-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BX+C6VRFDjDnDU6MSzvHU+nzu7fahK8VhI8sh0tQQ5hTLmjzyJUohzraBUPEotze vN+/NDEhtzdoyOqh9ya38w== 0001047469-07-008903.txt : 20071109 0001047469-07-008903.hdr.sgml : 20071109 20071109162521 ACCESSION NUMBER: 0001047469-07-008903 CONFORMED SUBMISSION TYPE: 10-12G PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20071109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CMR Mortgage Fund II, LLC CENTRAL INDEX KEY: 0001397396 IRS NUMBER: 200671528 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G SEC ACT: 1934 Act SEC FILE NUMBER: 000-52903 FILM NUMBER: 071231978 BUSINESS ADDRESS: STREET 1: 62 1ST STREET STREET 2: 4TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 415-974-1100 MAIL ADDRESS: STREET 1: 62 1ST STREET STREET 2: 4TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94105 10-12G 1 a2180921z10-12g.htm 10-12G
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As filed with the Securities and Exchange Commission on November 9, 2007

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

FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) or 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934

CMR Mortgage Fund II, LLC
(Exact name of registrant as specified in its charter)

California (State or other jurisdiction of incorporation or organization)		20-0671528 I.R.S. Employer Identification No.)
62 First Street, 4th Floor San Francisco, California (Address of principal executive offices)		94105 (Zip Code)

Registrant's telephone number, including area code:

(415) 974-1100

Securities to be registered pursuant to Section 12(b) of the Act:

None

Securities to be registered pursuant to Section 12(g) of the Act:

Membership Interests

(Title of class)

TABLE OF CONTENTS

		Page
Item 1.	Business	1
Item 1A.	Risk Factors	19
Item 2.	Financial Information	28
Item 3.	Properties	47
Item 4.	Security Ownership of Certain Beneficial Owners and Management	47
Item 5.	Directors and Executive Officers	48
Item 6.	Executive Compensation	48
Item 7.	Certain Relationships and Related Transactions, and Director Independence	50
Item 8.	Legal Proceedings	51
Item 9.	Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters	51
Item 10.	Recent Sales of Unregistered Securities	52
Item 11.	Description of Registrant's Securities to be Registered	52
Item 12.	Indemnification of Directors and Officers	55
Item 13.	Financial Statements and Supplementary Data	56
Item 14.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	56
Item 15.	Financial Statements and Exhibits	57
Financial Statements		F-1
Signatures		S-1
Exhibit Index

This Registration Statement on Form 10 contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The outcomes of the events described in these forward looking statements is subject to risks, uncertainties and other factors which may cause the actual outcomes and our results to differ materially from those projected in the forward looking statements. In some cases you can identify forward-looking statements by terms such as "believe," "expect," "will," "should," "may," "anticipate," "intend," "continue" or comparable terminology.

These forward-looking statements are based on the beliefs, assumptions and expectations of California Mortgage and Realty, Inc. (the "Manager") of our future performance as of the date this Registration Statement is filed. These beliefs, assumptions and expectations can change as a result of many factors, including those which are outside of the Manager's control. Risks and uncertainties that could cause our actual results to be different than anticipated or that could materially affect our financial condition, results of operations and cash flows include those described under "Item 1A—Risk Factors" and "Item 2—Financial Information—Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as many other factors, some of which may be unknown to the Manager. By making forward-looking statements, we have not assumed any obligation to, and you should not expect us to, update or revise those statements because of new information, future events or otherwise.

ITEM 1. BUSINESS.

Overview

We are a California limited liability company formed for the purpose of making or investing in business loans secured by deeds of trust or mortgages on real properties located primarily in California. The real properties consist of predominately commercial income-producing structures or land held by businesses. The land can be income-producing (e.g., vineyards) or may be held for commercial or residential development. Our loans are arranged and serviced by our manager, California Mortgage and Realty, Inc., a Delaware corporation (the "Manager"), which is licensed as a California real estate broker and a California Finance Lender. In addition, we have the ability to invest in loans that were not originated by the Manager. The Manager provides certain operating and administrative services to us. The Manager has complete control of our business, subject to the voting rights of our members on specified matters and on any other matters which the Manager wishes to submit to a vote. The Manager does not hold any of our membership interests currently and did not hold any of our membership interests at December 31, 2006 and 2005. An affiliate of the Manager held a membership interest at December 31, 2006 and 2005 of $303,607 and $277,569, respectively. This membership interest has been completely withdrawn.

In addition to arranging and servicing our loans, the Manager sells loans in our loan portfolio and purchases existing loans for us, including partial undivided interests in loans. The Manager sells and purchases loans for us primarily to and from its affiliates and its clients and occasionally from non-affiliated third parties. See "Our Mortgage Loan Portfolio" and "Potential Conflicts of Interest" below in this section.

Our business strategy is to generate current income by making or investing in mortgage loans with borrowers who are unwilling to undergo the lengthier or more burdensome underwriting processes often required by conventional mortgage lenders, such as commercial banks, in order to fund a loan, or borrowers who are unable to obtain financing from conventional mortgage lenders. Generally speaking, our underwriting focuses primarily on the value of the collateral securing the loan, and secondarily on the general creditworthiness of the borrower. In most cases, a personal guarantee of the borrower or the principal owner of the borrowing entity is obtained. See "Our Lending Standards and Policies—Credit Evaluations" below in this section. Loans normally are approved and funded within 30 days

from the date we receive a borrowing request, which is generally considerably faster than conventional mortgage lenders. We believe the higher credit risk profile of some of our borrowers is mitigated by our lending policies and standards, which, among other things, allow for a maximum loan-to-value ("LTV") ratio of 75% for commercial, residential or mixed use real property and a maximum loan-to-value ratio of 60% for land. At June 30, 2007, our average LTV ratios for loans secured by real property were as follows: commercial property (including multi unit residential property, office buildings, industrial warehouse facilities and retail properties): 66%; residential property: 62%, land: 47% and mixed use property (a combination of commercial and/or residential and/or land): 73%. See "Our Lending Standards and Policies—1. Loan-to-Value Ratios" below in this section. We receive higher interest rates in exchange for making or investing in loans to borrowers for whom quick decisions, reliable funding, and expeditious underwriting are paramount, or whose collateral or credit history precludes financing from commercial mortgage lenders. One outcome of our underwriting and lending practices is higher delinquency and foreclosures than experienced by conventional mortgage lenders. Historically, however, higher delinquencies and foreclosures have not led to higher charge-offs.

We obtain funding for our lending activities by selling our membership interests and selling all or a portion of our interest in the loans in our loan portfolio. We have, in one instance, accessed and in the future may access credit from third party lenders, as well as from the Manager or affiliates of the Manager, in order to fund our loans. See "Our Mortgage Loan Portfolio" below in this section.

Purchasers of the membership units become our members. A subscriber's subscription funds are placed initially in a segregated subscription account at a financial institution selected by the Manager. The Manager transfers subscription funds to us when it has identified a suitable lending opportunity and other funds are not available to make the loan. Any subscription funds remaining in the subscription account after 90 days from the date the Manager first received those funds are returned to the subscriber. Interest, if any, earned on subscription funds in the subscription account is solely for our benefit.

Upon transfer of the subscription funds to us, the subscriber becomes a member and is entitled to monthly allocations of our profits or losses, if any. Members may elect either to receive monthly distributions in cash, or to retain them in their capital accounts, thereby increasing their ownership (percentage interest) in us.

The rights and duties of members are set forth in our operating agreement. Members do not engage in our management, but certain events (dissolution or termination, amendment of the operating agreement, merger with another entity, and removal of or succession to the Manager) require the approval of the members. See "Item 11—Description of Registrant's Securities to be Registered" for a description of the operating agreement and the rights and the duties of our members.

The Manager receives a monthly management fee equal to 1/12th of 1% of the net assets under management as of the last day of each calendar month and, for each loan serviced, a monthly loan servicing fee not to exceed 2% per annum of the total unpaid principal balance of each loan serviced, which is payable only as we receive interest payments on the loan. For each loan the Manager originates, it receives an origination fee (typically 4% to 6%), as well as loan document preparation fees and certain other fees, which are paid by the borrower and not by us. The Manager, at its option, may waive fees to which it is entitled in order to provide a higher yield to members, but it is not obligated to do so. For a description of the duties of the Manager, see "The Manager" below in this section.

We are treated as a partnership for federal income tax purposes and therefore pay no federal income tax but report each member's share of our income, gains, losses, deductions and credits to the member. Each individual member then reports on his or her federal income tax his share of our income, gains, losses, deductions and credits.

Our Operating History

We filed our articles of organization on September 5, 2003 and obtained our permit from the California Department of Corporations to offer securities to investors residing in California on November 20, 2003. That permit provided for a maximum offering amount of $50 million and a minimum offering amount of $250,000. We began offering membership interests to investors on November 20, 2003 and, after we reached our minimum offering amount, made our first investment in the amount of $1 million in February 2004 by purchasing a portion of a loan from another fund managed by the Manager. Our current permit was issued by the California Department of Corporations on December 15, 2006 and permits us to offer securities to investors residing in California for a maximum offering amount of $150 million. Currently, we are not accepting any subscriptions for membership interests.

In 2004, our net income was approximately $650,000. At December 31, 2004, our total assets were approximately $24,590,000 (net of an allowance of $107,875 for loan losses); our total members' capital was approximately $23,680,000; we had interests in 19 loans totaling approximately $21,575,000; and no loans were in foreclosure.

In 2005, our net income was approximately $4,158,000. At December 31, 2005, our total assets were approximately $75,459,000 (net of an allowance of $365,085 for loan losses); our total members' capital was approximately $72,465,000; we had interests in 29 loans totaling approximately $72,130,000; and three loans in which our interests totaled approximately $4,900,000 were in foreclosure.

In 2006, our net income was approximately $8,328,000. At December 31, 2006, our total assets were approximately $125,703,000 (net of an allowance of $684,845 for loan losses); our total members' capital was approximately $99,779,000; we had interests in 36 loans totaling approximately $117,969,000; and four loans in which our interests totaled approximately $12,590,000 were in foreclosure.

In the first six months of 2007, our net income was approximately $851,838. At June 30, 2007, our total assets were approximately $122,130,000 (net of an allowance of $1,360,160 for loan losses); our total members' capital was approximately $90,951,393; we had interests in 30 loans totaling approximately $111,031,915; and eight loans in which our interests totaled approximately $24,575,000 were in foreclosure. At that date, we also owned one property with a net realizable value of approximately $6.6 million.

We began making monthly distributions of our profits in March 2004. The distributions to members were based on an assumption that our members' return on average members' capital would be 9% annually. The actual investment return on average members' capital for 2004, 2005 and 2006 was 6.21%, 8.47% and 8.30% annually, respectively. The actual yields to members for 2004, 2005, and 2006 differ from the 9% distributed due to changes in net income from amounts previously reported and changes in the methodology for computing average equity.

During 2004, total profits distributed in cash and total profits retained by members in their capital accounts were $363,412 and $286,712, respectively. During 2005, total profits distributed in cash and total profits retained by members in their capital accounts were $1,797,825 and $2,359,849, respectively. During 2006, total profits distributed in cash and total profits retained by members in their capital accounts were $4,300,422 and $4,027,524, respectively.

Commencing January 2008, the Manager intends to adjust distributions quarterly to reflect actual return on average member capital.

Our Mortgage Loan Portfolio

The loans in our loan portfolio are selected for us by the Manager in accordance with our lending standards and policies. Our loans are primarily for business purposes and secured by land or commercial

real property located primarily in California, although some collateral may occasionally be residential or mixed use or may be located in other states. In addition to mortgages and deeds of trust, loans are typically secured by liens against personal property of the borrowers or their guarantors. We do not make loans for the purchase of owner-occupied residential property. However, on occasion some of our loans are secured by residential property. Most of our loans are bridge loans which the borrower intends to repay or refinance within a relatively short timeframe; consequently, loan terms typically range from one to five years and payments are generally interest-only with a balloon payment of the entire principal amount at maturity. As of June 30, 2007, of the total of 91 loans that have been in our loan portfolio from 2004 through 2006, 32 of the 91 loans were paid off within two years of their origination. Interest rates on loans in our loan portfolio as of June 30, 2007 ranged from 12.0% to 13.95%.

In addition to arranging loans for us, the Manager purchases loans, or portions of loans, for our portfolio from other funds that it manages, from other investors for whom the Manager provides servicing or from third parties. The Manager sells all or a portion of loans in our portfolio to these same groups when the Manager determines that it appears to be in our interests for us to do so, based upon then-current interest rates, the length of time that we have held the loan, and our overall investment objectives, such as loan diversification, liquidity and optimizing the investment of available cash. The Manager may also arrange sales of loans in our loan portfolio in order to generate cash to invest in new loans. See "Potential Conflicts of Interest" below in this section.

At June 30, 2007, we were invested in the following 30 loans or portions thereof:

CMR Mortgage Fund II, LLC
Loan Portfolio

As of June 30, 2007

Outstanding Loan Balance Payable to Fund			Total Outstanding Loan Balance		Fund's Interest in Total Loan Balance		Primary Type of Collateral	Location of Collateral by County
$	55,000		$	110,000	50.0	%	Land	CA	San Luis Obispo
$	20,000		$	400,000	5.0	%	Commercial	CA	Alameda
$	200,000		$	1,000,000	20.0	%	Land	NV	Washoe
$	3,081,425		$	6,000,000	51.4	%	Land	FL	Polk
$	800,000		$	800,000	100.0	%	Residential	NY	New York
$	10,000,000		$	10,000,000	100.0	%	Mixed	CA	San Mateo/Monterey/San Bernardino/ Fresno/Alameda/Humboldt (NV)
$	2,300,000		$	2,300,000	100.0	%	Residential	NY	New York
$	318,000		$	734,333	8.5	%	Mixed	CA	Alameda
$	557,000		$	10,000,000	5.6	%	Land	CA	Lassen/Plumas
$	8,000,000		$	10,000,000	80.0	%	Land	CA	Lassen/Plumas
$	600,000		$	600,000	100.0	%	Mixed	CA/NV	San Mateo/Monterey/San Bernardino/ Fresno/Alameda/Humboldt (NV)
$	70,000		$	2,700,000	2.6	%	Mixed	CA	Contra Costa/Alameda/Nevada
$	4,000		$	1,200,000	0.3	%	Land	CA	San Bernardino
$	40,000		$	1,000,000	4.0	%	Mixed	CA	San Mateo/Alameda
$	25,000		$	3,651,838	0.7	%	Land	SC	Horry
$	5,791,744		$	9,141,744	63.4	%	Land	SC	Horry
$	680,000		$	4,000,000	17.0	%	Land	CA	Placer
$	3,424,450		$	7,700,000	44.5	%	Land	FL	Sarasota
$	48,000,000	(1)	$	48,000,000	100.0	%	Land	CA/AZ	Yolo/Sutter/San Mateo/Pinal (AZ)
$	2,584,000		$	16,967,894	15.2	%	Land	CA/AZ	Yolo/Sutter/San Mateo/Pinal (AZ)
$	10,000		$	1,100,000	0.9	%	Commercial	CT	Hartford
$	2,690,000		$	10,000,000	26.9	%	Land	CA	Fresno/San Benito/San Diego
$	6,983,000		$	9,500,000	73.5	%	Land	CA	Fresno/San Benito/San Diego
$	1,100,000		$	3,500,000	31.4	%	Land	CA	Stanislaus
$	340,000		$	2,200,000	15.5	%	Commercial	CA	Sonoma/San Francisco
$	4,750,000		$	5,500,000	86.4	%	Land	CA	Contra Costa
$	2,800,000	(2)	$	5,400,000	51.9	%	Commercial	CA	Alameda

$	2,320,000		$	31,783,573	7.3	%	Land	HI	Honolulu
$	1,688,296		$	1,688,296	100.0	%	Commercial	CA	Alameda
$	1,800,000		$	1,800,000	100.0	%	Commercial	CA	Contra Costa

$	111,031,915	(3)	$	211,777,677

(1): Our interest in the $48 million loan was pledged to Wells Fargo Foothill, Inc. ("Wells Fargo Foothill") as security for a $25 million loan from an affiliate, CMR Income Fund, LLC ("Income Fund"), which in turn loaned $25 million to us. See "Leveraging Our Portfolio" in this section.
(2): The borrower under this loan is the Manager. We formed a limited liability company to hold property on which we foreclosed and we sold all of our interest in the limited liability company to the Manager. As allowed by our operating agreement, the Manager paid 10% of the purchase price in cash and borrowed the remaining balance from us. See "Item 7—Certain Relationships and Related Transactions, and Director Independence." The net realizable value of the property was estimated by the Manager to be approximately $4.6 million at August 1, 2007.
(3): For financial reporting the Total Outstanding Loan Balances is presented net of allowances for loan losses, amounts held in trust for interest reserves and future advances. The amounts in the table above are gross loan balances before reduction to net.

