 31, 2013 and 2012, respectively.
 
 
36
 
 
·  
Acquisition and Origination Fees – The General Partner is entitled to receive and retain all acquisition and origination fees paid or payable by borrowers for services rendered in connection with the evaluation and consideration of potential investments of the Partnership (including any selection fee, mortgage placement fee, nonrecurring management fee, and any origination fee, loan fee, or points paid by borrowers). The acquisition and origination fees are paid by borrowers, and thus, are not an expense of the Partnership. No loan fees were earned by the General Partner during the three months ended March 31, 2013. Fees accrued or paid to the General Partner amounted to approximately $24,000 on loans originated or extended of approximately $800,000 for the three months ended March 31, 2012. The $24,000 of fees earned by the General Partner during the three months ended March 31, 2012 is a back end fee that will be paid only upon the full payoff of the subject loan.

·  
Late Payment Charges – The General Partner is entitled to receive all late payment charges by borrowers on delinquent loans held by the Partnership (including additional interest and late payment fees).  The late payment charges are paid by borrowers and collected by the Partnership with regular monthly loan payments or at the time of loan payoff.  These are recorded as a liability (Due to General Partner) when collected and are not recognized as an expense of the Partnership. The amounts paid to or collected by the General Partner for such charges totaled approximately $1,000 and $2,000 for the three months ended March 31, 2013 and 2012, respectively.

·  
Other Miscellaneous Fees - The Partnership remits other miscellaneous fees to the General Partner, which are collected from loan payments, loan payoffs or advances from loan principal (i.e. funding, demand and partial release fees). There were no such fees remitted to the General Partner during the three months ended March 31, 2013 and 2012, respectively.

·  
Partnership Expenses – The General Partner is entitled to be reimbursed by the Partnership for the actual cost of goods, services and materials used for or by the Partnership and obtained from unaffiliated entities. The General Partner is also entitled to reimbursement for the salaries and related salary expense of the General Partner’s non-management and non-supervisory personnel performing services for the Partnership which could be performed by independent parties (subject to certain limitations in the Partnership Agreement).  The amounts reimbursed to the General Partner by the Partnership were approximately $158,000 and $165,000 during the three months ended March 31, 2013 and 2012, respectively.

·  
Carried Interest and Contributed Capital – The General Partner is required to contribute capital to the Partnership in the amount of 0.5% of the limited partners’ aggregate capital accounts (the “GP Contribution Interest”) and, together with its carried interest (the “Carried Interest”), the General Partner has an interest equal to 1% of the limited partners’ capital accounts. This Carried Interest of the General Partner of up to 1/2 of 1% is recorded as an expense of the Partnership and credited as a contribution to the General Partner’s capital account as additional compensation. As of March 31, 2013, the General Partner had made cash capital contributions of $1,496,000 to the Partnership ($118,000 of which was distributed to the General Partner along with limited partner capital distributions during 2011). The General Partner is required to continue cash capital contributions to the Partnership in order to maintain its required capital balance. There was no Carried Interest expense charged to the Partnership for the three months ended March 31, 2013 and 2012.

Results of Operations

Overview

The Partnership invests in mortgage loans on real property located in the United States that are primarily originated by the General Partner. The Partnership’s primary objective is to generate monthly income from its investments in mortgage loans and real estate properties that were acquired through foreclosure. The Partnership’s focus is on making mortgage loans to owners and developers of real property whose financing needs are often not met by traditional mortgage lenders. These include borrowers that traditional lenders may not normally consider because of perceived credit risks based on ratings or experience levels, and borrowers who require faster loan decisions and funding. One of the Partnership’s competitive advantages has been the ability to approve loan applications and fund more quickly than traditional lenders.

 
37
 
The Partnership originates loans secured by very diverse property types. In addition, the Partnership occasionally lends to borrowers to whom traditional lenders will not normally lend to because of a variety of factors including their credit ratings and/or experience. Due to these factors, the Partnership may make loans that are riskier than loans made by commercial banks and other institutional lenders. To compensate for those potential risks, the Partnership seeks to make loans at higher interest rates and with more protection from the underlying real property collateral, such as with lower loan to value ratios. The Partnership is not presently originating new loans, as it must first either satisfy withdrawal requests of limited partners and/or make capital distributions pro rata to its limited partners of up to 10% of limited partners’ capital per calendar year with net proceeds from loan payoffs, real estate sales and/or capital contributions, as funds become available. However, Owens Realty Mortgage, Inc. anticipates resuming the origination of loans after the REIT conversion.

Due to the declining economy and reductions in real estate values over the past five years, the Partnership has experienced increased delinquent loans and foreclosures which have created substantial losses to the Partnership. In addition, the Partnership now owns significantly more real estate than in the past, which has reduced cash flow and net income. As of March 31, 2013, approximately 72% of Partnership loans are impaired and/or past maturity. In addition, the Partnership now owns approximately $133,000,000 of real estate held for sale or investment.

The Partnership may continue to experience losses in the future. Management expects that, as non-delinquent Partnership loans are paid off by borrowers, interest income received by the Partnership will be reduced. However, Owens Realty Mortgage, Inc. anticipates resuming the origination of loans after the REIT conversion. In addition, the Partnership may foreclose on more delinquent loans, thereby obtaining ownership of more real estate that may create larger losses. Management will attempt to sell many of these properties but may need to sell them for losses or wait until market values recover in the future.

The Partnership’s operating results are affected primarily by:

·  
the level of foreclosures and related loan and real estate losses experienced;
·  
the income or losses from foreclosed properties prior to the time of disposal;
·  
the amount of cash available to invest in mortgage loans;
·  
the amount of borrowing to finance mortgage loan investments, and the Partnership’s cost of funds on such borrowing;
·  
the level of real estate lending activity in the markets serviced;
·  
the ability to identify and lend to suitable borrowers;
·  
the interest rates the Partnership is able to charge on loans; and
·  
the level of delinquencies on mortgage loans.