As of June 30, 2007, 11 of our 30 loans or interests in portions of loans were secured by two or more properties on which we have liens of varying priorities ranging from first to fourth position. The other 19 loans were each secured by one property on which we have liens of varying priorities ranging from first to second position. We made 15 of the 30 loans, and 15 were made by other funds managed by the Manager, before subsequently being purchased by us. In addition, as a result of our sale of a loan in a principal amount of $19,500,000 to ING USA Annuity and Life Insurance Company ("ING"), we receive monthly payments from ING equal to 3% per annum of the loan principal, but only so long as the borrower makes all interest payments under the loan on a current basis. In the event the borrower defaults on its obligations to timely pay its monthly interest payments on the loan, and if such payment default continues for more than ten business days following the payment due date, then all interest with respect to the scheduled monthly payment or any future monthly payment accrue for the benefit of, and belong to, ING and not us, until such payment default has been cured. In connection with the sale, the Manager became the sub-servicer for the loan, and is paid a monthly sub-servicing fee of 2% per annum of the unpaid principal balance of the loan but only if the borrower makes all required interest payments on the loan on a current basis. To date, we and the Manager have received all monthly payments from ING.

We have two loans in our mortgage loan portfolio, with principal balances of $58 million (of which $48,557,000 is held by us), with respect to which the borrowers are not making payments, but which payments on our notes are being received from holders of loans secured by junior liens on the same properties. All of these junior loans are owned by funds managed by the Manager or others for whom the Manager provides loan servicing. These payments were approximately $526,035 in September 2007.

We have four loans in our mortgage portfolio, with principal balances totaling $37,064,894 (of which $18,167,000 is held by us), which are secured by junior liens subordinate to senior liens totaling $61,686,000. We are advancing, on a monthly basis, amounts necessary to cure monetary defaults on the senior loans. All of these senior loans are owned by funds managed by the Manager or others for whom the Manager provides loan servicing. These payments were approximately $667,323 in September 2007.

The following table shows the primary type of collateral securing the loans in our loan portfolio and the lien position on such primary collateral at December 31, 2006, 2005 and 2004.

		2006		2005		2004
Loans by priority of liens:
First deeds of trust		$	11,952,725		31,505,621		1,435,000
Second deeds of trust			19,278,191		25,872,000		10,800,000
Third deeds of trust			12,891,744		550,000		550,000
Mixed Lien Positions(1)			73,846,271		14,202,000		8,790,000

	Total(2)	$	117,968,931	$	72,129,621	$	21,575,000

(1): "Mixed Lien Position" indicates loans that are secured by two or more properties on which we have liens of varying priorities ranging from first to fourth position.
(2): For financial reporting the Total Outstanding Loan Balance is presented net of the allowance for loan losses and the amounts in trusts for interest reserves and future advances and is presented on a gross basis in this table.

		2006		2005		2004
Loans by type of property:
Commercial		$	7,383,271	$	17,777,121	$	10,675,000
Residential			1,090,000		200,000		4,740,000
Land			98,302,660		31,412,500		360,000
Mixed Use			11,193,000		22,740,000		5,800,000

	Total(1)	$	117,968,931	$	72,129,621	$	21,575,000

(1): For financial reporting the Total Outstanding Loan Balance is presented net of the allowance for loan losses and the amounts in trusts for interest reserves and future advances and is presented on a gross basis in this table.

Delinquency Experience

Our borrowers may from time to time be in payment default under the terms of their loans, as well as in covenant default (such as failure to pay taxes or failure to maintain insurance on the properties securing their loans). California statutes impose a lien for property taxes such that if such taxes are not paid, the lien for unpaid taxes will have priority over the liens we have on that property. The following table provides delinquency information for loans in our loan portfolio as of June 30, 2007 that were in payment default.

Mortgage Loans—Delinquencies

As of June 30, 2007

	Outstanding Loan Balance Payable to Fund		Percent of Total Balance to Loan Portfolio
30 - 59 days delinquent	$	0	0.0	%
60 - 89 days delinquent	$	0	0.0	%
90+ days delinquent(1)	$	24,574,425	22	%

Total	$	24,574,425	22	%

(1): The properties securing these loans are in foreclosure.

As of September 30, 2007, delinquencies were as follows: 30 days: $600,000; 60-89 days: $200,000 and 90+ days: $14,554,425. Loans on non-accrual status at June 30, 2007 and September 30, 2007 were $6,554,425 (6%) and $17,154,425 (13%), respectively.

The following table shows our delinquency experience (over 90 days past due) and foreclosures as of and during the years ended December 31, 2006, 2005 and 2004.

	2006			2005			2004
Delinquent loans (90+ days past due)	$	17,230,425		$	2,800,000			—
Loans foreclosed		3			2			—
Total mortgage investments(1)	$	117,968,931		$	72,129,621		$	21,575,000
Percent of delinquent loans to total loan		15.0	%		4	%		0	%

(1): For financial reporting the Total Outstanding Loan Balance is presented net of the allowance for loan losses and the amounts in trusts for interest reserves and future advances and is presented on a gross basis in this table.

The Manager may require a borrower to fund an interest reserve account with proceeds of its loan in order to provide the borrower with a period of time in which to arrange other financing and to provide some protection for us in the event that the borrower fails to make interest payments when due. The Manager generally requires interest reserve funds on loans secured by non-income generating property, such as unimproved land. These interest reserves have typically covered six to 18 months of interest payments. The Manager evaluates each loan on a case-by-case basis to determine whether an interest reserve will be required. There can be no assurance that the amount of any interest reserve established with respect to any loan will be adequate to cover any payment default by the borrower.

When we become aware of a payment default by a borrower, we typically send a written demand to the borrower that the default be promptly cured. Since the fourth quarter of 2006, our general policy has been to initiate foreclosure proceedings when borrowers miss two consecutive payments. As of June 30, 2007, there were eight loans with balances payable to us totaling $24,574,425 that were in default for which we had initiated a foreclosure proceeding.

In addition, as of June 30, 2007 we held title to one property that we foreclosed on in June 2007. The net realizable value of this property is estimated to be $6.6 million, resulting in a net loss of approximately $1.9 million.

Our Lending Standards and Policies

General Standards for Mortgage Loans. We make loans to and purchase loans from individuals, businesses and other entities. Each loan is secured by one or more mortgages or deeds of trust that encumber real property, which in most cases is located in California but occasionally is located in other states. In most cases, a personal guarantee of the borrower or the principal owner of the borrowing entity is obtained. Additionally, loans are occasionally further secured by various personal property interests of our borrowers or their guarantors. In this Registration Statement on Form 10, the terms "deed of trust" and "mortgage" are used interchangeably.

To the extent the Manager believes it to be in our best interests, we will also make or invest in loans whose proceeds will be used for construction. However, to date, we have not made any construction loans based on the "as completed" value of the improvements to be constructed, although the proceeds of certain loans have been used by borrowers to make improvements to their properties. The loans that we make are not guaranteed or insured by any governmental agency or private entity. Our guidelines for our investment in loans are set forth below.

1. Loan-to-Value Ratios. For each loan that we make, the Manager conducts a valuation for each property securing the loan (a "Market Value Analysis"). In performing a Market Value Analysis, an officer or loan officer of the Manager typically conducts a site visit, which includes visiting the area surrounding the property which will secure the loan. The Manager may also visit other properties in the area which may be similar to or may provide a basis for comparison to the property which is being inspected and in some cases interviewing business owners and others in the area. The Manager also often speaks with brokers and other property owners who may be familiar with property values and investment conditions in the area. The Manager subscribes to many of the same industry services that are available to certified appraisers and is able to obtain sale prices of comparable properties recently sold and/or properties being offered for sale in the area. In many cases, the Manager obtains from the borrower an existing appraisal or other property valuation report performed by an independent appraiser within the past one, two or more years. While the Manager reviews these appraisals and other property valuation reports in its valuation process, it relies primarily on its Market Value Analysis. Historically, in cases in which no appraisal had been done within a year (due to current market conditions, within six months) by an independent third party, the Manager will usually obtain an appraisal by an independent third party, although the Manager will typically fund the loan prior to receiving this independent appraisal. The Manager believes that its Market Valuation Analysis provides a reasonable basis to evaluate the market value of the real property because it is based on at least the same essential information that an independent appraiser would use. We believe our primary reliance on the Manager's Market Value Analysis allows us to maintain our competitiveness by avoiding delays associated with obtaining or updating an appraisal done by an independent party prior to funding or purchase of a loan. The Manager will take certain precautions to avoid environmental problems, such as not making or investing in loans secured by properties known or suspected to have (or to be likely to have) significant environmental problems; however, there can be no assurance that any environmental review undertaken or requested by the Manager will reveal any environmental problems with respect to the real property securing a loan.

The following table shows the maximum LTV ratio prescribed by our lending standards and policies and the approximate LTV ratio of loans in our loan portfolio as of June 30, 2007 and December 31, 2006. The LTV ratio compares (i) the sum of the principal amount of the loan and the outstanding debt secured by any senior deed of trust on the property or properties securing the loan (in each case, as of the date of determination) to (ii) the value of the property or properties securing the loans, as determined by the Market Value Analysis at the time the loan is made. Market values are

updated for loans in non-accrual status. LTV ratios are reviewed at least quarterly to see if any update in market values is necessary as a result of additional loans in non-accrual status.

Type of Property	Loan to Value Ratio per lending policies		Loan to Value Ratio of Loans in Portfolio as of June 30, 2007		Loan to Value Ratio of Loans in Portfolio as of December 31, 2006
Commercial(1)	75	%	66	%	62	%
Residential (single family)	75	%	62	%	58	%
Land	60	%	47	%	43	%
Mixed Use	75	%	73	%	64	%

(1): Because our LTV ratio lending policies do not apply to purchase money financings, we excluded from the June 30, 2007 LTV ratio for Commercial Property the LTV ratio relating to property securing a $5.4 million loan which we made to the Manager to enable the Manager to purchase property on which we had foreclosed. The LTV ratio for the property securing this loan is greater than 100%. If the LTV ratio for this property is included in the loan-to-value ratio table above for Commercial Property, it would be 77% and 69% for June 30, 2007 and December 31, 2006, respectively.

The LTV ratios in our lending policies may be increased if, in the sole discretion of the Manager, a given loan is supported by credit adequate to justify a higher LTV ratio or if mortgage insurance is obtained; however, the Manager has not required and does not anticipate obtaining or requiring the borrowers to maintain mortgage insurance. The LTV ratio in our lending policies do not apply to purchase money financing that we provide for the sale of any real estate owned (i.e., property acquired through foreclosure) or to refinance an existing loan that is in default at the time of maturity. In such cases, the Manager may accept any reasonable financing terms that it deems to be in our best interests, in its sole discretion.

2. Geographic Area of Lending Activity. Most loans are secured by mortgages or deeds of trust on properties located in California, but we also invest in loans secured by real property in other states if such loans otherwise satisfy the underwriting criteria described herein. As of June 30, 2007, eight loans totaling approximately $17.8 million were secured only by real property in states other than California. As of June 30, 2007, two loans, totaling approximately, $50,584,000, were secured both by properties in California and properties in Arizona.

3. Priority of Mortgages. If a loan is secured by a first deed of trust, the deed of trust is senior to all other recorded monetary liens other than liens for taxes or the assessments of special assessment districts to fund street, utility or other public improvements. Our loans are secured primarily by first and second priority deeds of trust on California real property. However, we may invest in loans secured by deeds of trust of mixed priority or which are junior to other senior encumbrances, i.e., third, fourth or even more junior position deeds of trust. As of June 30, 2007, we held in our loan portfolio nine loans secured by first deeds of trust, 11 loans secured by second deeds of trust, two loans secured by third deeds of trust, and eight loans secured by multiple deeds of trust with varying priorities. If a prospective loan is to be secured by a junior deed of trust (i.e., a second, third, fourth or other junior deed of trust) and the obligation secured by the senior lien(s) is in default, we will rarely make that loan unless the loan proceeds will be used to completely cure the default of the senior obligation(s). In addition, for loans already in our portfolio, we may make advances on behalf of borrowers to prevent or cure defaults relating the obligation secured by a senior lien. For example, we have made advances to borrowers to keep current an obligation secured by a senior lien to pay for fire insurance or for attorneys' fees.

4. Terms of Loans. The term (duration) of the loans we make will vary at the discretion of the Manager. Our loans will typically have a term of between three and five years, but may have a shorter or longer term but not longer than 20 years. Our loans will generally provide for monthly payments of interest only with the entire amount of the principal due at the end of the term, but may occasionally be partially or fully amortizing over the term of the loan. We typically do not have prepayment penalties in our loans. As of June 30, 2007, we did not have any loan in our portfolio with a maturity greater than five years and no loans were amortizing loans.

5. Escrow Conditions. Our loans are funded through an escrow account handled by a qualified title insurance escrow company or the Manager. Our policy is that loan funds are not disbursed until the following conditions are met:

(a) Title insurance coverage is obtained, with the title insurance policy naming us as the insured and providing title insurance in an amount not less than the principal amount of the loan. Title insurance insures only the validity and priority of our deed of trust, and does not insure us against loss by reason of other causes, such as diminution in the value of the property securing the loan, over-appraisals, borrower's defaults, etc. In the experience of the Manager, claims made to title insurance companies for losses that are generally considered to be covered by their title policies are often delayed or contested by the title insurance companies.

(b) Fire and casualty insurance is obtained (except for unimproved property), which insurance will name us as loss payee and mortgagee and generally will be in an amount at least equal to the lesser of the principal amount of the loan or the value of the improvements.

(c) Loan documents (notes, deeds of trust, etc.) in our name and insurance policies name us as beneficiary and as loss payee or additional loss insured, as applicable. In cases in which there are co-lenders, those co-lenders may be named as loss payees and beneficiaries or additional loss insureds or may be named as additional loss payees and beneficiaries or additional loss insureds, as applicable. In the event we purchase loans, our policy is that we receive an assignment of all beneficial interest in any documents related to each loan so purchased. Our investments in loans are not held in the name of the Manager or any other nominee.

6. No Loans to Manager. We will not make loans to the Manager or to any of its affiliates, except for any financing extended as part of a sale of real estate owned as a result of foreclosure. See "Potential Conflicts of Interest—Sale of Defaulted Loans or Real Estate Owned to Affiliates" below in this section.

7. Purchase of Loans from Affiliates and Others. The Manager is an active mortgage loan broker and California finance lender. We and other affiliates of the Manager make loans arranged for us or them by the Manager. We may purchase existing loans funded or acquired by the Manager or its affiliates. In addition, we have purchased and in the future may purchase loans from third parties. All loans we purchase will generally satisfy the lending guidelines described above, except that a new appraisal or market value analysis is not required when we purchase loans or portions of loans purchased from other entities managed by the Manager or when we purchase loans or portions of loans from a third party that purchased that loan from an entity managed by the Manager.

In order to take advantage of special opportunities that may arise to purchase loans at significant discounts (i.e., for a purchase price which is lower than the par value of the loan and thus yields potential additional profit to us), the Manager has the authority to cause us to acquire loans (or interests in loans) that are in default, but only so long as (i) the loan is being purchased from a third party unrelated to the Manager or its affiliates; (ii) the loan otherwise satisfies the lending guidelines described above; and (iii) immediately after the loan purchase, the aggregate principal amount of all loans held by us that are in default would not exceed 5% of our total capital. At June 30, 2007, we did not have any loans in our loan portfolio that had been purchased from third parties at a discount. In the past, we have acquired loans or portions of loans that were in default at the time we acquired those

loans. Of the loans in our loan portfolio as of June 30, 2007, eight loans or portions thereof aggregating $4,016,000 at the time of acquisition had been acquired when they were in payment default.

Generally, the purchase price we pay for any existing loan will not exceed the par value of the note or its fair market value, whichever is lower, but the Manager may purchase loans for a premium if the loan is current and the Manager believes the total purchase price is fair and reasonable, and in our best interest. To the extent the Manager is able to negotiate the purchase of a loan from third parties at a discounted purchase price, our policy is to pay the Manager a commission, in addition to the normal fees it is entitled to receive. However, the amount of the commission paid to the Manager on the purchase of a discounted loan may never exceed the amount of the discount (i.e., the par value of the loan less the purchase price of the loan) obtained for us by the Manager. See "Item 6—Executive Compensation—Compensation to Manager and its Affiliates."

8. Loan Diversification. No more than 25% of our total capital (equal to members' equity) will be invested in any one loan, calculated as of the time the investment is made. In 2006, we indirectly borrowed $25 million from Wells Fargo Foothill through Income Fund, an affiliate of the Manager, in order to fund a loan of $48 million. See "Leveraging Our Portfolio" and "Item 7—Certain Relationships and Related Transactions, and Director Independence." Although the entire $48 million loan to the borrower was more than 25% of our total capital at the time we made this loan, the amount of our own funds that we invested in the loan was $23 million, which was 22.7% of our total capital when the investment was made. The Manager and its affiliates made additional loans to this borrower aggregating approximately $19.4 million. We also have an interest aggregating $2,584,000 in a junior loan which is secured by the same property. See "Leveraging Our Portfolio" below.

Because the terms of the original loan from Wells Fargo Foothill required monthly payments of interest and amortized principal, the original loan balance of the Wells Fargo Foothill loan decreased. As a consequence of the additional loans and the reduced principal balance of the Wells Fargo Foothill loan, loans to this borrower secured by the same property totaled 26.6% of our capital at December 31, 2006 and 28.8% at June 30, 2007. The percentage of our total capital that our investment in these loans represent may grow if additional advances are made to this borrower or if our capital is reduced as a result of withdrawals by members from their capital accounts. See—"Leveraging Our Portfolio"—for additional discussion of this loan.

9. Reserve Fund. A contingency reserve fund may be retained for the purpose of covering our unexpected cash needs, if the Manager believes that to be in our best interests. The amount of this reserve fund, if any, would be established by the Manager. This reserve fund may be held in bank accounts, money market accounts or other liquid assets. Among the purposes of the fund would be the following: (i) provision for regular expenses incurred by us such as accounting and legal expenses associated with being a reporting company under the Exchange Act, (ii) provision for losses due to nonperforming loans and (iii) provision for advances which may be necessary to protect our interests. The creation of this reserve would involve the use of funds that would otherwise be available for distribution to members, and would necessarily have the effect of decreasing such distributions. To date, no such reserve fund has been created.

Credit Evaluations. The Manager may consider the income level and general creditworthiness of a borrower, and any guarantor, to determine a borrower's ability to repay the loan according to its terms, but such considerations are usually subordinate to a determination that a borrower has sufficient equity in the property or properties securing the loan to satisfy the LTV ratios or investment criteria described above. Therefore, we may make loans to borrowers who are in default under other of their obligations (e.g., to consolidate their debts) or who do not have sources of income that would be sufficient to qualify for loans from other lenders, such as banks or other financial institutions; however, we will not make a loan unless the Manager believes in good faith that the borrower has the ability and intent to repay the loan according to its terms.

Loan Servicing. All loans are and, unless the Manager selects another loan servicing agent for one or more loans, will be "serviced" (i.e., loan payments collected and other administrative services performed) by the Manager who is compensated for such loan servicing activities. See "Item 6—Executive Compensation."

Borrowers make loan payments in arrears, i.e., interest accrued over the preceding month on the outstanding principal balance, and are instructed to send their loan payments either to us directly or to the Manager for deposit on our behalf in the Manager's trust account, which is maintained at a financial institution selected by the Manager. At times, part of the available balance of a loan to a borrower may be held by the Manager or by us in order to provide for interest reserves for the loan and payments on the loan may be made from such funds.

Sale of Loans. We invest in mortgage loans. We are permitted to invest in real estate directly but have not done so, except if we foreclose on a property on which we have invested in a mortgage loan and we or an affiliate takes over ownership and management of the property. We presently do not intend to invest in mortgage loans primarily for the purpose of reselling such loans in the ordinary course of business. However, we will sell mortgage loans (or fractional interests therein) when the Manager determines that it appears to be in our interest to do so, based upon then-current interest rates, the length of time that we have held the loan, and our overall investment objectives, such as loan diversification, liquidity and optimizing the investment of available cash. The Manager may also arrange sales of loans in our loan portfolio in order to generate cash to invest in new loans that are arranged by it. This bolsters the Manager's position in the lending marketplace as a lender that has a ready funding capacity, which may indirectly benefit us (and the Manager's other affiliates) by promoting a steady flow of loan opportunities in which to invest but also results in the Manager receiving loan fees. See "Potential Conflicts of Interest" below in this section.

Leveraging Our Portfolio

When the Manager deems it to be in the best interests of our members, we may borrow funds from a third party lender (which may but is not required to be a bank or other financial institution) or the Manager or its affiliates in order to fund additional mortgage loans or for other liquidity needs. By leveraging our loan portfolio, we may be able to increase the yield to our members. This increased yield will result if the interest we earn on our leveraged loans exceeds the interest that we must pay on the funds we borrow. This "spread" between the interest we earn on a leveraged loan and the interest paid on the borrowed funds used to make the loan will accrue to us. However, leveraging entails certain risks that would not otherwise be present if we had funded all of our loans from our own funds. For example, to the extent we make loans at long-term fixed interest rates while we borrow funds at short-term variable interest rates, we will be subject to the risk that prevailing interest rates (and our associated borrowing costs) will rise above the levels we earn on the fixed-rate portion of our loan portfolio, causing us losses. Another risk would be the liability to lenders and the loss of capital in the event we were unable to meet our obligations under any loan agreements with the lenders. In addition, while any additional profits we earn from leveraging our portfolio will be generally advantageous to our members, a portion of such additional profit may constitute unrelated business taxable income that may be taxable to our members (such as ERISA plan investors) that are otherwise tax exempt.

any payments since the last disbursement from the interest reserve in July 2007. As the owner of a portion of the $18 million loan, we have elected to make advances to pay interest on the $20 million loan in order to protect our lien position. Another holder of a portion of the $18 million loan, also managed by the Manager, has elected to make advances to pay interest on the $48 million loan. As security for the loan from Income Fund and the loan from the Wells Fargo Foothill, we pledged our interest in the $48 million loan to Income Fund and Wells Fargo Foothill and our interest in the collateral securing the $48 million loan (the "Fund II Collateral"). Income Fund has assigned our $25 million promissory note to Wells Fargo Foothill and its interest in the Fund II Collateral as security for the $25 million loan that it received from Wells Fargo Foothill. Our promissory note to Income Fund, as well as the Wells Fargo Foothill loan to Income Fund, matured on May 31, 2007. The Wells Fargo Foothill loan was renegotiated as of June 1, 2007 for interest only payments and extended to August 31, 2007. Wells Fargo Foothill and Income Fund entered into a forbearance agreement in which Wells Fargo Foothill agreed to not exercise remedies until October 31, 2007. The forbearance agreement also increased the interest rate on the loan to LIBOR plus 6.5% (as of September 30, 2007, the rate was 12.165%). Our note to Income Fund was correspondingly extended and its rate increased. Income Fund has also agreed not to exercise remedies pending discussions with Wells Fargo Foothill. The Manager is currently in negotiations with the borrowers on the $48 million loan to enter into a forbearance agreement to forbear exercising remedies for six months on certain conditions. See "Item 1A—Risk Factors—We have and in the future may assign any portion of our loan portfolio as security to a third party lender, and if we fail to meet our payment or other obligation under the loan from the third party lender, we may risk losing the loans we assign as security to such lender and the lender may have recourse to our other assets, which would adversely affect our financial condition and the return on investment of our members."

The Manager

Our manager is California Mortgage and Realty, Inc., a Delaware corporation. It was incorporated on March 31, 1994 as Bellevue Capital Management Inc. and did business under the name of California Mortgage and Realty, Inc. In 1995, 1997 and 1998, the Manager acquired the operations of three California mortgage brokers. In 2004, the Manager changed Bellevue Capital Management Inc.'s name to California Mortgage and Realty, Inc. The telephone number of the Manager is (415) 974-1100. The sole director of the Manager is David Choo. The sole stockholder of the Manager is CMR Group, LLC, a Nevada limited liability company, whose sole member is David Choo. The Manager is licensed and qualified to do business in California as a real estate broker and as a California finance lender. The Manager engages in the business of arranging, funding, selling, purchasing and servicing trust deed investments for us, its other affiliates, its private investors and its own account. The Manager and its affiliates are also actively engaged in the businesses of real estate investment and occasionally real estate brokerage; however, the Manager specializes in arranging privately funded mortgage and trust deed investments. The Manager acts as the servicing agent in connection with our loan investments, unless the Manager selects another loan servicing agent for one ore more loans, and otherwise manages and directs our affairs. For a description of the officers and directors of the Manager, see "Item 5—Directors and Executive Officers."

The Manager is also the sponsor and manager of CMR Mortgage Fund, LLC, a California limited liability company and licensed California finance lender ("Fund I") which was formed in 2000, CMR Mortgage Fund III, LLC, a California limited liability company ("Fund III"), which was formed in 2006, Income Fund and First Street Commercial Mortgage Fund, LLC ("First Street Fund"). All of these funds engage in business similar to our business. The Manager also manages CMR Commercial Mortgage Fund, LLC ("Commercial Fund"), of which it is a minority member and which is engaged in business similar to ours.

The Manager manages and controls our affairs and has responsibility and final authority in almost all matters affecting our business. We do not have our own employees or offices and the Manager

carries out our operations with its employees at its offices. The duties of the Manager with respect to us include:

•: dealings with members;
•: accounting, tax and legal matters;
•: communications and filings with regulatory agencies;
•: evaluating and choosing mortgage loans in which we will invest in accordance with our lending standards and policies described on pages 8 to 12 of this Registration Statement on Form 10;
•: deciding what loans, or interests in loans, to purchase from and sell to other funds managed by it or to other investors and the timing of those purchases and sales;
•: deciding what agreements we will enter into and whether we will enter into joint ventures with other companies or investors to invest in loans;
•: originating, servicing and managing our loan portfolio, including dealing with foreclosures and real estate owned properties;
•: entering into third party financing arrangements for us;
•: managing our other operations, if any; and
•: the Manager also acts as the "Tax Matters Partner" in connection with administrative or judicial proceedings in respect of federal taxes arising out of members' distributive shares of profits.

The Manager obtains borrowers through brokers, advertisements, referrals and repeat business.

In processing a loan, the Manager:

•: orders and/or reviews a property title search;
•: as part of conducting a market value analysis, generally performs a property inspection, reviews any existing appraisals or property valuation reports, which in many cases will be addressed to third parties and not the Manager, and, typically, obtains sales prices of comparable properties that have recently sold and for properties being offered for sale in the area; and
•: as may be prudent, in the opinion of the Manager, reviews the borrower's background, credit and financial information and perform a litigation review.

Since 1995, the Manager has arranged more than 600 loans totaling more than $704,671,000 secured by deeds of trust or mortgages. As of June 30, 2007, the Manager serviced a portfolio of approximately $359,876,000 in trust deed or mortgage investments.

Fiduciary Duties of the Manager. Under California law, a manager is accountable to a limited liability company as a fiduciary, which means that a manager is required to exercise good faith and integrity with respect to company affairs. This fiduciary duty is in addition to those other duties and obligations of, and limitations on, the Manager which are set forth in our operating agreement. Our business operations and affairs are managed entirely by the Manager, which is subject to certain conflicts of interest. See "Potential Conflicts of Interest" below in this section.

The Manager must make available to any member or such member's authorized representative for inspection and copying during business hours certain information concerning us, including a current list of each member and the capital contribution, percentage interest and the capital account of each member, a current list and address of the Manager, a copy of our operating agreement and articles of organization, copies of certain of our federal, state and local tax or information returns and reports, copies of certain of our financial statements, and our books and records relating to our internal affairs for certain recent periods.

Our operating agreement provides that the Manager shall have no liability to us for losses resulting from errors in judgment or other acts or omissions, so long as the Manager in good faith determines that its course of conduct was in our best interests and its conduct did not constitute fraud, bad faith or willful misconduct. The operating agreement also provides that we will indemnify the Manager against any loss, expense, claim or liability (including reasonable attorneys' fees) resulting from any claim or legal proceeding brought by members or third parties relating to any act or omission concerning our activities, including derivative suit claims, so long as the Manager in good faith determined that its course of conduct was in our best interests and its conduct did not constitute fraud, bad faith or willful misconduct. Therefore, members may have a more limited right of action than they would have absent these provisions in the operating agreement. Because any indemnification of the Manager is payable solely from our assets, a successful indemnification of the Manager or any litigation that may arise in connection with the Manager's indemnification could deplete our assets.

Potential Conflicts of Interest

The relationships among the Manager, the officers, the director and other affiliates of the Manager and us will result in various conflicts of interest. The Manager and its officers and the director and other affiliates are engaged in business activities involving real estate lending and real estate investing and may engage in additional business activities in the future that may be competitive with us. The Manager and its officers and director are required to exercise their fiduciary duties to us and to our members in a manner they believe will preserve and protect the interests of us and our members.

At September 1, 2007, CMR Group, LLC, a Nevada limited liability company, owned all of the outstanding shares of the Manager, and the sole member of CMR Group, LLC, is David Choo, who is also the sole director and president of the Manager.

The interests of the Manager will conflict with our interests in important areas described below. Members must rely on the general fiduciary standards which apply to the Manager to prevent unfairness by the Manager or an affiliate of the Manager in a transaction with us. See "The Manager—Fiduciary Duties of the Manager" above in this section. We have not been represented by separate legal counsel in connection with our formation or our dealings with the Manager. Except as may arise in the normal course of the relationship, there are no transactions presently contemplated between us and the Manager (or its affiliates) other than those listed below and discussed under "Item 7—Certain Relationships and Related Transactions, and Director Independence."

Loan Origination, Renewal and Forbearance Fees. None of the compensation set forth under "Item 6—Executive Compensation—Compensation to the Manager and its Affiliates" was determined by arms' length negotiations. For most loans, the Manager receives a loan origination fee of between 4% and 6%. Renewal fees are typically between 3% and 6% and forbearance fees are typically between 1% and 1.5%. These fees may be higher or lower depending upon market conditions. Any increase in such charges may have a direct, adverse effect upon the interest rates that borrowers will be willing to pay us, thus reducing the overall rate of return to members. Conversely, if the Manager reduced loan origination, renewal and forbearance fees, a higher rate of return might be obtained for us and our members. This conflict of interest will exist in connection with every Fund loan transaction, and members must rely upon the fiduciary duties of the Manager to protect their interests. We will generally charge borrowers interest at rates generally prevailing in the geographical areas where the security property is located for loans to comparable borrowers of similar creditworthiness, size, duration and the amount of our loans relative to the value of the real property securing our loans.

The Manager has the right to retain the services of other firms, in addition to or in lieu of the Manager, to perform brokerage services, loan servicing and other activities in connection with our loan portfolio that are described in this registration statement.