From 2007 to 2012, the U.S. economy deteriorated due to a combination of factors including a substantial decline in the housing market, liquidity issues in the lending market, and increased unemployment. The national unemployment rate increased from 5.0% in December 2007 to 7.6% in March 2013. The California unemployment rate increased from 6.1% in December 2007 to 9.4% in March 2013. The Federal Reserve decreased the federal funds rate from 4.25% as of December 31, 2007 to 0.25% as of December 31, 2008, where it remained as of March 31, 2013.

The Partnership has experienced increased loan delinquencies and foreclosures over the past six years.  The General Partner believes that this has primarily been the result of the depressed economy, lack of availability of credit and the slowing real estate market in California and other parts of the nation. The increased loan delinquencies and foreclosures have resulted in a substantial reduction in Partnership income over the past six years. In addition, due to the state of the economy and depressed real estate values, the Partnership has had to increase its loan loss reserves and take write-downs on certain real estate properties which, in turn, have resulted in losses to the Partnership.

 
38
 
Although currently the General Partner believes that only six of the Partnership's delinquent loans will result in loss to the Partnership (and has caused the Partnership to record specific allowances for loan losses on such loans), real estate values could decrease further.  The Partnership continues to perform frequent evaluations of such collateral values using internal and external sources, including the use of updated independent appraisals.  As a result of these evaluations, the allowance for loan losses and the Partnership’s investments in real estate could change in the near term, and such changes could be material. During 2012, the Partnership obtained updated appraisals on the majority of the properties securing its trust deed investments and its wholly- and majority-owned real estate properties.

The Partnership has experienced a significant increase in limited partner capital withdrawal requests since late 2008. As of March 31, 2013, the Partnership has received requests for withdrawal from limited partners holding approximately 109,648,000 Units, which represents approximately 39% of all outstanding limited partner Units and units represented by the general partner’s interest. All scheduled withdrawals from January 1, 2009 to March 31, 2013 were not made because the Partnership has not had sufficient available cash to make such withdrawal requests, needed to have funds in reserve for operations, needed to protect its interest in certain delinquent loans, needed to make improvements to real estate properties and, until its bank line of credit was repaid in December 2010, was restricted from making withdrawals under the terms of the line of credit. When funds become available for distribution from net proceeds, the General Partner is permitted to make a pro rata distribution to all partners of up to 10% of the aggregate capital accounts of all outstanding limited partners Units in any calendar year, which will prevent any limited partner withdrawals during the same year. However, there can be no assurance that 10% of the aggregate capital accounts of all outstanding limited partner Units will be distributed in any calendar year. No pro rata capital distributions were made during the three months ended March 31, 2013 and the year ended December 31, 2012.

After the REIT conversion, a new distribution policy will be implemented.  In order to maintain its qualification as a REIT under the IRS Code, Owens Realty Mortgage, Inc. (the successor REIT of the Partnership) is required to distribute at least 90% of its REIT taxable income for such year (determined without regard to the dividends paid deduction and by excluding net capital gain). Owens Realty Mortgage, Inc. currently intends, to the extent practicable, to distribute substantially all of its REIT taxable income and net capital gain each year, consistent with the Partnership’s practice of distributing all of its net income available for distribution. Owens Realty Mortgage, Inc. may distribute an amount in excess of its REIT taxable income and net capital gain, which amount will generally represent a non-taxable return of capital up to a shareholder’s tax basis in Owens Realty Mortgage, Inc. stock and then generally capital gain. Owens Realty Mortgage, Inc. anticipates that distributions will be paid monthly. Owens Realty Mortgage, Inc. anticipates that distributions generally will be paid from net cash available for distribution (generally equal to cash from operations (other than repayments of mortgage loan principal) less an amount set aside for creation or restoration of reserves during the quarter). However, the actual amount and timing of the distributions will be as determined and authorized by the board of directors of Owens Realty Mortgage, Inc., and will depend on its financial condition, earnings and other factors.

Although it appears that the U.S. economy has recently experienced positive growth, continued unemployment could negatively affect the values of real estate held by the Partnership and providing security for Partnership loans. This could potentially lead to even greater delinquencies and foreclosures, further reducing the liquidity and net income (yield) of the Partnership, decreasing the cash available for distribution, and increase real estate held by the Partnership.

Historically, the General Partner has focused its operations on California and certain Western states. Because the General Partner has a significant degree of knowledge with respect to the real estate markets in such states, it is likely most of the Partnership’s loans will be concentrated in such states. As of March 31, 2013, 63.4% of loans were secured by real estate in Northern California, while 11.0%, 11.0% 5.9%, 3.8%, 3.0% and 1.9% were secured by real estate in Arizona, Southern California, Pennsylvania, Utah, Washington and Louisiana, respectively. Such geographical concentration creates greater risk that any downturn in such local real estate markets could have a significant adverse effect upon results of operations.

 
39
 
 
Summary of Financial Results
 
Three Months Ended March 31,
  
 
2013
  
2012
  
Total revenues
$
4,635,135
  
$
4,776,740
  
Total expenses
  
3,231,443
    
3,990,211
  
             
Net income
$
1,403,692
  
$
786,529
  
             
Less: Net loss (income) attributable to noncontrolling interests
  
26,240
    
(624,016
)
             
Net income attributable to Owens Mortgage Investment Fund
$
1,429,932
  
$
162,513
  
             
Net income allocated to limited partners
$
1,415,329
  
$
160,818
  
             
Net income allocated to limited partners per weighted average limited partnership unit
$
0.005
  
$
0.001
  
             
Annualized rate of return to limited partners (1)
  
2.0%
    
0.2%
  
             
Distribution per partnership unit (yield) (2)
  
(0.2)%
    
(1.8)%
  
             
Weighted average limited partnership units
  
278,606,000
    
278,606,000
  

 
 
 (1)
The annualized rate of return to limited partners is calculated based upon the net income allocated to limited partners per weighted average limited partnership unit as of March 31, 2013 and 2012 divided by the number of months during the period and multiplied by twelve (12) months.
 
 
(2)
Distribution per partnership unit (yield) is the annualized average of the monthly yield paid to the partners for the periods indicated. The monthly yield is calculated by dividing the total monthly cash distribution to partners by the prior month’s weighted average partners’ capital balance.