Other Funds or Businesses. The compensation structure applicable to the Manager in connection with loans that are arranged or originated for Fund I, Fund III, Income Fund, First Street Fund, Commercial Fund or individual investors may be different, and may be more lucrative to the Manager than the compensation payable to the Manager in connection with loans arranged for us. As a result, there may exist a financial incentive for the Manager to arrange loans for Fund I, Fund III, Income Fund, First Street Fund, Commercial Fund or for private investors outside the Fund, and the members must rely on the fiduciary duties of the Manager to protect their interests under such circumstances.

The Manager manages Fund I, Fund III, First Street Fund, Income Fund and Commercial Fund and in the future the Manager may also sponsor other funds formed to conduct business similar to ours. In addition, the Manager, principals and officers of the Manager, other affiliates of the Manager and other investors and clients of the Manager also invest in loans and may compete with us for investment opportunities. If these other funds or officers of the Manager have funds to invest at the same time as we do, there will then exist conflicts of interest on the part of the Manager as to whether to offer a particular loan opportunity to us or to these other funds. The Manager will decide which loans are appropriate for funding by us or by such other funds after consideration of all relevant factors, including the size of the loan, portfolio diversification, and amount of uninvested funds, but such decisions will not be subject to review or approval by members. The Manager is required by the terms of the operating agreement it has entered into with a member of Commercial Fund to offer loans to Commercial Fund and other funds and investors affiliates of the Manager in a specified order of rotation.

The Manager may engage for its own account, or for the account of others, in other business ventures, similar ours or otherwise, and neither we nor any member shall be entitled to any interest therein.

We will not have independent management and will rely on the Manager for our operations. The Manager is required to devote only so much time to our business as the Manager may deem to be reasonably necessary for the conduct of our business. The Manager will have conflicts of interest in allocating management time, services and functions between its existing business interests other than us and any future business ventures or arrangements which it may organize or in which it may be involved. The Manager believes it has sufficient staff available to be capable of discharging its responsibilities to all such entities.

Sale of Defaulted Loans or Real Estate Owned to Affiliates. In the event we become the owner of any real property by reason of foreclosure on a property securing a loan, the Manager's first priority will be to use its best efforts to sell the property for a fair price on the open market. If after 90 days, the property cannot be sold for a fair price, the Manager may arrange a sale to the Manager itself or to persons or entities controlled by or affiliated with the Manager (e.g., to another entity formed by the Manager or its affiliates or where the Manager or its affiliates may share management or ownership). In the event a loan goes into default, the Manager may arrange a sale of the loan to the Manager itself or to persons or entities controlled by or affiliated with the Manager. The Manager will be subject to conflicts of interest in arranging such sales since it will represent both parties to the transaction. For example, it will be determining the purchase price and other terms and conditions of sale for both us and the potential buyer. The Manager's decision will not be subject to review by any outside parties. In the event the property is sold by the Manager or an affiliate of the Manager, the net purchase price must be (i) no less favorable to us (taking into account any avoided commissions or other cost savings) than any bona fide third-party offer received, and (ii) no less than the total amount of our "investment" in the property.

A portion of the purchase price for real property may be paid by the Manager or affiliate executing a promissory note in favor of us, secured by a mortgage or deed of trust on the property being sold. In such a case, the total amount of the promissory note in favor of us and any senior mortgages or deeds of trust against the underlying real property will not exceed 90% of the purchase price of the property, and the note will otherwise contain terms and conditions consistent with those that would be contained in similar notes executed by third parties in arm's length transactions.

Sale or Purchase of Loans from the Manager or Other Funds Managed by the Manager. The Manager regularly sells loans or portions of loans from our portfolio and purchases loans or portions of loans for our portfolio to or from other funds that it manages, investors for whom it acts as servicer or third parties. Loans purchased from the Manager or its affiliates cannot be purchased at premium, and loans sold to the Manager or any of its affiliates cannot be sold at a discount. Pursuant to our operating agreement, we may sell existing loans to the Manager or its affiliates, but only so long as we receive net sales proceeds from the sale equal to the total unpaid balance of principal, accrued interest and other charges owing under such loan, or the fair market value of such loan, whichever is greater. In addition, our operating agreement provides that we may purchase loans from the Manager or its affiliates so long as at the time of purchase the borrower is not in default under the loan and no brokerage commissions or other compensation by way of premiums or discounts may be paid to the Manager or any of its affiliates by reason of such purchase (except loan origination fees earned upon initial funding of the loan). The Manager may also arrange sales of loans in our loan portfolio when the Manager determines that it appears to be in our interests for us to do so, based upon then current interest rates, the length of time that we have held the loan, and our overall investment objectives, such as loan diversification, liquidity and optimizing the investment of available cash.

Competition

The Manager faces intense competition in the business of originating or acquiring loans and loan interests for us. The Manager believes that the number of market participants in California alone who make mortgage loans to borrowers who cannot or do not want to obtain loans from conventional mortgage lenders is in the thousands. The Manager competes for borrowers with other private mortgage commercial lenders, subprime commercial lenders, hedge funds, investment banks, mortgage real estate investment trusts, private investors, commercial banks and others. Competition among industry participants can take many forms, including convenience in obtaining a loan, amount and term of the loan, speed in closing loans, customer service, loan origination fees and interest rates. To the extent any competitor significantly expands their activities in the nonprime market, we could be adversely affected.

We believe that the Manager's substantial experience in property valuation, flexibility in structuring the security for loans, and speed in closing loans enable us to remain competitive in our industry. Because the Manager services all loans in our loan portfolio, we are able, unlike most conventional mortgage lenders, to make loans secured by a combination of commercial and income producing properties, residential, and land.

Regulation

Our operations are conducted by the Manager. Additionally, the Manager earns origination and servicing fees. Both we and the Manager hold California Finance Lender licenses. Additionally, the Manager holds a California real estate brokers' license. Each of these licenses requires that certain reports be filed with the California Department of Corporations or the California Department of Real Estate.

We have not qualified as a real estate investment trust under the Internal Revenue Code, and therefore we are not subject to the restrictions on activities that are imposed on real estate investment

trusts. We believe that we conduct our business so that we are not an investment company within the meaning of the Investment Company Act of 1940.

We and the Manager are subject to the Equal Credit Opportunity Act of 1974, which prohibits creditors from discriminating against loan applicants on the basis of race, color, sex, age or marital status, and the Fair Credit Reporting Act of 1970, which requires lenders to supply applicants with the name and address of the reporting agency if the applicant is denied credit. We are also subject to various federal and state securities laws regulating the issuance and sale of securities. Currently we have a permit from the California Department of Corporations to offer securities to residents of California in a maximum offering amount of $150 million.

If our assets are deemed to be "plan assets" under the Employee Income Security Act of 1974, as amended ("ERISA"), then the following issues will arise and impact ERISA-subject plan and individual account ("IRA") investors:

•: our investments will be subject to the prudence standards and other provisions of ERISA applicable to investments by plans and their fiduciaries would extend to our investments;
•: certain of our transactions might constitute or result in a "prohibited transaction" under ERISA and the Internal Revenue Code because the Manager would be deemed to be a fiduciary (and therefore a "party-in-interest") with respect to the ERISA plans and IRA investors; and
•: our audited financial information would have to be reported annually to the U.S. Department of Labor (the "DOL").

Under DOL regulations, when an ERISA-subject plan or IRA acquires an equity interest in another entity, such as any of our membership interests, the underlying assets of that entity will be considered "plan assets" unless an exception is available. We expect to rely on the "insignificant participation" exception in operating our business, which will be available if less than 25% of our percentage interests are held in the aggregate by ERISA Plan and IRA investors.

Should the Manager or we fail to adhere to applicable regulations, we could face potential disciplinary or other civil action that could have a material adverse effect on our business. The provision of our operating agreement which provides for indemnification of the Manager does not provide for such indemnification only in the case of the Manager's fraud, bad faith or willful misconduct or if the Manager fails to in good faith determine that its conduct was in our best interests. See, "Item 12—Indemnification of Directors and Officers."

Past Sales of Membership Interests

We have offered our membership interests in reliance upon an exemption from the registration requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act"), afforded by Section 3(a)(11) of the Securities Act and Rule 147 thereunder (collectively, the "Intrastate Offering Exemption").

One requirement of the Intrastate Offering Exemption is that we offer or sell our membership interests only to persons resident within the State of California. If a person purchases our membership interests on behalf of other persons, those other persons also must be resident within the State of California. The Intrastate Offering Exemption is unavailable for all offers and sales of our membership interests in a specific issue of membership interests if any of our membership interests sold in that issue are purchased by or on behalf of persons not resident within the State of California.

Adeline Investments, Inc., a Nevada corporation whose principal place of business is San Francisco, California ("Adeline"), is an affiliate of the Manager. At times in the past, Adeline has owned our membership interests, but currently does not own any such membership interests. Prior to Adeline's acquisition of our membership interests, certain individuals not resident within the State of

California loaned money to Adeline. It is possible that once Adeline acquired our membership interests, these loans made to Adeline by such persons constituted an indirect investment in the Fund made by Adeline on behalf of such persons.

If it is determined that such an indirect investment occurred, the offers or sales of our membership interests made by us in issues affected by such indirect investment would not qualify for the Intrastate Offering Exemption. In addition, if it is determined that such an indirect investment occurred, we would have offered and sold membership interests not in compliance with the registration requirements of Section 5 of the Securities Act since it is not likely that such offers or sales would qualify for any other exemption from such requirements. Under Section 12(a) of the Securities Act, we would be liable to persons purchasing our membership interests for the consideration paid, plus interest thereon, if the offer or sale was made in violation of Section 5 of the Securities Act. However, under Section 13 of the Securities Act, the purchaser must bring the action within one year after the sale made in violation of such Section 5. No similar statute of limitations applies to enforcement or remedial actions that may be taken by the U.S. Securities and Exchange Commission ("SEC") with respect to violations of the registration requirements of such Section 5.

The SEC has notified the Manager that it is conducting an informal inquiry relating to the Manager and us in order to determine whether there have been violations of the federal securities laws. In conjunction with this inquiry, certain information has been requested from us. The Manager is currently in the process of responding to the inquiry and has and will continue to cooperate with the SEC in response to its requests. The Manager believes that there will not be a material impact to our financial position or operations as a result of this inquiry.

ITEM 1A. RISK FACTORS.

An investment in membership interests involves a significant degree of risk and is suitable only for investors who have no need for liquidity in their investments. Prospective investors should carefully consider the following risks and other factors before making their investment decisions.

Risks Relating to Our Loans

Our ability to generate cash for our operations, to make additional loans, or to fund withdrawals or distributions for members, will depend primarily on the ability of our borrowers to make timely payments on, and ultimately repay their loans, and defaults by a significant number of borrowers on their loan payments could have a material adverse effect on our operations and financial condition.

We derive cash from operations primarily from interest payments by borrowers on their loans, and obtain funds for making new loans and satisfying member withdrawals from cash from operations and loan repayments and additional capital from members. The ability of borrowers to make payments on their loans depends on a number of factors, including cash flow from their own operations, sale or refinancing of property and their other assets. A significant portion of our portfolio is secured by land which typically does not generate cash until the property is sold or refinanced. If a significant number of borrowers fail to make timely payments on their loans, including interest payments, we may not have adequate cash to fund our operations, make new loans or repay our obligations, including our indebtedness, and our financial condition may be materially adversely affected, which would adversely affect withdrawals or distributions to our members.

We also rely on borrower loan repayments to generate funds to make subsequent loans, to make payments on senior defaulted loans, to acquire or make payments on defaulted senior loans and to fund member withdrawals. Borrowers may be unable to repay the entire principal amount out of their own funds and consequently may be compelled to refinance. Fluctuations in interest rates and the unavailability of mortgage funds could adversely affect the ability of borrowers to refinance their loans at maturity. If our borrowers are unable to refinance or liquidate their properties in a timely manner,

our ability to fund our operations and protect our existing interests will be impaired. In addition, we may need to rely on future borrowings to fund operations, make loans or repay indebtedness, and there can be no assurance that such borrowings will be available to us or in amounts sufficient and on commercially reasonable terms to enable us to meet our liquidity needs.

A number of factors could affect the value of the real property securing a loan that we make or the amount that we may recover through foreclosure, which may result in recovery of amounts that are less than the full amount of a loan.

We are customarily an "asset" rather than a "credit" lender. This means that we may rely primarily on the value of the real property securing the loans to protect our investment. There are a number of factors which could adversely affect the value of any such real property securing loans, including, among other things, the following:

1. The Manager will review independent appraisals or opinions of value of third-party brokers and will rely on its Market Value Analysis to determine the fair market value of real property offered to secure loans made by us. No assurance can be given that such appraisals or other valuations will be accurate in any or all cases. Moreover, since any appraisal or valuation fixes the value of real property at a given point in time, subsequent events could adversely affect the value of real property used to secure a loan. Such subsequent events may include nationwide, statewide or local economic, demographic, property or other trends, or may include specific local events. Neither an appraiser nor the Manager will be able to predict with any certainty whether these events will occur after a loan is made. Moreover, in many cases, the independent appraisals that borrowers provide to us have often been completed one or more years prior to the time the Manager reviews their loan applications.

2. If a borrower defaults, we may be forced to purchase the affected property at a foreclosure sale. If we cannot quickly sell such property, and the property does not produce any significant income, our profitability will be adversely affected.

3. To the extent that loans are secured by improved real property, the improvements will likely constitute a significant portion of the value of the real property security for such loans. In the event that such improvements are destroyed or damaged, the value of the real property security will be correspondingly diminished to the extent not covered by insurance. Even where insurance coverage exists, the insurer may deny insurance coverage or the amount of the insurance may not be adequate to cover the amount of the loss.

4. Due to certain provisions of California law applicable to all real estate loans, if the real property security proves insufficient to repay amounts owing to us, it is unlikely that we would have any right to recover any deficiency from the borrower.

5. A number of our loans will be secured by second or other junior mortgages or deeds of trust. In the event of foreclosure on a loan that is so secured, the debt secured by the senior mortgages or deeds of trust must be satisfied before any proceeds from the sale of the property can be applied toward the debt owed to us. Furthermore, to protect our junior security interest, we may be required to make substantial cash outlays for such items as loan payments to senior lienholders to prevent their foreclosing on the property, property taxes, insurance, repairs, maintenance and other expenses associated with the property. We may not have adequate cash reserves on hand at all times to protect our security, in which event we could suffer a loss of our invested capital in such loan. Therefore, investments in loans secured by junior mortgages or deeds of trust are subject to greater risk in the event of a decline in property values than are loans secured by first mortgages or deeds of trust.

6. The recovery of sums advanced by us in making or investing in loans and protecting our security may also be delayed or impaired by the operation of federal bankruptcy laws or by

challenges by borrowers to the manner in which a loan was made or other terms of the loan. Any borrower has the ability to delay a foreclosure sale by us for a period ranging from several months to several years simply by filing a petition in bankruptcy, which automatically stays any actions to enforce the terms of the loan. The length of this delay and the associated costs may have an adverse impact on our profitability.

7. The Manager will arrange for title, fire and casualty insurance, as necessary, on the properties securing loans we make, but is not required to arrange, and to date has not arranged, for earthquake insurance. In addition, there are certain types of losses (generally of a catastrophic nature) which are either uninsurable or not economically insurable, such as losses due to war, floods, mudslides or other acts of God. Should any such disaster occur, we could suffer a loss of principal and interest on the loan secured by the uninsured property.

8. If toxic or hazardous substances are present in real property we acquire through foreclosure, we may be responsible for the costs of removal or treatment of the substances. Clean up or treatment costs could exceed the value of the real property. Even if we do not foreclose on a contaminated site, the mere existence of hazardous substances on the property may depress the market value of the property so that the loan is no longer adequately secured, which may result in a substantial or total loss of the amount invested in a loan.

There are risks associated with junior mortgage positions, and we may not recover our initial investment in a foreclosure.