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Total Revenues

Interest income on loans secured by trust deeds increased $273,000 (44.5% increase) during the three months ended March 31, 2013, as compared to the same period in 2012, primarily due to past due interest of approximately $231,000 collected on one delinquent loan during the quarter.

Gain on sale of real estate increased $30,000 during the three months ended March 31, 2013, as compared to the same period in 2012, due to the sale of four lots (one with a manufactured home) in the manufactured home subdivision development located in Ione, California during the quarter. There were no real estate sales during the three months ended March 31, 2012.

Gain on foreclosure of loan increased $952,000 during the three months ended March 31, 2013, as compared to the same period in 2012. Tahoe Stateline Venture, LLC (“TSV”) purchased a note senior to notes held by the Partnership at a discount during the quarter. TSV then foreclosed on the note and acquired the parcels of land during the quarter. The fair market value of the land acquired was estimated to be higher than TSV’s basis in the subject loan, and, thus, a gain on foreclosure in the amount of approximately $952,000 was recorded.
 
 
 
40
 
Recognition of deferred gain on sale of real estate decreased $805,000 during the three months ended March 31, 2013, as compared to the same period in 2012. During the three months ended March 31, 2012, the Partnership recognized $805,000 in deferred gain related to the sale of the Bayview Gardens property in 2006 as the carry back note was repaid in full by the buyer/borrower during the quarter ended March 31, 2012.

Total Expenses

The maximum servicing fees were paid to the General Partner during the three months ended March 31, 2013 and 2012. If the maximum management fees had been paid to the General Partner during the three months ended March 31, 2013, the management fees would have been $478,000 (increase of $38,000), which would have decreased net income allocated to limited partners by approximately 2.7% and net income allocated to limited partners per weighted average limited partner unit by the same percentage to income of $.0049 from income of $.0051. If the maximum management fees had been paid to the General Partner during the three months ended March 31, 2012, the management fees would have been $451,000 (increase of $10,000), which would have decreased net income allocated to limited partners by approximately 5.96% and net income allocated to limited partners per weighted average limited partner unit by the same percentage to income of $0.0005 from income of $0.0006.
 
The maximum management fee permitted under the Partnership Agreement is 2.75% per year of the average unpaid balance of mortgage loans. For the years 2010, 2011 and 2012 and the three months ended March 31, 2013 (annualized), the management fees were 1.00%, 2.19%, 2.67% and 2.53% of the average unpaid balance of mortgage loans, respectively. Although management fees as a percentage of mortgage loans have increased substantially between 2010 and 2013, the total dollar amount of management fees paid to the General Partner has decreased because the weighted balance of the loan portfolio has decreased by approximately 57% between 2010 and 2013.
 
In determining the yield to the partners and hence the management fees, the General Partner may consider a number of factors, including current market yields, delinquency experience, un-invested cash and real estate activities. The General Partner expects that the management fees it receives from the Partnership will vary in amount and percentage from period to period. However, due to reduced levels of mortgage investments held by the Partnership, during the three months ended March 31, 2013, the General Partner has chosen to take close to the maximum compensation that it is able to take pursuant to the Partnership Agreement and will likely continue to take the maximum compensation for the foreseeable future.

Professional fees decreased $248,000 (59.5%) during the three months ended March 31, 2013, as compared to the same period in 2012, primarily due to increased legal costs incurred in the first quarter of 2012 related to certain regulatory matters and related documents and proposed filings for the Partnership and the cost of retaining a firm to appraise the majority of the Partnership’s trust deed and real estate assets as of December 31, 2011.

The reversal of the provision for loan losses of $257,000 during the three months ended March 31, 2013 was the result of an analysis performed on the loan portfolio. The general loan loss allowance decreased $69,000 during the quarter due to a decrease in the historical loss rate utilized. The specific loan loss allowance decreased $188,000 during the quarter as reserves were adjusted on six impaired loans. The Partnership recorded a reversal of the provision for loan losses of approximately $389,000 during the three months ended March 31, 2012.

Net Loss from Rental and Other Real Estate Properties

Net income from rental and other real estate properties increased $94,000 (from net income of $34,000 to net income of $128,000) during the three months ended March 31, 2013, as compared to the same period in 2012, due primarily to the ability of the General Partner to increase the net income or decrease net losses on several Partnership real estate properties in 2012 and 2013, increased occupancy on several properties and the sale of certain properties during the fourth quarter of 2012.

 
41
 

Financial Condition

March 31, 2013 and December 31, 2012

Loan Portfolio

The number of Partnership mortgage investments decreased from 24 as of December 31, 2012 to 21 as of March 31, 2013 and the average loan balance increased from $2,928,000 to $3,252,000 between December 31, 2012 and March 31, 2013.

As of March 31, 2013 and December 31, 2012, the Partnership had thirteen and sixteen impaired loans totaling approximately $47,288,000 (69%) and $49,252,000 (75%), respectively.  This included eleven and thirteen past maturity loans totaling $44,194,000 (65%) and $46,057,000 (66%), respectively. In addition, two and one loan(s) totaling approximately $1,790,000 (3%) and $690,000 (1%), respectively, were past maturity but current in monthly payments as of March 31, 2013 and December 31, 2012, respectively (combined total of impaired and past maturity loans of $49,078,000 (72%) and $49,942,000 (71%), respectively). Of the impaired and past maturity loans, approximately $28,225,000 (41%) and $28,225,000 (40%), respectively, were in the process of foreclosure and $2,630,000 (4%) and $4,493,000 (6%), respectively, involved borrowers who were in bankruptcy as of March 31, 2013 and December 31, 2012.

As of March 31, 2013 and December 31, 2012, approximately $68,298,000 (100%) and $70,161,000 (99.9%) of Partnership loans are interest-only and require the borrower to make a “balloon payment” on the principal amount upon maturity of the loan. To the extent that a borrower has an obligation to pay mortgage loan principal in a large lump sum payment, its ability to satisfy this obligation may be dependent upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial cash amount. As a result, these loans involve a higher risk of default than fully amortizing loans. Borrowers occasionally are not able to pay the full amount due at the maturity date.  The Partnership may allow these borrowers to continue making the regularly scheduled monthly interest payments for certain periods of time to assist the borrower in meeting the balloon payment obligation without formally filing a notice of default.  These loans for which the principal is due and payable, but the borrower has failed to make such payment of principal are referred to as “past maturity loans”. As of March 31, 2013 and December 31, 2012, the Partnership had thirteen and fourteen past maturity loans totaling approximately $45,984,000 and $46,747,000, respectively.