We are more likely to lose our entire investment in the case of a second or other junior mortgage or deed of trust than with first mortgage or deed of trust loans because upon any foreclosure or other sale of the property, the obligation secured by the senior lien must be paid in full before any obligation secured by a junior lien can be satisfied. There can be no assurance that any proceeds from the sale of property on which we have a junior lien will be available to satisfy the borrower's loan obligation to us. Furthermore, to protect our junior security interest, we may be required to make substantial cash outlays for such items as loan payments to senior lien holders to prevent their foreclosing on the properties or for property taxes, insurance, repairs, maintenance and other expenses associated with the property. These outlays could reduce or eliminate any proceeds available to us which could have an adverse effect on our profitability and significantly reduce the amount of distributions to members.

The lien that we have on property securing loans that we make may be subject to senior liens which allow the senior lienholder to accelerate the loan if the borrower grants a lien on the property to a junior lienholder.

A "due-on-encumbrance" clause contained in a senior deed of trust, which permits the holder of the deed of trust to accelerate the loan if the borrower executes an additional deed of trust on the security property in favor of a junior lienholder, is enforceable in all cases except when the security property consists of residential property consisting of four or fewer units. The Manager intends to follow customary and prudent lending practices when potential security property for a loan (except residences with four or fewer units) is already encumbered by a senior deed of trust which contains a "due-on-encumbrance" or "prohibition against junior financing" clauses and, if deemed necessary, the Manager, before making the loan, may obtain the written consent of the senior lienholder agreeing not to enforce the "due-on-encumbrance" or "prohibition against junior financing" clauses by reason of our loan.

Risks Relating to Our Business and Lending Activities

Our results of operations are subject to fluctuations in interest rates and other economic conditions over which we have no control and any significant decline in economic activity may impact our ability to make loans and may result in lower interest rates on the loans we make and consequently result in lower distributions to members.

Our results of operations will vary with changes in interest rates and with the performance of the real estate market in California and, to a lesser extent, in certain other states. If the economy is healthy, we believe that more people will borrow money to acquire or develop real property. However, if the economy grows too fast, interest rates may increase too much and the cost of borrowing may become too expensive. Also, if the economy enters a recession, real estate development may slow down. These changes in interest rates or in the economy may result in our investing in fewer loans or having fewer loans to acquire and will therefore reduce our revenues and the distributions to members.

If interest rates decline and lower interest rate mortgage loans are available, a borrower may prepay its obligations on its existing higher interest rates loans. Since our rates are typically higher than those of conventional mortgage lenders and we typically do not have prepayment penalties in our loans, it is more likely that borrowers will prepay our loans in these circumstances. We will continue to invest in loans at competitive market interest rates. If interest rates decline with respect to future investments, we will invest funds at the market rate, which will reduce the overall yield.

If interest rates rise, our borrowers may find it more difficult to refinance our loans when they mature or to sell their properties. This would increase the risk that our borrowers will not be able to refinance their loans or will default on their loans. On the other hand, if interest rates rise with respect to future investments, we will make investments at higher rates increasing overall yield.

Our results will also reflect other economic conditions, such as a particular industry migrating to or from California. If businesses start to leave California or migration into California slows or there is a regional or local economic downturn in California, our ability to invest in loans in California will be adversely affected and the quality of our existing loan portfolio may decline, which may result in lower distributions to members.

We and the Manager may face lawsuits by borrowers relating to our lending activities which could adversely affect our profitability.

The Manager intends to act in good faith and use reasonable judgment in selecting borrowers and making and managing the loans. However, as lenders, both we and the Manager are exposed to the risk of litigation by a borrower or its affiliates, successor and assigns challenging the terms of the loans or the actions or representations of the Manager in making, managing or foreclosing on the loans. It is impossible for the Manager to foresee what allegations may be brought, and the Manager will use its best efforts to avoid litigation if, in the Manager's judgment, the circumstances warrant an alternative resolution. If an allegation is made and/or litigation is commenced against us or the Manager, we will incur legal fees and costs to respond to the allegations and to defend any resulting litigation. If we incur such fees and costs, this could have an adverse effect on our profitability and reduce the distributions to our members. In addition, in the event claims by the borrower against us are upheld by a court or regulatory authorities, loan principal, interest and other charges which we may have been entitled to may not be recoverable from the borrower.

We could incur liability for the remediation of hazardous substances as a result of our lending activities or as a result of foreclosure on properties that secure loans that we make, and the cost to remediate any hazardous substances could be substantial, which could adversely affect our financial condition.

We do not and will not participate in the on-site management of any facility on the property in order to minimize the potential for liability for cleanup of any environmental contamination under applicable federal, state, or local laws.

Under current federal and state law, the owner of real property contaminated with toxic or hazardous substances (including a mortgage lender that has acquired title through foreclosure) may be liable for all costs associated with any remedial action necessary to bring the property into compliance with applicable environmental laws and regulations. This liability may arise regardless of who caused the contamination or when it was caused.

There can be no assurance that if we foreclose on real property that we would not incur full recourse liability for the entire cost of any such removal and cleanup, or that the cost of such removal and cleanup would not exceed the value of the property. In addition, we could incur liability to tenants and other users of the affected property, or users of neighboring property, including liability for consequential damages. We would also be exposed to risk of lost revenues during any cleanup and to the risk of lower lease rates or decreased occupancy if the existence of such substances or sources on the property becomes known. If we fail to remove the substances or sources and clean up the property, it is possible that federal, state, and/or local environmental agencies could perform such removal and cleanup, and impose and subsequently foreclose liens on the property for the cost thereof. We may find it difficult or impossible to sell the property prior to or following any such cleanup. We could be liable to the purchaser thereof if the Manager knew or had reason to know that such substances or sources existed. In such case, we could also be subject to the costs described above. If toxic or hazardous substances are present on real property, the owner may be responsible for the costs of removal or treatment of the substances. The owner may also incur liability to users of the property or users of neighboring property for bodily injury arising from exposure to such substances. If we are required to incur such costs or satisfy such liabilities, this could have a material adverse effect our profitability.

Even if a mortgage lender does not foreclose on a contaminated site, the mere existence of hazardous substances on the property may depress the market value of the property such that the loan is no longer adequately secured. Additionally, if a borrower is required to incur such costs or satisfy such liabilities, this could result in the borrower's inability to repay its loan.

A lender's best protection against environmental risks is to thoroughly inspect and investigate the property before making or investing in a loan; however, such environmental inspections and investigations are expensive, and may not be financially feasible in connection with a particular size and type of loan we may make, particularly if the collateral is residential property. In addition, given the timeframes in which we make loans, we may not be able to obtain an appropriate (Phase I or Phase II) report on the property securing the loan and toxic contamination reports or other environmental site assessments will generally not be obtained by us in connection with our loans.

We may face other real property related liabilities as a result of our lending or foreclosure activities.

When we acquire any equity or leasehold interest in real property by direct investment, foreclosure or otherwise, we are exposed to the risks of liability incident to real property ownership or tenancy. Owners of real property may be subject to liability for injury to persons and property occurring on the real property or in connection with the activity conducted thereon, and liability for non-compliance with governmental regulations.

Our investment practices are not supervised or regulated by any federal or state authority.

Our management and investment practices are not supervised or regulated by any federal or state authority, except to the extent that certain of the lending and brokerage activities of us and the Manager are subject to supervision or regulation by the California Department of Real Estate or Department of Corporations. Therefore, members may not rely on the oversight of federal or state regulatory authorities over our business and affairs.

We may face losses due to fines, penalties and other amounts relating to any governmental action to enforce alleged violations of lending laws.

While the Manager will use its best efforts to comply with all local, state and federal lending regulations, there is the possibility of governmental action to enforce any alleged violations of such lending laws which may result in legal fees, damage awards or fines and penalties. While the Manager has never been cited for any such violations in the past, there is always a risk of potential governmental enforcement action which may lead to losses by us.

HOEPA imposes restrictions on and requires certain Truth-in-Lending disclosures with respect to mortgage loans secured by a consumer's principal dwelling (other than purchase money or construction loans and reverse mortgages) which either: (a) bear interest at an annual percentage rate that is 10 percentage points higher than the yield on Treasury securities having comparable periods of maturity; or (b) involve payment of points and fees by the consumer in excess of the greater of 8% of the loan amount or $400. A failure to comply with HOEPA subjects the lender to a loss of all finance charges and fees paid by the consumer and may be grounds for rescission by the consumer. HOEPA raises significant questions as to its application and interpretation, especially in cases involving clerical errors that result in mistaken disclosures. We may make loans that are subject to HOEPA and if we do so we intend to comply with the requirements of the HOEPA. However, it is possible that we may inadvertently fail to comply with the requirements of the HOEPA, which may result in unanticipated costs and losses to us.

Further, the California legislature and local governments have enacted certain statutes and ordinances designed to discourage so-called "predatory" lending practices by mortgage lenders. The Predatory Lending Law in California applies to consumer loans with an original principal balance of less than $250,000 and provides civil and administrative remedies against persons who willfully and knowingly violate provisions of this law. We do not intend to make any loans that would be subject to this California statute or any such local ordinance, although it is possible that we may inadvertently make a loan that is subject to such statute or ordinance, which may result in unanticipated costs and losses to us.

Risks Relating to Our Borrowing

We have and in the future may assign any portion of our loan portfolio as security to a third party lender, and if we fail to meet our payment or other obligation under the loan from the third party lender, we may risk losing the loans we assign as security to such lender and the lender may have recourse to our other assets, which would adversely affect our financial condition and the return on investment of our members.

We may borrow funds in order to fund mortgage loans. We may assign most or all of our loan portfolio to such lenders for the loans.

The cost of the funds that we will be borrowing from lenders may accrue interest at a floating rate of interest. However, to date, most or all of our loans have been made at a fixed rate of interest. If the floating rate on funds borrowed should increase such that the cost of borrowed funds exceeds the fixed rate of interest that we are earning on the fixed rate portion of our loan portfolio, we may default under our loan and security agreement with a lender. If some or all of our loan portfolio is assigned to

a lender as security for the loan, we would be at risk of losing our assets (i.e., our loans and the underlying real property security), which loss may subsequently cause losses to members.

Various other events may cause us to default under a loan thereby allowing a lender to foreclose on our loan portfolio. These events may include our failure to observe any of the covenants contained in the loan agreement, our default under any other loan agreement to which we are a party, the bankruptcy or insolvency of the Manager, and other events specified in the loan agreement. Thus, we are at risk of losing most or all of our loan portfolio on the occurrence of many events that do not directly relate to our ability to service the loans and some of which are not within our control.

As of June 30, 2007, we had one promissory note outstanding in the principal amount of $21,489,124, related to a loan from our affiliate Income Fund. The original principal amount of the loan was $25 million, which Income Fund borrowed from Wells Fargo Foothill in order to make the loan to us. We borrowed this amount in order to originate a $48 million loan to several affiliated borrowers which loan is secured by several large land properties. This loan is one of three loans to the same borrowers secured by deeds of trust with differing priorities on these properties: a $48 million loan, a $20 million loan and an $18 million loan. We have no ownership interest in the $20 million loan but we own a 15.2% interest in the $18 million loan. The borrowers under these loans have not made any payments since the last disbursement from the interest reserve in July 2007. As the owner of a portion of the $18 million loan, we have elected to make advances to pay interest on the $20 million loan in order to protect our lien position. Another holder of a portion of the $18 million loan, also managed by the Manager, has elected to make advances to pay interest on the $48 million loan. As security for the loan from Income Fund and the loan from the Wells Fargo Foothill, we pledged our interest in the $48 million loan to Income Fund and Wells Fargo Foothill and our interest in the Fund II Collateral. Income Fund has assigned our $25 million promissory note to Wells Fargo Foothill and its interest in the Fund II Collateral as security for the $25 million loan that it received from Wells Fargo Foothill. Our promissory note to Income Fund, as well as the Wells Fargo Foothill loan to Income Fund, matured on May 31, 2007. The Wells Fargo Foothill loan was renegotiated as of June 1, 2007 for interest only payments and extended to August 31, 2007. Wells Fargo Foothill and Income Fund entered into a forbearance agreement in which Wells Fargo Foothill agreed to not exercise remedies until October 31, 2007. The forbearance agreement also increased the interest rate on the loan to LIBOR plus 6.5% (as of September 30, 2007, the rate was 12.165%). Our note to Income Fund was correspondingly extended and its rate increased. Income Fund has also agreed not exercise remedies pending discussions with Wells Fargo Foothill. The Manager is currently in negotiations with the borrowers on the $48 million loan to enter into a forbearance agreement to forbear exercising remedies for six months on certain conditions. The Manager anticipates that if we, through Income Fund, continue to make interest payments on the Wells Fargo Foothill loan and we are proceeding with respect to the $48 million loan in a manner acceptable to Wells Fargo Foothill, it will not foreclose on our pledged interest in the $48 million loan.

If Wells Fargo Foothill elected to exercise its remedies and foreclosed on the Fund II Collateral, we could lose our equity in the Fund II Collateral unless we are able to repay the Wells Fargo Foothill loan or protect our interest by bidding at the foreclosure sale. There is no assurance that we will have cash sufficient to pay the Wells Fargo Foothill loan prior to a foreclosure sale. Wells Fargo Foothill would also have recourse against our assets and will not be required to first seek recovery from the Fund II Collateral. Whether Wells Fargo Foothill should choose to recover the current amount we owe under the $25 million loan from our general assets or from a foreclosure on the Fund II Collateral, there would be an adverse effect on our financial condition and amounts available for distribution to our members.

Risks Relating to the Manager

Members will not have any opportunity to participate in our management and must rely on the Manager and the principals of the Manager to manage us; therefore, the loss of the Manager or any of its principals may adversely affect our business and operations.

Members will not have a voice in our management decisions and can exercise only a limited amount of control over the Manager. In addition, members will have no opportunity to review potential Fund loans. The Manager will make all decisions with respect to our management, including the determination as to what loans to originate or purchase, and we are dependent to a substantial degree on the Manager's continued services. In the event of the dissolution, death, retirement or other incapacity of the Manager or its principals, our business and operations may be adversely affected.

We will compete with the Manager and its affiliates, as well as others engaged in the mortgage lending business, including other investors which may limit the availability of secured loans and the quality of our loan portfolio, and the Manager will not be required to devote its full time to our affairs.

The Manager has substantial prior experience in the mortgage lending business. Due to the nature of our business, our profitability will depend to a large degree upon the future availability of secured loans or loan interests. We will compete with the Manager, its affiliates, its investors, institutional lenders and others engaged in the mortgage lending business, some of whom have greater financial resources and experience than us. Competition in the mortgage lending business may affect our ability to obtain both the quantity and quality of loans that we desire for our portfolio. In addition, the Manager is not required to devote its full time to our affairs, but only such time as the Manager may deem to be reasonably necessary for the conduct of our business. Its management of other entities may limit the time and services that it devotes to us.

Our success is dependent on the performance of the Manager, and therefore, if the Manager is unable to serve as our manager for any reason or unable to devote the time necessary to manage us, our performance may be adversely affected.

Because our day-to-day affairs are managed exclusively by the Manager, and we rely on the Manager's expertise to locate and evaluate lending opportunities for us and to manage our portfolio, our performance may be adversely affected if it becomes necessary to find another manager if the Manager, for any reason, were unable to continue to serve in this capacity or unable to devote the time necessary to manage our affairs. If the Manager suffers or is distracted by adverse financial operational problems in connection with its operations unrelated to us, its ability to allocate time and/or resources to our operations may be adversely affected. If the Manager is unable to allocate sufficient resources to oversee and perform our operations for any reason, the amount of cash we are able to generate may decrease significantly.

Risks Relating to Our Membership Interests

Members may not be able to liquidate their membership interests to take advantage of higher returns available from other investments.