During the three months ended March 31, 2012, the Partnership extended to December 31, 2013 the maturity date of one loan with a principal balance of $800,000.

During the three months ended March 31, 2012, the Partnership recognized $805,000 in deferred gain related to the sale of the Bayview Gardens property in 2006 as the carry back note with a remaining principal balance of approximately $4,891,000 was repaid in full by the buyer/borrower during the quarter ended March 31, 2012.

The Partnership foreclosed on three loans during the three months ended March 31, 2013 with aggregate principal balances totaling approximately $3,264,000 and obtained the properties via the trustee’s sales. The Partnership foreclosed on no loans during the three months ended March 31, 2012.

 
42
 

As of March 31, 2013 and December 31, 2012, the Partnership held the following types of mortgages:

   
2013
  
2012
  
By Property Type:
              
Commercial
  
$
21,989,203
  
$
23,953,081
  
Condominiums
    
17,629,631
    
17,629,631
  
Single family homes (1-4 Units)
    
250,000
    
250,000
  
Improved and unimproved land
    
28,429,550
    
28,429,550
  
   
$
68,298,384
  
$
70,262,262
  
By Deed Order:
              
First mortgages
  
$
51,681,038
  
$
53,544,038
  
Second and third mortgages
    
16,617,346
    
16,718,224
  
   
$
68,298,384
  
$
70,262,262
  

Scheduled maturities of loans secured by trust deeds as of March 31, 2013 and the interest rate sensitivity of such loans are as follows: 

   
Fixed
  
Variable
      
   
Interest
  
Interest
      
   
Rate
  
Rate
  
Total
  
Year ending March 31:
                    
2013 (past maturity)
  
$
45,983,629
  
$
—
  
$
45,983,629
  
2014
    
1,400,000
    
—
    
1,400,000
  
2015
    
3,094,755
    
16,500,000
    
19,594,755
  
Thereafter (through Mar. 2022)
    
—
    
1,320,000
    
1,320,000
  
   
$
50,478,384
  
$
17,820,000
  
$
68,298,384
  

Variable rate loans may use as indices the one-year, five-year and 10-year Treasury Constant Maturity Index (0.14%, 0.77% and 1.87%, respectively, as of March 31, 2013), the prime rate (3.25% as of March 31, 2013) or the weighted average cost of funds index for Eleventh District savings institutions (0.97% as of March 31, 2013) or include terms whereby the interest rate is adjusted at a specific later date. Premiums over these indices have varied from 2.0% to 6.5% depending upon market conditions at the time the loan is made.

The following is a schedule by geographic location of loans secured by trust deeds as of March 31, 2013 and December 31, 2012:
   
March 31, 2013
  
Portfolio
  
December 31, 2012
  
Portfolio
  
   
Balance
  
Percentage
  
Balance
  
Percentage
  
Arizona
  
$
7,535,000
  
11.03%
  
$
7,535,000
  
10.72%
  
California
    
50,810,804
  
74.40%
    
52,774,682
  
75.12%
  
Louisiana
    
1,320,000
  
1.93%
    
1,320,000
  
1.88%
  
Pennsylvania
    
4,021,946
  
5.89%
    
4,021,946
  
5.72%
  
Utah
    
2,594,631
  
3.80%
    
2,594,631
  
3.69%
  
Washington
    
2,016,003
  
2.95%
    
2,016,003
  
2.87%
  
   
$
68,298,384
  
100.00%
  
$
70,262,262
  
100.00%
  

As of March 31, 2013 and December 31, 2012, the Partnership’s loans secured by deeds of trust on real property collateral located in Northern California totaled approximately 63% ($43,311,000) and 64% ($45,275,000), respectively, of the loan portfolio. The Northern California region (which includes Monterey, Fresno, Kings, Tulare and Inyo counties and all counties north) is a large geographic area which has a diversified economic base. The ability of borrowers to repay loans is influenced by the economic strength of the region and the impact of prevailing market conditions on the value of real estate. In addition, as of March 31, 2013 approximately 85% of the Partnership’s mortgage loans were secured by real estate located in the states of California and Arizona, which have experienced dramatic reductions in real estate values over the past six years.

 
43
 
The allowance for loan losses decreased by $257,000 and $389,000 (provision net of charge-offs and recoveries) during the three months ended March 31, 2013 and 2012, respectively.  The General Partner believes that the allowance for loan losses is sufficient given the estimated underlying collateral values of impaired loans. There is no precise method used by the General Partner to predict delinquency rates or losses on specific loans.  The General Partner has considered the number and amount of delinquent loans, loans subject to workout agreements and loans in bankruptcy in determining the allowance for loan losses, but there can be no absolute assurance that the allowance is sufficient.  Because any decision regarding allowance for loan losses reflects judgment about the probability of future events, there is an inherent risk that such judgments will prove incorrect.  In such event, actual losses may exceed (or be less than) the amount of any reserve.  To the extent that the Partnership experiences losses greater than the amount of its reserves, the Partnership may incur a charge to earnings that will adversely affect operating results and the amount of any distributions payable to Limited Partners.

Changes in the allowance for loan losses for the three months ended March 31, 2013 and 2012 were as follows:

   
2013
  
2012
  
Balance, beginning of period
  
$
24,417,897
  
$
24,541,897
  
Reversal of provision for loan losses
    
(257,213
)
  
(389,214
)
Balance, end of period
  
$
24,160,684
  
$
24,152,683
  

As of March 31, 2013 and December 31, 2012, there was a general allowance for loan losses of $1,735,000 and $1,804,000, respectively, and a specific allowance for loan losses on five and six loans in the total amount of $22,425,684 and $22,613,897, respectively.
 
Real Estate Properties Held for Sale and Investment

As of March 31, 2013, the Partnership held title to thirty-two properties that were acquired through foreclosure with a total carrying amount of approximately $132,592,000 (including properties held in sixteen limited liability companies), net of accumulated depreciation of $6,889,000. As of March 31, 2013, properties held for sale total $56,135,000 and properties held for investment total $76,457,000. When the Partnership acquires property by foreclosure, it typically earns less income on those properties than could be earned on mortgage loans and may not be able to sell the properties in a timely manner.

Changes in real estate held for sale and investment during the quarters ended March 31, 2013 and 2012 were as follows:
   
2013
  
2012
  
Balance, beginning of period
  
$
127,773,349
  
$
145,591,660
  
Real estate acquired through foreclosure, net of specific loan loss allowance
    
4,690,525
    
—
  
Investments in real estate properties
    
541,804
    
725,413
  
Sales of real estate properties
    
(43,066
)
  
(1,590,838
)
Assignment of two model homes to Dation joint venture partner for payment of management fees accrued
    
—
    
(96,820
)
Depreciation of properties held for investment
    
(370,433
)
  
(693,875
)
Balance, end of period
  
$
132,592,179
  
$
143,935,540
  

Fourteen of the Partnership’s thirty-two properties do not currently generate revenue. Expenses from real estate properties have decreased from approximately $3,283,000 to $2,595,000 (21% decrease) for the three months ended March 31, 2012 and 2013, respectively, and revenues associated with these properties have decreased from $3,317,000 to $2,723,000 (18% decrease), thus generating a net income from real estate properties of $128,000 during the three months ended March 31, 2013 (compared to $34,000 for the same period in 2012).

 
44
 
During the three months ended March 31, 2013, the Partnership sold four lots (one including a manufactured home) in the manufactured home subdivision development located in Ione, California for aggregate net sales proceeds of approximately $73,000 resulting in a net gain to the Partnership of approximately $30,000.

During the three months ended March 31, 2012, all of the improved lots and manufactured rental homes owned by Dation, LLC were sold for $1,650,000 (cash of $330,000 and a note from the buyer of $1,320,000) resulting in no gain or loss to the Partnership. In addition, during the three months ended March 31, 2012, the Partnership paid its joint venture partner a portion of its accrued management fees owed of approximately $147,000 in the form of $50,000 cash and two model homes with a book value of $97,000 as part of a settlement agreement to remove the partner as a member of the LLC. The $1,320,000 note receivable from the sale was assigned to the Partnership during the quarter. Dation continues to own 40 acres of unimproved land in the home park and one model home.

In May 2013 (subsequent to quarter end), the Partnership sold the 45 residential and 2 commercial units located in Oakland, California and held within 1401 on Jackson, LLC via a land sales contract for $11,000,000 ($1,000,000 down with payments of $37,500 due monthly including 4% interest with all remaining principal and interest due in one year).

In addition, in May 2013, the Partnership sold the office/retail complex located in Hilo, Hawaii for $1,950,000 with a $250,000 cash down payment and a $1,700,000 carryback note due in three years with monthly payments of interest only at a starting rate of 5% per annum. The note calls for principal paydowns of $125,000 each within 30 and 60 days of issuance of the title policy on the property.

TOTB Miami, LLC (TOTB) is a Florida limited liability company formed for the purpose of owning and operating 169 condominium units and a 160 unit apartment building in a complex located in Miami, Florida which were acquired by the Partnership, the General Partner and PRC Treasures, LLC (“PRC”), who were co-lenders in the subject loan, via foreclosure in February 2011. In March 2012, the Partnership made a priority capital contribution to TOTB in the amount of $7,200,000. TOTB then purchased PRC’s member interest in TOTB for $7,200,000. Thus, the remaining members in TOTB are now the Partnership and the General Partner.  On the same date, the Partnership and the General Partner executed an amendment to the TOTB operating agreement to set the percentage of capital held by each at 80.74% for the Partnership and 19.26% for the General Partner based on the dollar amount of capital invested in the properties/TOTB (excluding the Preferred Class A Units). Income and loss allocations are now made based on these percentages after a 15% preferred return to the Partnership based on its $2,583,000 contribution to TOTB in 2011 (represented by its Preferred Class A Units). The change in capital as a result of the PRC buyout and the amended agreement resulted in an adjustment to the Partnership’s capital of approximately $2,760,000. Per the PRC redemption agreement, in the event the TOTB real estate assets are sold in the future for proceeds in excess of the Partnership’s and General Partner’s investments in the LLC, including all capital contributions, loans, protective advances and accrued and unpaid interest under the operating agreement, PRC is to receive 25% of such excess. The assets, liabilities, income and expenses of TOTB have been consolidated into the consolidated balance sheets and statements of operations of the Partnership. The noncontrolling interests of the other members of TOTB totaled approximately $6,073,000 and $6,055,000 as of March 31, 2013 and December 31, 2012, respectively.

2013 Foreclosure Activity

During the quarter ended March 31, 2013, Brannan Island, LLC (wholly owned by the Partnership) foreclosed on two first mortgage loans secured by a marina located in Bethel Island, California with an aggregate principal balance of $1,863,000 and obtained the property via the trustee’s sale.In addition, advances made on the loan or incurred as part of the foreclosure (such as legal fees and delinquent property taxes) in the total amount of approximately $140,000 were capitalized to the basis of the property.

During the quarter ended March 31, 2013, TSV (wholly owned by the Partnership) foreclosed on a first mortgage loan secured by undeveloped parcels of land located in South Lake Tahoe, California that was purchased at a discount during the quarter with a principal balance of approximately $1,401,000 and obtained the property via the trustee’s sale. In addition, advances made on the loan or incurred as part of the foreclosure (including delinquent property taxes) in the total amount of approximately $335,000 were capitalized to the basis of the property. The fair market value of the land acquired was estimated to be higher than TSV’s basis in the subject loan, and, thus, a gain on foreclosure in the amount of approximately $952,000 was recorded.