Mortgage interest rates are subject to abrupt and substantial fluctuations, but the purchase of units is a relatively illiquid investment. If prevailing interest rates rise above the average interest rate being earned by our loan portfolio, investors may wish to liquidate their investment in order to take advantage of higher returns available from other investments but may be unable to do so because of limitations on withdrawal in our operating agreement. Under our operating agreement, a member may withdraw all or a portion of that member's capital account, but only with 60 days' prior written notice to the Manager and subject to availability of cash available to make this redemption. In addition, we will not be required to liquidate the capital account of any withdrawing member to the extent the aggregate distributions paid to all withdrawing members during any twelve month period would exceed

10% of the aggregate capital accounts of all members at the beginning of such period. Due to these limitations on withdrawal of a member's capital account, members may not be able to liquidate their investment in a timely manner in order to take advantage of higher returns available from other investments, in an emergency or for any other reason.

There is no public market for membership interests and none is expected to develop in the future.

There is no public market for our membership interests, and even if potential buyers could be found, the transferability of units is also restricted by the provisions of the Securities Act and Rule 147 thereunder, the California Corporate Securities Law of 1968, as amended, the regulations thereunder and by the provisions of our operating agreement. Any sale or transfer of units also requires the prior written consent of the Manager, which may be withheld in its sole discretion and may require the prior written consent of the California Commissioner of Corporations. Furthermore, members will have only limited rights to redeem their interests or withdraw from the Fund or to otherwise obtain the return of their invested capital. Therefore, all members must be capable of bearing the economic risks of investment in us with the understanding that their membership interests may not be liquidated by resale, and should expect to hold their membership interests for an undetermined period of time.

Other Risks

Changes in tax laws could affect the tax treatment of us as a partnership.

We are treated as a partnership for federal income tax purposes. Any favorable federal tax treatment presently available to us could be affected by any changes in tax laws that may result through future Congressional action, tax court or other judicial decisions, or interpretations of the Internal Revenue Service.

We expect to incur significant costs in connection with Exchange Act compliance and we may become subject to liability for any failure to comply.

As a result of our obligation to register our membership interests with the Securities and Exchange Commission under the Exchange Act, we will be subject to Exchange Act rules and related reporting requirements. This compliance with the reporting requirements of the Exchange Act will require timely filing of quarterly reports on Form 10-Q, annual reports on Form 10-K and current reports on Form 8-K, among other actions. Further, recently enacted and proposed laws regulations and standards have increased the costs of corporate governance, reporting and disclosure practices which are now required of us. Our efforts to comply with applicable laws and regulations, including requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002, are expected to involve significant and potentially increasing costs. In addition, these laws, rules and regulations create new legal bases for administrative enforcement, civil and criminal proceedings against us in case of non-compliance, thereby increasing our risks of liability and potential sanctions.

ITEM 2. FINANCIAL INFORMATION.

Selected Financial Data

The following table presents selected historical financial data pertaining to us. The information in the following table has been derived from our unaudited financial information for the six-month periods ended June 30, 2007 and June 30, 2006, and from our audited financial statements for the years ended December 31, 2006, 2005 and 2004. The selected financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and related notes appearing elsewhere in this Registration Statement on Form 10.

The accompanying interim condensed financial statements as of June 30, 2007 and for the six months ended June 30, 2007 and 2006 included in this filing have not been reviewed by our independent registered public accounting firm in accordance with professional standards for conducting such reviews. During 2007, in connection with preparation of the Registration Statement on Form 10, it was determined that our prior auditors were not independent with respect to SEC rules and regulations. We changed auditors and they are in the process of reviewing the interim condensed financial statements as required.

SELECTED FINANCIAL DATA

CMR Mortgage Fund II, LLC

		June 30,						December 31,
		2007			2006			2006			2005			2004
Selected Financial Data
Summary of Operations:
Interest income		$	6,926,279		$	6,687,474		$	14,806,358		$	4,968,823		$	1,047,687
Interest on advances to borrowers			167,750			85,974			207,343			546,696			0
Other interest income			93,356			73,830			208,074			127,768			13,724
Total interest income			7,187,385			6,847,278			15,221,775			5,643,287			1,061,411
Loan servicing fees			1,156,278			1,054,186			2,361,457			675,792			164,617
Interest expense			1,522,402			324,500			1,959,928			0			0
Other gains									307,111			0			0
Provision for loan losses (recovery)			2,629,250			221,000			1,675,777			252,210			107,875
Operating expenses			1,027,617			529,386			1,203,778			557,611			138,795
Net income			851,838			4,718,206			8,327,946			4,157,674			650,124
Other Data:
Total assets			122,134,605			138,347,416			125,702,800			75,458,712			24,593,859
Loan (net) and advances
	End of period		112,439,057			112,626,018			117,103,913			70,406,934			21,589,333
	Average		115,648,017			93,311,258			108,231,360			41,431,772			8,362,311
Borrowings			21,704,279			25,386,006			23,508,511
Members' capital
	End of period		90,951,393			107,389,816			99,779,132			72,464,558			23,677,589
	Average		99,338,601			93,256,707			100,307,339			49,102,361			10,470,079
Financial Ratios:
Yield on average loans (net) and advances			12.83	%		14.83	%		13.87	%		13.31	%		12.53	%
Return on average loans (net) and advances			3.78	%		10.11	%		7.69	%		10.03	%		7.77	%
Return on average members' capital			4.40	%		10.12	%		8.30	%		8.47	%		6.21	%

Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Exchange Act. 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 this Registration Statement on Form 10. Forward-looking statements include, among others, statements regarding future interest rates, availability of mortgage credit, and economic conditions and their effect on us and our assets, trends in real estate markets in which we do business, future loan payoffs, foreclosures and value recovered from property sales, estimates as to the allowance for loan losses and the valuation of real estate held for sale, our growth and estimates of future member withdrawals. Although the Manager believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions and available data and research, there are certain factors, in addition to these risk factors and cautioning statements, such as general economic

conditions, local and regional real estate conditions, adequacy of reserves, or weather and other natural occurrences that might cause a difference between actual results and those forward-looking statements. As a consequence, our actual results may be significantly different from the expectations expressed in the forward looking statements and our past results. All forward-looking statements and reasons why results may differ included in this Registration Statement on Form 10 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.

Overview. We are a California limited liability company organized on September 5, 2003 for the purpose of making or investing in business loans secured by deeds of trust or mortgages on real properties located primarily in California. The loans are arranged and serviced for us by the Manager. We fund our lending activities by selling our membership interests, selling all or a portion of our interest in the loans in our loan portfolio and accessing credit from third party lenders, as well as from the Manager or affiliates of the Manager. We commenced operations in February 2004. We ceased accepting new members in the third quarter of 2006.

Our business strategy is to generate current income by making or investing in mortgage loans with borrowers for whom quick decisions, available funding and flexible underwriting are the primary considerations (compared to the lengthier or more burdensome underwriting processes often required to originate and fund a loan by conventional commercial mortgage lenders, such as commercial banks, in order to fund a loan), or for whom the collateral type (e.g., undeveloped land or partially leased office buildings in need of repairs or maintenance and/or remodeling) or their credit histories precludes financing from conventional commercial mortgage lenders. Loans are arranged by the Manager from repeat borrowers, referrals, new "off-the-street" borrowers, advertising in real estate trade journals and business publications, or from loan brokers engaged and paid by the borrower. In addition, from time to time, we identify loans or portfolios of loans originated by other third parties that match our own origination criteria and acquire these loans or portfolios of loans. Although profitable, this has not been a significant part of our mortgage investing activities. Interest that we earn on our loans has been and is expected to continue to represent our primary source of revenue.

Generally speaking, the underwriting by the Manager focuses primarily on the value of the collateral securing the loan, and secondarily on the general creditworthiness and reputation of the borrower. The collateral is generally real properties—predominantly commercial income-producing structures or land held by businesses. The land can be itself income-producing (e.g., vineyards) or may be held for commercial or residential development. The collateral may include a security interest in the equity of the entity holding the asset or other interests such as water rights, personal property, work product, equipment or other business assets. In most cases, a personal guarantee of the borrower or the principal owner of the borrowing entity is obtained. As a result of the nature of our underwriting and lending our business model generally results in higher delinquency and foreclosures than experienced by conventional commercial mortgage lenders. Historically, higher delinquencies and foreclosures have not led to higher charge-offs.

Our operating results are primarily affected by:

•: the cash available to invest in loans and our goal of managing the level of cash to be sufficient to meet operating expenses and distributions to investors in a timely manner;
•: the amount of funding available through borrowings to finance investments in loans and the costs of these borrowings;
•: the ability of the Manager to source and provide us with suitable loans;
•: the level of real estate lending activity in our market and competition from other lenders;
•: the interest rates on the loans we make and those on the loans in which we invest;

•: the level of loan losses experienced, including the gains and losses from the disposition of foreclosed properties;
•: general national and local economic conditions and trends that influence the level of real estate investments and the prices thereof and in turn impact the demand for the financing of real estate investments; and
•: our operating costs, which consist of amounts paid to the Manager (servicing and asset management fees) and professional services, primarily legal, accounting, audit and tax.

Most of our assets are fixed-rate mortgage loans. We have not invested in derivative instruments or otherwise engaged in hedging transactions to reduce the risks of interest rate changes. In the future, we may consider hedging transactions as a tool in managing our interest rate risk.

The commercial mortgage loan business often is vulnerable to changes in macroeconomic conditions, including levels of interest rates. If softness in economic conditions results in decreases in interest rates, more borrowers may prepay their loans and we may not be able to reinvest the amounts repaid in loans generating as high a yield. To stay fully invested, our Manager may be required to arrange loans for us on terms less favorable to us or to make loans involving greater risk to us.

Interest rate movements also affect real estate values, as do quality and location of the real property, cash availability and end-user demand. Modest movements in real property values or interest rates are not expected to significantly affect our performance. A severe decline in real estate values could adversely affect the value of collateral underlying the loans which, in an event of default, could adversely affect ultimate collection of loan principal and interest and result in losses to us. Deterioration in economic conditions could also increase loan delinquencies and loan defaults with comparable effect. Decreases in loan payoffs, increases in loan delinquencies and defaults, and/or decreases in the yield in our mortgage-loan portfolio (including increases in real estate owned ("REO")), would reduce the cash we have available for distribution to our members and impact our returns.

The loans we invest in are relatively higher yielding loans at LTV ratios that are relatively lower than is typical with conventional commercial mortgage lenders. Historically, our loans have been originated with annual interest rates that have averaged between 12% and 13.95%, while LTV's have averaged below 65%. Since our formation in 2003, the challenge of originating these loans has been particularly pronounced due primarily to increased competition from other commercial mortgage lenders, rapidly increasing commercial property values and demands from potential borrowers for higher LTV loans and lower interest rates.

For many commercial property types such as apartment buildings, office buildings, hotels and retail buildings, values have risen over the past five years. During the same period, capitalization rates, a popular method of valuing income properties, decreased to their lowest levels in decades. As capitalization rates decrease, property values go up since the same net income results in higher valuations. The commercial property markets also experienced unprecedented demand from investors and lenders. Many of these investors and lenders came from overseas as the global economy expanded resulting in sizable amounts of liquidity in the real estate, private equity and financial markets.

In California and some other states, office properties increased in value significantly, resulting in part from low vacancy rates and rising rental rates, increasing their values. Hotels also experienced higher occupancy and average daily rates, increasing their values. Apartment values rose with higher occupancy rates and, in some areas, a significant interest from investors competing to purchase well-located buildings for conversion to condominiums.

Over the past five years, and particularly in California, there also has been a proliferation of competing lenders vying to originate mortgage loans. Many lenders who only a few years ago were not

active commercial real estate lenders began to enter the market or increase the aggressiveness of their lending efforts. Some of these lenders were engaged in the same type of lending as the Manager, with a focus primarily on the value of the underlying real estate collateral and less on the general creditworthiness and reputation of the borrower. Many hedge funds—some of them recently formed—began competing vigorously for commercial mortgage loans. In addition, several publicly traded REITs and other large publicly traded real estate companies began more actively lending against commercial real estate properties. A number of lenders and investors formed collateralized debt obligation programs which securitized mortgage loans and related other securities often secured by the same types of properties against which the Manager had traditionally originated loans.

The strong increase in property values, the falling capitalization rates, the increased number of other lenders engaged in our type of mortgage lending and the general availability of credit and liquidity resulted in a very competitive lending environment over the past several years. Loan requests were at or above the highest ranges of our LTV limitations and at interest rates lower than our targeted yields. The Manager also became concerned about not only lending at high LTV ratios, but doing so on appraised values that have increased as a result of shrinking capitalization rates and the relatively lower level of net income supporting these new valuations.

During this period, the Manager and many others in the real estate and mortgage financing industries began to anticipate the eventual downturn in the residential real estate markets. Home prices throughout the United States had risen dramatically beginning in the last half the 1990s and continuing through 2006. Home prices (and commercial real estate values) have always been cyclical and many of the commonly watched ratios and statistics such as the ratio of the average homeowner's income needed to make mortgage payments, the ratio of home prices relative to average income levels, the percentage of those able to afford to purchase homes and others had been stretched to what were considered by many to be unsustainable levels.

The Manager has always believed in the cyclical nature of the real estate market and that downturns in the real estate markets are inevitable over time. By holding a portfolio of loans with relatively lower LTVs, we believed we would be better able to withstand a significant decrease in real estate values without suffering large losses of uncollected principal and interest under our loans.

As of June 30, 2007, approximately 84% in aggregate principal amount of our loans was secured by California real estate. Also, as of June 30, 2007, 81% of our loan portfolio was secured by undeveloped land (68% in California and 13% outside of California), most of which properties do not generate current income. Undeveloped land can be held for future residential, commercial, or mixed-use development projects. The percent of loans secured by undeveloped land by type are to 3% residential and to 16% commercial and mixed-use. These geographic and land type concentrations of location and land type serve to increase our risk of adverse effects on our results of operations and cash flow from a local or regional real estate market downturn or one that affects particular types of properties (or affects particular types of properties more severely).

Due to the significance of loans collateralized by land held for residential development, the reversal in housing markets and the recent turmoil of the capital markets, particularly those elements that provide funding to subprime, Alt-A, and prime jumbo (non-conforming) lenders and borrowers, are expected to challenge our results of operations and cash flows. Although preliminary estimates of gross domestic product indicated growth at a robust 4% in the second quarter of 2007 (significantly improved from 0.7% in the first quarter), conditions in the housing sector remain exceptionally weak. Sales of existing and new homes continued in August 2007, and housing inventories continued to climb. In August 2007, inventory levels reached a 10 month supply (8.2 months for new homes) surpassing the worst point observed during the 1990-91 recession. Housing prices are generally declining, but unevenly. Much of the larger declines are in California and Arizona. Taken together, the slow home absorption rates and an increasing inventory of vacant developed lots are creating financial difficulties and an

uncertain future for the home builders and land developers, who are our borrowers. Homebuilder confidence fell in October to its lowest level since 1985, when record keeping began. In this uncertain market, prices for land held for residential development declined. The decline is exacerbated by the lack of buyers and available funding. Therefore, recent sales of land tend to be by highly motivated sellers to purchasers seeking rock-bottom prices.

Forward indicators for housing—the number of housing starts and housing permits registered sharp declines in August 2007—portend a future rebalancing of supply and demand. The Joint Center for Housing Studies of Harvard University states: "The length and depth of the current correction will depend on the course of employment growth and interest rates, as well as the speed with which builders pare down excess supply." Economists of the Federal National Mortgage Association project that housing activity will stabilize in the second half of 2008, unfortunately with additional price declines into 2009. They project home sales to decline 15% in 2007 and nearly 10% in 2008. The three-year (2006-2008) drop in single-family sales would be the largest since the housing downturn of 1979-1982. Sustained gains in sales are forecast to begin in early 2009. A 2007 paper from the Fisher Center for Real Estate & Urban Economics at the Haas School of Business at U.C. Berkeley forecasts even more dramatic declines in new single-family housing starting from 1.7 million in 2005 to 750,000 in 2008. Existing home sales are forecasted to decline from 7 million to 5.3 million in 2008.