 
45
 
Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents and restricted cash decreased from approximately $27,396,000 as of December 31, 2012 to approximately $24,053,000 as of March 31, 2013 ($3,343,000 or 12.2% decrease), due primarily to the payment of approximately $1,691,000 in delinquent property taxes out of escrow related to the TSV parcels, the purchase of a first deed of trust by TSV at a discount in the amount of approximately $1,401,000 and the payment of accrued income distributions to partners of approximately $1,265,000 net of approximately $542,000 in capitalized improvements to real estate properties during the quarter ended March 31, 2013.

Interest and Other Receivables

Interest and other receivables decreased from approximately $3,485,000 as of December 31, 2012 to $2,334,000 as of March 31, 2013 ($1,151,000 or 33% decrease) due primarily to a receivable recorded of approximately $1,500,000 from the sale of the golf course owned by DarkHorse Golf Club, LLC on December 31, 2012. The final sale proceeds were wired to the LLC’s bank account on January 2, 2013.

Other Assets

Other assets increased from approximately $1,805,000 as of December 31, 2012 to approximately $2,203,000 as of March 31, 2013 ($397,000 or 22%), due primarily to capitalized offering costs incurred related to the Partnership’s conversion to a REIT as discussed in more detail under “Recent Activities” above.

Accrued Distributions Payable

Accrued distributions payable decreased from approximately $1,234,000 as of December 31, 2012 to $0 as of
March 31, 2013 because income distributions to partners for December 2012 were sent in early January 2013 (and thus accrued at December 31, 2012) and there was no income distribution made to partners in April 2013.

Due to General Partner

Due to General Partner increased from approximately $298,000 as of December 31, 2012 to approximately $453,000 as of March 31, 2013 ($155,000 or 52% increase) due primarily to higher accrued management and service fees owed to the General Partner as of March 31, 2013 as compared to December 31, 2012. These fees are paid pursuant to the Partnership Agreement (see “Results of Operations” above) and can fluctuate from month to month.

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities decreased from approximately $4,013,000 as of December 31, 2012 to approximately $2,820,000 as of March 31, 2013 ($1,193,000 or 29.7% decrease), due primarily to delinquent property taxes accrued on the parcels owned by TSV as of December 31, 2012 that were paid during the quarter ended March 31, 2013.

Asset Quality

A consequence of lending activities is that losses will be experienced and that the amount of such losses will vary from time to time, depending on the risk characteristics of the loan portfolio as affected by economic conditions and the financial experiences of borrowers.  Many of these factors are beyond the control of the General Partner. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on specific loans or on segments of the loan portfolio.

 
46
 
The conclusion that a Partnership loan may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to regulations that, among other things, require them to perform ongoing analyses of their loan portfolios (including analyses of loan-to-value ratios, reserves, etc.), and to obtain current information regarding their borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted these practices. Rather, management of the General Partner, in connection with the quarterly closing of the accounting records of the Partnership and the preparation of the financial statements, evaluates the Partnership’s mortgage loan portfolio. The allowance for loan losses is established through a provision for loan losses based on the General Partner’s evaluation of the risk inherent in the Partnership’s loan portfolio and current economic conditions. Such evaluation, which includes a review of all loans on which the General Partner determines that full collectability may not be reasonably assured, considers among other matters:

·
prevailing economic conditions;
 
·
the Partnership’s historical loss experience;
 
·
the types and dollar amounts of loans in the portfolio;
 
·
borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;
 
·
evaluation of industry trends;
 
·
review and evaluation of loans identified as having loss potential; and
 
·
estimated net realizable value or fair value of the underlying collateral.

Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover probable losses of the Partnership. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Loan losses deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses. As of March 31, 2013, management believes that the allowance for loan losses of $24,161,000 is adequate in amount to cover probable losses. Because of the number of variables involved, the magnitude of the swings possible and the General Partner’s inability to control many of these factors, actual results may differ significantly from estimates made by the General Partner. As of March 31, 2013, thirteen loans totaling $47,288,000 were impaired and are no longer accruing interest. Eleven of these loans totaling $44,194,000 were past maturity as of March 31, 2013. In addition, two loans totaling $1,790,000 was also past maturity but current in monthly payments as of March 31, 2013 (combined total of $49,078,000 in loans that are past maturity and impaired). During the quarter ended March 31, 2013, the Partnership recorded a decrease in the allowance for loan losses of approximately $257,000 (decrease in specific loan loss allowance of $188,000 and decrease in general loan loss allowance of $69,000).  The General Partner believes that the allowance for loan losses is sufficient given the estimated fair value of the underlying collateral values of impaired and past maturity loans.

Liquidity and Capital Resources

The Partnership’s principal source of liquidity is its cash from operations and investments (including interest income, income from the sale of properties held for sale, income from loan pay-offs and income from the operation of certain properties held for investment).

During the quarter ended March 31, 2013, net cash flows used in operating activities approximated $262,000. Investing activities provided approximately $550,000 of net cash during the quarter, as approximately $2,492,000 was received from the payoff of loans, sale of real estate and transfer from restricted to unrestricted cash (as funds were disbursed out of escrow deposits to pay delinquent property taxes related to loans), and approximately $1,942,000 was used for improvements to real estate properties and the purchase of a loan at a discount.  Approximately $1,312,000 of net cash was used in financing activities, as $43,000 was used to make principal payments on a note payable and $1,265,000 was distributed to partners in the form of income distributions. The General Partner believes that the Partnership will have sufficient cash flow to sustain operations over the next year.

Below is management’s estimate of sources and uses of cash for the last nine months of 2013. The below chart includes only those items which management believes to be material. The below chart does not include ordinary course revenues and expenses as management expects that these items will be driven
 
 
47
 
by the market and any estimates would not be meaningful.  As with all estimates, the below table is subject to many possible uncertainties resulting from such items, including, but not limited to, real estate market conditions, macro-economic conditions, tax policy and other items referenced in the “Forward-Looking Statements” above.

         
Sources of cash:
        
Net proceeds from sales of real estate properties
     $
4,413,000
  
Net proceeds from loan payoffs
    
9,000,000
  
Proceeds from new borrowings
    
3,000,000
  
Total sources of cash
     $
16,413,000
  
         
Uses of cash:
        
Purchase of senior indebtedness related to impaired loans
     $
(1,300,000
)
Purchase of parcels contiguous to parcels securing impaired loans
    
(5,500,000
)
ORM share repurchase program
    
(7,000,000
)
Investments in mortgage loans (including impaired loans)
    
(8,500,000
)
Capital expenditures on real estate properties
    
(3,500,000
)
Organization and registration expenditures related to ORM
    
(431,000
)
Total uses of cash
     $
(26,231,000
)
         

In the past, the Partnership has received capital for new mortgage investments from sales of Units to investors, reinvestment of limited partner distributions, portfolio loan payoffs, sales of foreclosed properties and advances on the Partnership’s line of credit (which has been fully repaid and terminated).  If general market interest rates were to increase substantially, investors might turn to interest-yielding investments other than Partnership Units, which would reduce the liquidity of the Partnership and its ability to make additional mortgage investments to take advantage of the generally higher interest rates. In addition, an increase in delinquencies on Partnership loans (including an increase in loans past maturity) could further reduce liquidity and could reduce the cash available to invest in new loans and distribute to limited partners.  In contrast, a significant increase in the dollar amount of loan payoffs, sales of foreclosed properties and additional limited partner investments without the origination of new loans of the same amount would increase the liquidity of the Partnership. Such an increase in liquidity could result in a decrease in the yield paid to limited partners as the Partnership would typically invest the additional funds in lower yielding, short term investments.

The Partnership has experienced a significant increase in limited partner capital withdrawal requests since late 2008. As of March 31, 2013, the Partnership has received requests for withdrawal from limited partners holding approximately 109,648,000 Units, which represents approximately 39% of all outstanding limited partner Units and units represented by the general partner interest. All scheduled withdrawals from January 1, 2009 to March 31, 2013 were not made because the Partnership has not had sufficient available cash to make such withdrawal requests, needed to have funds in reserve for operations, to protect the Partnership’s interest in certain delinquent loans and to make needed improvements to real estate properties and, until its bank line of credit was repaid in December 2010, was restricted from making withdrawals under the terms of the line of credit. When funds become available for distribution from net proceeds, the General Partner is permitted to make a pro rata distribution to all partners of up to 10% of the aggregate capital accounts of all outstanding limited partners Units in any calendar year, which will prevent any limited partner withdrawals during the same year. However, there can be no assurance that 10% of the aggregate capital accounts of all outstanding limited partner Units will be distributed in any calendar year. No pro rata capital distributions were made during the quarter ended March 31, 2013 and the year ended December 31, 2012. During 2011, the Partnership made pro rata capital distributions to all partners totaling approximately $11,588,000, which was approximately 4% of the aggregate capital accounts of all outstanding limited partner Units.

Limited partner capital increased by approximately $1,385,000 during the quarter ended March 31, 2013 due to book basis net income earned by the Partnership during the quarter. There were no reinvested distributions from limited partners during the quarters ended March 31, 2013 and 2012. In April 2011, the General Partner suspended the Distribution Reinvestment Plan for all limited partners, in an effort to ensure the Partnership’s ability to continue to operate in compliance with the requirements of the Partnership Agreement.  The Partnership intends to amend its registration statement to withdraw the remaining
 
 
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registered Units as it no longer intends to sell Units under this registration statement or pursuant to the Distribution Reinvestment Plan. There were no limited partner withdrawals or capital distributions for the quarters ended March 31, 2013 and 2012. No pro rata capital distributions were made during the quarter ended March 31, 2013 or the year ended December 31, 2012. Pro rata capital distributions totaling $11,587,000 were made to all partners during the year ended December 31, 2011. Limited partner withdrawal and capital distribution percentages have been 0.00%, 5.66%, 0.00%, 2.01% and 10.14% for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, respectively. These percentages are the annual average of the Limited Partners’ capital withdrawals and pro rata capital distributions in each calendar quarter divided by the total limited partner capital as of the end of each quarter. Management does not intend to make any further pro rata capital distributions to limited partners prior to the REIT conversion. Following the REIT conversion, management intends to make distributions to stockholders of substantially all income and gain so as to comply with the 90% distribution requirement and limit corporate-level U.S. federal income taxation of Owens Realty Mortgage, Inc.

The Partnership has a note payable with a bank through its investment in 720 University, LLC with a balance of $10,042,000 and $10,085,000 as of March 31, 2013 and December 31, 2012, respectively. The note required monthly interest-only payments until March 1, 2010 at a fixed rate of 5.07% per annum. Commencing April 1, 2010, the note became amortizing and monthly payments of $56,816 are now required, with the balance of unpaid principal due on March 1, 2015. The Partnership anticipates that this note will be paid off from the proceeds of the eventual sale of the property. Alternatively, the note may be refinanced.

Although the Partnership previously had commitments under construction and rehabilitation loans, no such commitments remained as of March 31, 2013.

The Partnership has an obligation to pay all required costs to remediate and monitor contamination of the real properties owned by 1850. As part of the Operating Agreement executed by the Partnership and its joint venture partner in 1850, Nanook, the Partnership has indemnified Nanook against all obligations related to the expected costs to monitor and remediate the contamination. In 2008, the Partnership had accrued an amount that a third party consultant had estimated will need to be paid to monitor and remediate the site. The majority of clean-up activities were completed during 2012 as part of the tenant’s construction of a new building on the site. Thus, approximately $459,000 was paid by the Partnership from the previously established liability and an additional $100,000 was accrued during the year ended December 31, 2012 as a result of an updated estimate of future costs to be incurred. If additional amounts are required, it will be an obligation of the Partnership. As of March 31, 2013 and December 31, 2012, approximately $68,000 and $70,000, respectively, of this obligation remains accrued on the Partnership’s books. All costs for this remediation will be paid from cash reserves.