Offsetting the near term correction is a more positive longer term outlook for housing. Household growth (in large part due to immigration and the children of these immigrants) is projected by the Joint Center for Housing Studies to exceed 14.6 million between 2005 and 2015 (exceeding by two million the strong growth of 1995 to 2005). While the Center projects continuing challenges from housing affordability, strong household growth bodes well for a rebalancing of for-sale housing inventory in 2009.

The Manager believes that the above economic conditions in the housing market have, in fact, resulted in a significant decrease in value in certain regions for land held for residential development. This decline is uneven across regions and even across projects within the same region. It may be a short-term or a longer-term event.

The general decline in value of land held for residential development is in some cases offset by an increase in value attributed to progress on land development, such as annexation by a town or municipality or granting of entitlement status that moves the project closer to a stage where lots can be sold, individually or in bulk.

The Manager reviews the collateral value of the land for each project in making the determination to recognize in the current period interest income for financial reporting and to determine if adjustments to the reserve for loan losses and/or adjustments to the carrying values of REO. (See "Critical Accounting Estimates" below in this section).

As to commercial real estate, other than land held for residential development, values appear to be holding steady or for some properties and property types increasing. The Federal Reserve Board in "The Beige Book" dated October 17, 2007, in the section on the Twelfth District—San Francisco states: "In contrast to housing, market demand for commercial real estate advanced further, and positive absorption continued in most areas despite the availability of substantial new contstruction." The Manager believes that similar market conditions exist in the markets in which it has lent.

Critical Accounting Estimates. Preparation of our financial statements requires the Manager to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience, independent evaluations (such as appraisals of specific properties), market data on real estate and real estate transactions available from public sources, industry and market research and forecasts, discussions with real estate brokers, developers and investors and various other sources and factors we believe to be reasonable

and reliable under the circumstances. The Manager periodically reviews our accounting policies and these estimates and assumptions and make adjustments when facts and circumstances dictate. Our accounting policies that are affected by estimates principally relate to the determination of (i) the allowance for loan losses (i.e., the amount of allowance established against loans receivable as an estimate of probable loan losses), including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the value of the property as collateral, and (ii) the valuation of real estate owned through foreclosure. Different estimates and assumptions in the application of these policies could result in material changes in our financial condition, results of operations, or cash flows.

Our assets do not trade regularly on public exchanges or in public markets. Most, if not all, transactions are negotiated privately with individuals or other funds. The Manager frequently negotiates such transactions for us and other funds it manages. Because information on trades and transactions is not publicly available, the Manager estimates fair values based on the best available data, including transactions it has completed and transactions it has been offered.

The Manager analyzes loans and the related accrued interest, late fees and advances weekly for collectability and recoverability. Delinquencies are identified and monitored as part of the loan servicing process. Delinquencies are determined based upon contractual terms. For past due loans, interest continues to accrue, and to be recognized as revenue in the financial statements, if the loan is adequately collateralized (up to 90% loan-to-collateral value) and the loan is in the process of collection. If warranted, a provision is made for loan losses to adjust the allowance for loan losses to an amount considered by the Manager to be adequate, with due consideration for collateral values, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). We charge off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible.

If the probable ultimate recovery of the carrying amount of a loan, with due consideration for collateral values, is less than amounts due according to the contractual terms of the loan agreement, the carrying amount of the investment is reduced to the present value of future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral. See "Asset Quality" below in this section.

Real estate held for sale, including real estate acquired through foreclosure, is stated at the lower of the recorded investment in the loan, plus any senior indebtedness, or the property's estimated fair value, less estimated costs to sell. We periodically compare 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 the future undiscounted cash flows, the assets are reduced to estimated fair value through a provision for REO losses and a valuation account.

Recent events and trends in the real estate and capital markets and the economy have been taken into consideration in the process of arriving at the allowance for loan losses.

We cannot assure you that economic difficulties or other circumstances that would adversely affect our borrowers and their ability to repay outstanding loans will not occur. Such inability to pay which would be reflected in increased losses in our loan portfolio, which could result in actual losses that exceed reserves previously established.

Other Accounting Policies.

Revenue Recognition

We recognize interest as revenue for financial reporting so long as collateral adequately secures the loan and the collection effort is ongoing because the presumption is that the borrower will repay the debt and we will not acquire the property/collateral to satisfy the debt. A loan is classified as non-accrual for financial reporting purposes when any one of the following four events occurs:

•: When a notice of sale ("NOS") on a property is recorded, the loan collateralized by the property becomes non-accrual. If a loan is secured multiple properties, an NOS on any one property results in non-accrual status for that loan.
•: When the current combined loan to value ("CLTV") ratio exceeds 90%. The CLTV calculation includes all amounts due including advances; accrued interest on advances; senior debt and accrued interest; fees and advances on senior debt; and an estimate for the cost of foreclosure and the cost of sale.
•: The borrower declares bankruptcy. If the bankruptcy only impacts a small portion of the collateral and the remaining collateral continues to meet the CLTV criteria and it reasonable to expect the borrower to satisfy the loan, then the bankruptcy doesn't require non-accrual status.
•: A loan is more than 12 months delinquent.

Allocation of Profits and Losses; Distributions.

Our profits are allocated among the members first in proportion to any losses previously allocated to them until the losses have been recouped and then on the basis of their relative capital account balances (i.e., percentage interests) as of the first day of the month; provided that if membership interests are purchased, increased or decreased during the month, the profits realized during the month will be prorated in proportion to the number of days during the month that each member held a capital account on a weighted average basis. Losses, if any, are allocated monthly as of the last day of the month to members in accordance with their percentage interests.

Members may elect to receive monthly cash distributions equal to their percentage interest of cash available for distribution or have those amounts added to their capital account and reinvested in us. Subject to certain limitations, as described in the operating agreement, members may change their elections. As a result of the ability to elect either cash distribution or reinvestment, a member's proportionate share of total members' capital will likely change over time. Accrued distributions represent the net income not yet distributed to those members who have elected to receive monthly cash distributions.

Summary of Financial Results. The following discussion is designed to provide a better understanding of significant trends related to our financial condition and results of operations. The discussion should be read in conjunction with our audited financial statements and notes thereto and the other financial information appearing elsewhere in this Registration Statement on Form 10.

Set forth below are summaries of our financial results for the six months ended June 30, 2007 and 2006 and for the years ended December 31, 2006, 2005 and 2004.

Results of Operations
Six months ended June 30, 2007 and 2006

				Six Months Ended June 30, 2007		Percent of Revenues, net	Six Months Ended June 30, 2006		Percent of Revenues, net
Revenues:
	Interest income:
		Interest on loans		$	6,926,279	114.9	$	6,687,474	115.4
		Interest on advances to borrowers			167,750	2.8		85,974	1.5
		Other interest income			93,356	1.5		73,830	1.3

			Total interest income		7,187,385	119.2		6,847,278	118.2
		Loan servicing fees			1,156,278	19.2		1,054,186	18.2

			Total interest income, net of servicing fees		6,031,107	100.0		5,793,092	100.0

	Gain on sale of loan				—	—		—	—

	Gain on sale of real estate owned				—	—

			Total revenues, net of servicing fees		6,031,107	100.0		5,793,092	100.0
Interest expense					1,522,402	25.2		324,500	5.6
Provision for loan losses					2,629,250	43.6		221,000	3.8

			Net revenues		1,879,455	31.2		5,247,592	90.6
Operating expenses:
	Asset management fees				493,575	8.2		478,358	8.3
	Professional services				525,815	8.7		40,020	0.7
	Other operating expenses				8,227	0.2		11,008	0.2

			Total operating expenses		1,027,617	17.1		529,386	9.2

			Net income	$	851,838	14.1	$	4,718,206	81.4

Revenues, Net of Servicing Fees

Interest income amounted to 119% of total revenues, net of servicing fees in the first six months of 2007 and 118% in the first six months of 2006. Interest income totaled approximately $7.2 million in the first six months of 2007, a $340,000 (5%) increase over the first six months of 2006. Interest income on loans accounted for a majority of the change, with interest on loans increasing $239,000 in the first six months of 2007 from the first six months of 2006. The increase reflects a growth in average loans outstanding of $16.0 million. Interest income for the first six months of 2007 and 2006 included interest on advances from borrowers of $168,000 and $86,000, respectively. Advances are amounts we pay to senior lienholders to prevent them from foreclosing on a property or for taxes, insurance, repairs, maintenance or other expenses and will fluctuate from period-to-period.

The yield on loans and advances in the first six months of 2007 was 12.27% annualized on average loans and advances of $115.6 million (loans: $113.6 million plus advances: $2.0 million) compared to 14.51% annualized on average loans and advances of $93.3 million (loans: $92.3 million plus advances: $1.0 million) in the first six months of 2006. The decline in yield of 224 basis points is primarily attributable to an increase in loans on non-accrual status ($8.1 million at June 30, 2007 compared to $3.1 million at June 30, 2006) and, at June 30, 2007, real estate owned that had previously been loans

on non-accrual status of $8.4 million. Collection of late fees, default interest income and other fees that are recognized when received significantly mitigated the effect of the non-accruing loans and REO.

Loan servicing fees increased to approximately $1.2 million in the first six months of 2007 (an increase of $102,000 or 9.7%) from $1.1 million in 2006. Loan servicing fees were 2% of the principal of each loan and were paid as interest income was collected. This increase reflects the increasing average size of the loan portfolio.

Interest Expense

Interest expense in the first six months of 2007 of $1.5 million was attributable to the note payable to Income Fund, an affiliate of the Manager, in the original amount of $25 million. Income Fund obtained the loan from Wells Fargo Foothill and passed the proceeds through to us so that we could fund a $48 million loan. This was our first such borrowing and was obtained in May 2006. The rate, all in, of this borrowing was 13.47%.

Provision for Loan Losses

The provision for loan losses increased $2.4 million (1,090%) to $2.6 million in the first six months of 2007 from $221,000 in the first six months of 2006. The increase is attributable to a write-down during the first six months of 2007 of $2.0 million of a loan to the appraised value, less estimated costs to sell, of the real estate taken back upon completion of the foreclosure, and a valuation reserve on two loans ($110,000). There were no such specific adjustments to the provision in 2006.

Operating Expenses

Operating expenses increased $498,000 (94%) in the first six months of 2007 from the first six months of 2006. Professional services accounted for substantially all of the increase, amounting to $526,000 in the first six months of 2007, which was $486,000 (1, 214%) more than the $40,000 in the first six months of 2006. The increase is attributable to significantly higher professional fees, primarily legal, accounting, and audit services, resulting from preparation for the registration of our membership interests under the Exchange Act and our need to comply with the reporting and other requirements of the Exchange Act. We expect these reporting and other requirements, including complying with the provisions of the Sarbanes Oxley Act of 2002 ("Sarbanes Oxley"), will result in higher professional fees, offset by certain efficiencies gained. Asset management fees, which amount to 1% annually of our "net asset value" and which are payable monthly, increased 3% in the first six months of 2007 from the first six months of 2006 (in line with the increase in the average loan outstanding.) We may reimburse the Manager for operating expenses, other costs and out-of-pocket general and administrative expenses, such as accounting, postage and preparation of the reports to the members, it incurs on behalf of us. As of June 30, 2007, there were no operating expenses or other costs incurred by the Manager for which reimbursement was sought.

Net Income

Net income in the first six months of 2007 amounted to $852,000, a $3.9 million (81.9%) decrease from the $4.7 million recorded in the first six months 2006 primarily because of the increase in provision for loan losses and loans on non-accrual status. The net income represents returns of 4.40% annualized on average equity of $99.6 million for the first six months of 2007 and 10.12% on average members' capital of $93.2 million for the first six months of 2006. We have continued to make monthly distributions to members, however, at an estimated rate of 9% of average equity through and including October 31, 2007. Whether the net income will equal 9% will depend on events in the fourth quarter, including whether the Manager pays down the note it gave us in connection with its 2006 purchase of a REO from us to meet the 20% down payment required by accounting standards applicable to real estate asset sales and thereby to recognize the deferred gain of $1.3 million on REO. The Manager

may also purchase from us a property we foreclosed on in June 2007, at a price and terms which will offset the loss recognized in 2007. Without such actions by the Manager or if such actions are not sufficient, either by themselves or in combination with other possible actions, to cause the actual yield to equal the estimated 9% distribution, then the amounts distributed in excess of the actual yield would constitute a return of members' capital, not a distribution of profits.

Results of Operations
Years Ended December 31, 2006, 2005, and 2004

				2006		Percent of Revenues, net		2005		Percent of Revenues, net		2004		Percent of Revenues, net
Revenues:
	Interest income:
		Interest on loans		$	14,806,358	112.4	%	$	4,968,823	100.0	%	$	1,047,687	116.8	%
		Interest on advances to borrowers			207,343	1.6			546,696	11.0			—	—
		Other interest income			208,074	1.6			127,768	2.6			13,724	1.5

			Total interest income		15,221,775	115.6			5,643,287	113.6			1,061,411	118.3
		Loan servicing fees			2,361,457	17.9			675,792	13.6			164,617	18.3

		Total interest income, net of servicing fees			12,860,318	97.7			4,967,495	100.0			896,794	100.0
	Gain on sale of loan				165,664	1.3			—	—			—	—
	Gain on sale of real estate owned				141,447	1.0			—	—			—	—

			Total revenues, net of servicing fees		13,167,429	100.0			4,967,495	100.0			896,794	100.0
Interest expense					1,959,928	14.9			—	—			—	—
Provision for loan losses					1,675,777	12.7			252,210	5.1			107,875	12.0

			Net revenues		9,531,724	72.4			4,715,285	94.9			788,919	88.0

Operating expenses:
	Asset management fees				1,027,163	7.8			503,293	10.1			104,865	11.7
	Professional services				151,039	1.1			46,987	0.9			28,416	3.2
	Other operating expenses				25,576	0.2			7,331	0.1			5,514	0.6

			Total operating expenses		1,203,778	9.1			557,611	11.1			138,795	15.5

			Net income	$	8,327,946	63.3	%	$	4,157,674	83.7	%	$	650,124	72.5	%

Revenues, Net of Servicing Fees

Interest income amounted to 116% of total revenues, net of servicing fees in 2006, 114% in 2005 and 118% in 2004. Interest income totaled approximately $15.2 million in 2006, a $9.6 million (170%) increase over 2005. The 2005 total interest income of approximately $5.6 million was an increase of $4.6 million (432%) over the $1.1 million recorded in 2004, our first year of operations. Interest income on loans accounted for a majority of the change, with interest on loans increasing $9.8 million in 2006 from 2005 and $3.9 million in 2005 from 2004. The 2005-2006 increase reflects a growth in average loans outstanding of $66.8 million; the 2004-2005 increase reflects a growth in average loans outstanding of $33.1 million. Interest income for 2005 was impacted positively by $547,000 in interest on advances to borrowers (amounting to 11% of interest income for that year), as compared to $208,000 in 2006 and $14,000 in 2004. Advances are amounts we pay to senior lienholders to prevent them from foreclosing on a property or for taxes, insurance, repairs, maintenance or other expenses and will fluctuate from year to year.

The yield on loans and advances was 13.87% in 2006 on average loans and advances of $108.2 million (loans of $108 million plus advances of $255,000); 13.31% in 2005 on average loans and advances of $41.4 million (loans of $38.4 million plus advances of $3.0 million); and 12.53% in 2004 on average loans and advances of $8.3 million (loans of $8 million plus advances of $2,000). The yield fluctuations are typical for a fund in the first years of operation when pricing of individual loans, loans in non-accrual status and collection of ancillary fees recorded as revenue when received have a more significant impact on yield than when the fund is larger and loan amounts are more consistent period-to-period. Loans including accrued interest and advances on non-accrual status were $4,437,234 in 2006 and $7,182,027 million in 2005. There were no loans on non-accrual status in 2004. The yield is impacted positively by collection of late fees, default interest income and other fees that are recognized when received.

Loan servicing fees increased to approximately $2.4 million in 2006 (an increase of $1.7 million or 250%) from $675,000 in 2005 (an increase of $511,000 or 311%) from $165,000 in 2004. Loan servicing fees were 2% of the principal of each loan and were paid as interest income was collected. This increase reflects the increasing average size of the loan portfolio.