During the course of due diligence performed by a potential buyer of TOTB in the year ended December 31, 2012, a low level of arsenic was found in the ground water of a monitoring well located on the property owned by TOTB. While the level of arsenic exceeds the minimum level acceptable for drinking water standards, the water under this property is subject to tidal influence and is not used for domestic consumption.  The Partnership and the General Partner have retained an environmental consultant to perform additional testing and analysis with the goal of petitioning the appropriate governmental agency to issue a no further action letter for this property due to the low level of contamination and the low quality of the ground water under the property.  At this time, the costs of any potential remediation and/or monitoring are unknown and cannot be estimated.  Approximately $30,000 has been accrued and/or paid as an estimate of the environmental consultant’s costs to perform testing and analysis.

The Partnership has four delinquent loans with aggregate principal balances totaling approximately $24,203,000 that were originally secured by first, second and third deeds of trust on 29 parcels of land with entitlements for a 502,267 square foot resort development located in South Lake Tahoe, California known as Chateau at Lake Tahoe, or the Project. In July 2012, the Partnership signed purchase agreements totaling $6,600,000 to acquire seven parcels in the Project that are contiguous to parcels securing the Partnership’s loans. These seven parcels had provided partial security for the Partnership’s existing loans which were junior to loans held by senior lenders that foreclosed on the property in 2010 and early 2011.  While these parcels were originally part of the security for the Partnership’s loans, management chose not to advance the funds to acquire the parcels at the foreclosure sales due to the bankruptcy of the borrower and the uncertainty surrounding the Project. As a result, there are multiple owners of the contiguous parcels.  For similar reasons, in July 2012, the Partnership also signed a letter of intent to acquire the senior note for $1,400,000 secured by two parcels on which OMIF holds second and third deeds of trust. In addition, the Partnership agreed to advance $200,000 to obtain a release of the deed of trust that is senior to the Partnership’s loan on a single parcel in the second phase of the Project, and advance $100,000 for the option to acquire a note for $700,000 which is senior to the Partnership’s loan.

 
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The parcel purchases were closed in December 2012 through a new wholly-owned subsidiary of the Partnership, Tahoe Stateline Venture, LLC (“TSV”). The Partnership paid approximately $5,697,000 out of cash reserves for the parcel purchases, including approximately $2,316,000 held by the title company to pay delinquent property taxes on the parcels until property reassessments were completed ($1,691,000 in delinquent property taxes paid and $625,000 in excess funds remitted back to TSV in February 2013). The sellers of the parcels also provided financing for the balance of the purchase prices which total $3,300,000 at 5% interest with interest only, semi-annual payments due in four years from the close of escrow. One of the note purchases in the amount of $1,400,000 closed in February 2013 through TSV and TSV foreclosed on this loan and obtained the parcels via the trustee’s sale in March 2013. In February 2013, the Partnership’s beneficial interest in the four delinquent loans discussed above was transferred to TSV. In May 2013 (subsequent to quarter end) TSV foreclosed on all of the remaining deeds of trust and gained ownership of the related parcels. Because the second note purchase discussed above was not completed prior to foreclosure, TSV became subject to the existing first deed of trust on one of the parcels in the amount of $1,000,000. TSV now owns a total of 19 parcels which includes all of the parcels necessary to complete the first phase of the Project. Management made the decision to purchase these parcels and notes in order to protect the Partnership’s existing investment in the loans by securing controlling ownership of the first phase of the Project, which will enable the Partnership to move ahead with the sale or the development of the Project.  As of March 31, 2013 and December 31, 2012, the Partnership had recorded a specific loan allowance on the delinquent loans discussed above of approximately $18,333,000 and $18,523,000, respectively.

The Partnership has entered into various contracts for the preliminary design, engineering and permit approval process for the land owned by Tahoe Stateline Venture, LLC (see above). The aggregate amount of these contracts as of the date of this filing is approximately $1,712,000. All costs for this project will be paid from cash reserves and/or construction financing to be obtained in the future.

Contingency Reserves

The Partnership is required to maintain cash, cash equivalents and marketable securities as contingency reserves in an aggregate amount of at least 1.5% of the tax basis capital accounts of the limited partners. The cash capital contributions of the General Partner, up to a maximum of 1/2 of 1% of the limited partners’ capital accounts, may be maintained as additional contingency reserves, if considered necessary by the General Partner.  Although the General Partner believes the contingency reserves are adequate, it could become necessary for the Partnership to sell or otherwise liquidate certain of its investments or other assets to cover such contingencies on terms which might not be favorable to the Partnership.


The General Partner of the Partnership carried out an evaluation, under the supervision and with the participation of the General Partner’s management, including the General Partner’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer of the General Partner concluded that, as of March 31, 2013, which is the end of the period covered by this quarterly report on Form 10-Q,  the Partnership’s disclosure controls and procedures were effective.

There have been no changes in the Partnership’s internal control over financial reporting in the fiscal quarter ending March 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 
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PART II. OTHER INFORMATION


In the normal course of business, the Partnership may become involved in various types of legal proceedings including, but not limited to, assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, and judicial foreclosure. These proceedings may seek to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes, or to protect, or recoup the Partnership’s investment from the real property secured by the deeds of trust.  The Partnership believes that it is not party to any pending legal or arbitration proceedings that would have a material adverse effect on its financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on net income in any particular period.


(a)   Exhibits
   31.1
Section 302 Certification of William C. Owens
    31.2 
Section 302 Certification of Bryan H. Draper
32
Certifications Pursuant to 18 U.S.C. Section 1350
 
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Financial statements from this quarterly report on Form 10-Q, formatted in XBRL: (i) the Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, (ii) the Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012, (iii) the Consolidated Statements of Partners’ Capital for the three months ended March 31, 2013 and 2012, (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012, and (v) the Notes to such Consolidated Financial Statements.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Dated:           May 15, 2013
  
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
     
   
By:
OWENS FINANCIAL GROUP, INC., GENERAL PARTNER
       
Dated:           May 15, 2013
  
By: 
 
/s/ William C. Owens
     
William C. Owens, President
       
Dated:           May 15, 2013
  
By: 
 
/s/ Bryan H. Draper
     
Bryan H. Draper, Chief Financial Officer
       
Dated:           May 15, 2013
  
By: 
 
/s/ Melina A. Platt
     
Melina A. Platt, Controller



 
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