Total revenues, net of servicing fees for 2006 included a $166,000 gain on sale of a loan and $141,000 gain on sale of real estate owned. As with advances, sales of loans and real estate occur from time to the normal course of business.

Interest Expense

Interest expense in 2006 of $1.9 million was attributable to the note payable to Income Fund, an affiliate of the Manager, in the original amount of $25 million. Income Fund obtained the loan from Wells Fargo Foothill and passed the proceeds through to us so that we could fund a $48 million loan. This was our first such borrowing and was obtained in May 2006. The rate, all in, of this borrowing was 13.23%.

Provision for Loan Losses

Provision for loan losses was $1.6 million in 2006, $252,000 in 2005, and $108,000 in 2004. A provision for loan losses sufficient to maintain a non-specific (i.e., general) reserve for loan losses of one-half of one percent (0.5% or 50 basis points) of the amount of loans and advances outstanding was recorded in 2006, 2005 and 2004. In 2006, an additional provision was recorded of $1,151,017 to write down the value of a property acquired through foreclosure to the appraised value, less estimated costs to sell of $200,000, for a total of $1,351,017, and a specific reserve of $95,000 for another loan. There were no such specific adjustments to the provision in 2005 and 2004.

Operating Expenses

Operating expenses increased $646,000 (116%) in 2006 over 2005 and $419,000 (302%) in 2005 over 2004.

Asset management fees, which amount to one percent annually of our "net asset value" and which are payable monthly, accounted for the significant part of the increase, growing $524,000 (or 104%) in 2006 over 2005 and $398,000 (380%) in 2005 over 2004. This growth was again attributable to the growth in our loan portfolio.

Professional services amounted to $151,000 in 2006, which was $104,000 (221%) more than the $47,000 recorded in 2005, which was $19,000 more than the $28,000 recorded in 2004. Professional fees are primarily legal, accounting, and audit services and the increase cost is in line with the increasing size and complexity of our operations. The increase is also attributable to the additional legal, accounting, and audit services required to prepare for the registration of our membership interests

under the Exchange Act and our need to comply with the reporting and other requirements of the Exchange Act.

We may reimburse the Manager for operating expenses, other costs and out-of-pocket general and administrative expenses, such as accounting, postage and preparation of the reports to the members, it incurs on our behalf. As of December 31, 2006, there were no operating expenses or other costs incurred by the Manager for which reimbursement was sought.

Net Income and Annualized Rate Return to Members

Net income amounted to $8.3 million for 2006 (8.30% of average members' equity of $100.3 million); $4.2 million for 2005 (8.74% of average members' equity of $49.1 million); and $650,000 for 2004 (6.20% of average members' equity of $9.7 million). The increase in average equity is attributable to sale of membership interests, net of withdrawals, and the reinvestment of distributions by members.

Lending Capacity and Assets. From inception in February 2004, our lending capacity had increased at December 31, 2006, to $123.3 million (members' capital of $99.8 million and note payable-$23.5 million). Cash and equivalents ($4.1 million), loans ($115.3 million) and advances ($1.2 million) increased in the same period to $120.6 million or 98% of available capacity. The lending capacity at December 31, 2005 had increased from inception to $74.6 million (members' capital plus investors in applicant status). Cash and equivalents, loans and advances increased to $74.6 million or 100% of capacity. The increase in funding capacity in 2006 over 2005 was $48.7 million, or 65%, and approximately half of this increase was due to borrowings. As we are no longer accepting new members at this time, future growth in lending capacity will come from reinvestment of earnings and additional contributions from existing members and from borrowings.

Loan Portfolio and Asset Quality. As of June 30, 2007, December 31, 2006, December 31, 2005 and December 31, 2004 our mortgage investments aggregated 30, 36, 29, and 19, respectively. The average loan balances were $1,135,526 and $2,487,228 at the end of 2004 and 2005, respectively, and increased to $3,276,915 as of December 31, 2006 and $3,701,064 as of June 30, 2007. The average loan balance in our portfolio has been increasing since 2004, the first year of operations.

During the year ended December 31, 2006, we sold a 100% interest in one whole loan at the face value of $19.5 million to an unrelated party. The Manager retained a sub-servicing right in this transaction. As a result of a spread between the note yield and the yield provided to the purchaser, we recorded a gain of $166,000.

Approximately $24,574,425 (22%), $17,230,425 (15%) and $2,800,000 (4%) of the loans we invested in were more than 90 days delinquent in monthly payments as of June 30, 2007, December 31, 2006 and December 31, 2005, respectively. Of these loans, the amounts attributable to borrowers who filed bankruptcy were approximately $973,000 (1%), $65,000 (0%) and $10,000 (0%), respectively. In addition, loans past maturity (delinquent in principal) but current in monthly payments were approximately $0 (0%), $60,000 (0%) and $0 (0%), respectively. Four loans totaling approximately $5,012,000, as of December 31, 2006, were paid off in full and no partial paydowns on loans were made subsequent to year end(1).

We have negotiated various contractual workout agreements with borrowers whose loans are past maturity or who are delinquent in making payments. We are not obligated to fund additional money on these loans as of June 30, 2007. There are four loans totaling approximately $10,988,000 subject to workout agreements as of June 30, 2007.

(1): For financial reporting the Total Outstanding Loan Balance is presented net of the allowance for loan losses and the amounts in trusts for interest reserves and future advances and is presented on a gross basis.

As of June 30, 3007 and December 31, 2006, 2005, and 2004, we held the following types of mortgages.

		June 30, 2007		December 31, 2006		December 31, 2005		December 31, 2004
First Trust Deeds		$	19,580,425	$	11,952,555	$	31,505,621	$	1,435,000
Second Trust Deeds			19,293,296		19,278,192		25,872,000		10,800,000
Third Trust Deeds			13,791,744		12,891,744		550,000		550,000
Mixed Trust Deeds			57,378,450		73,846,271		14,202,000		8,790,000

	Total	$	111,031,915	$	117,968,931	$	72,129,621	$	21,575,000

Commercial Real Estate		$	6,658,296	$	7,383,271	$	17,777,121	$	10,675,000
Residential Real Estate			3,100,000		1,090,000		200,000		4,740,000
Land			90,245,619		98,302,660		31,412,500		360,000
Mixed-Use Properties			11,028,000		11,193,000		22,740,000		5,800,000

	Total(1)	$	111,031,915	$	117,968,931	$	72,129,621	$	21,575,000

(1): For financial reporting the Total Outstanding Loan Balance is presented net of the allowance for loan losses and the amounts in trusts for interest reserves and future advances and is presented on a gross basis in this table.

Asset Quality. A consequence of originating or investing in loans is that losses may occur. The actual amount of such losses, if any, may vary from time to time. Factors that affect such potential risks include general economic conditions of the real estate market as well as specific conditions in a particular sub-market (e.g., land development), availability of funds in the capital market, and the experience and expertise of the borrower. While many of these factors are beyond the control of the Manager, they can be monitored and used by the Manager in assessing potential risks.

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 ratio, reserves, etc.) and to obtain current information regarding their borrowers and the securing properties. While the Fund is not subject to these regulations, the Manager has adopted many of these practices. The Manager has a weekly scheduled servicing meeting (and special meetings as warranted) in which any potential risks to the loan portfolio are discussed and analyzed. These discussions include:

•: prevailing economic and real estate market (and sub-market) conditions;
•: evaluation of industry trends;
•: availability of funds in the capital market;
•: type and dollar amount of loans in the portfolio;
•: our historical loss experience;
•: review and evaluation of loans identified as having loss potential;
•: the current fair market value of the underlying collateral(s);
•: estimated net realizable amount of the underlying collateral(s);
•: status of any improvements, rehabs, sales, rents, or entitlements; and
•: borrower's and guarantor's financial condition including any potential adverse situations that may affect the borrower's or guarantor's ability to pay.

The evaluation of a loan or loan portfolio and determining any potential losses is not an exact science. It requires an evaluation of all of the facts available as well as a best efforts estimate of

imprecise or unavailable information. While there is no precise methodology whereby the Manager can absolutely predict the potential loss on a loan, the Manager considers each of the above factors in light of the underlying collateral and borrower, along with the number and amount of delinquent loans, of loans subject to workout agreements and of loans in bankruptcy, in determining allowances for loan losses, but there can be no absolute assurance that the allowance is sufficient. Because any decision regarding the allowance for loan losses reflects judgment about the probability of future events, there is an inherent risk such judgments will prove incorrect. Actual losses may exceed (or be less than) the amount of loss reserves. To the extent that we experience losses greater than the amount of our reserves, we may incur a change to earnings that will adversely affect operating results and the amount of distributions payable to members.

The Manager, as part of the quarterly closing of our accounting records and preparation of our financial statements, evaluates our mortgage loan portfolio along with all the analysis established through our servicing meetings. Loan losses are established based on the Manager's evaluation of any risks inherent in our loan portfolio along with a review of the analysis provided for the individual loans by the assigned loan officer.

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 June 30, 2007, management believes that the allowance for loan losses of $1,360,160 is adequate in amount to cover probable losses.

Changes in the allowance for loan losses for the six months ended June 30, 2007 and June 30, 2006, and the years ended December 31, 2006, 2005 and 2004 were as follows.

		Six months ended June 30,
		2007			2006		2006			2005		2004
Balance, beginning of the year		$	684,845		$	360,085	$	360,085		$	107,875	$	—
	Provision		2,629,250			221,000		1,675,777			252,210		107,875
	Charge-offs		(1,953,935	)		—		(1,351,017	)		—		—

Balance		$	1,360,160		$	581,085	$	684,845		$	360,085	$	107,875

Mortgage Loans—Delinquencies

As of June 30, 2007

		Outstanding Loan Balance Payable to Us		Percent of Total Balance to Loan Portfolio
30-59 days delinquent		$	0	0.0	%
60-89 days delinquent		$	0	0.0	%
90+ days delinquent(1)		$	24,574,425	22	%

	Total	$	24,574,425	22	%

(1): The properties securing these loans are in foreclosure.

These same loans were delinquent in monthly payments greater than 90 days as of September 30, 2007.

Real Estate Owned. At June 30, 2007, we held title to one property that we foreclosed on in June 2007, which had an appraised value as determined in July 2007 of $7 million. The net realizable value of this property is estimated to be $6.6 million, resulting in a net allowance for losses of

$1,953,935. This property does not currently generate revenue. Expenses for the property including payments to the senior lienholders are expected to be approximately $250,000 per quarter.

During 2006, one property was acquired through foreclosure with a loss of $1,351,017. The Manager bought the property from us at the carrying value of the property plus the reported loss. The gain is being reported on the installment sale method of accounting. Expenses for this property were reimbursed by the Manager.

No properties were acquired through foreclosure during 2005 or 2004.

Liquidity and Capital Resources. Sale of new membership interests, payoff of existing loan investments, and interest on our loans have been the primary sources of our liquidity and capital. We also sell partial or whole interests in a loan investment to provide additional liquidity and diversification. In 2006, we sold one loan and we also borrowed in order to fund a loan. There were no unpaid subscription proceeds and no investors in applicant status at either June 30, 2007 or December 31, 2006 because we were not accepting new subscriptions.

In 2006, net cash provided by financing activities amounted to $40.9 million, compared to $46.2 million and $23.8 million in 2005 and 2004, respectively. Contributions from members amounted to $44.4 million in 2006, which were partially offset by withdrawals and distributions of $24.9 million. Contributions from members amounted to $55.8 million in 2005, which were partially offset by withdrawals and distributions of $11.0 million. Net cash used by financing activities totaled $4.4 million in the first six months of 2007 compared to net cash provided by financing activities of $42.2 million in the first six months of 2006. The change was the result of ceasing to accept new members resulting in minimal cash contributions from existing members in 2007 compared to $38.8 million in cash contributions from new and existing members for the same period in 2006.

We make cash available for distribution monthly based on a 9% assumed annual yield. When subscribing for membership interest, subscribers must elect whether to receive monthly distributions of cash or to "reinvest" their prorated share of the profit allocation in their capital accounts.

Members may withdraw all or part of their capital accounts on 60 days' written notice, subject to the availability of our cash flow, although we can limit all such withdrawals to not more than 10% of aggregate outstanding capital accounts during any 12-month period. We are not required to establish a reserve fund for making these payments and have not done so. Member withdrawals amounted to $21,153,238 and $9,422,098, or 21.1% and 19.2% of $9,579,265 in 2006 and 2005, respectively.

Investing activity used cash totaling $46.5 million in 2006, $48.8 million in 2005 and $21.6 million in 2004 as we invested the member contributions in loans. The sale of one loan in 2006 generated $19.1 million and was the primary source of cash provided by investing activities over the three-year period. Investing activity used cash of $4.4 million in the first six months of 2007 compared to $42.2 million in the first six months of 2006. The reduction in investing activities was a result of no longer accepting new member subscriptions and an absence of loan payoffs. This resulted is less new cash available in 2007.

Operating activities provided cash of $5.2 million in 2006, a decrease of $712,000 from 2005. Although net income increased from $4.2 million in 2005 to $8.3 million in 2006, additional loan loss reserves, a non-cash item of $1.4 million and an increase of $1.7 million in accrued interest receivables caused a net decline in the cash flow. The increase in accrued interest receivables was primarily caused by the increase in loans secured by land. Although these loans are still well secured, the borrowers generally have not made the monthly interest payments after the initial interest reserves were depleted. In addition, the net amount due from related parties (after deducting amounts due to related parties) increased $2.5 million in 2006 from 2005 reflecting amounts funded at the closing of loans and held by the Manager in a trust account as an interest reserve or for future advances.

Operating activities provided cash of $5.9 million in 2005, an increase of $6.6 million from the $898,000 of cash used by operations in 2004. Net income amounted to $4.2 million. In contrast to 2006, the net amount due to related parties (after deducting amounts due from related parties) increased $1.9 million in 2005 from 2004, reflecting collection of funds due from the sale of loan participation shares that were held in escrow at December 31, 2004.

From time to time, we may borrow funds from a third party lender (which may, but is not required to, be a bank or other financial institution), the Manager or its affiliates in order to fund additional mortgage loans or for other liquidity needs. As of June 30, 2007, we had one outstanding obligation in the original amount of $25 million to a fund affiliated with the Manager. Income Fund, which borrowed $25 million from Wells Fargo Foothill and in turn loaned us that amount in order for us to originate a new loan. The Wells Fargo Foothill loan is secured with a hypothecation and assignment of the promissory note and deed of trust of the new loan that the Manager originated. See "Item 1A—Risk Factors—We have and in the future may assign any portion of our loan portfolio as security to a third party lender, and if we fail to meet our payment or other obligation under the loan from the third party lender, we may risk losing the loans we assign as security to such lender and the lender may have recourse to our other assets, which would adversely affect our financial condition and the return on investment of our members." There are no limits on our borrowings.

Our cash and cash equivalents amounted to $364,880 at June 30, 2007, compared to $4,138,948 at December 31, 2006, and $4,556,991 at December 31, 2005. The Manager may establish, but has not to date established, a contingency reserve fund. Such a fund, if established, would be used to provide for(i) regular expenses incurred by us such as accounting and legal expenses associated with being a reporting company under the Exchange Act, (ii) losses due to nonperforming loans, and (iii) advances which may be necessary to protect our interests.

We believe the level of cash and cash equivalents at June 30, 2007, was substantially sufficient to provide for our operating expenses through year end. It may, however, be insufficient to fund member withdrawals or to provide significant advances in respect of properties should that be necessary to prevent foreclosure by senior lienholders, or otherwise provide for payment of taxes, insurance or other expenses on properties securing our loans. To provide for these latter amounts requires that loans be repaid, that interest be timely collected or that we sell some of our loans or interests in some of our loans, or to borrow from the Manager or third parties. Whether we temporarily reduce or suspend distributions or withdrawals to conserve our cash or whether we sell some of our loans or interests in some of our loans or borrow will be determined by the Manager as events develop during the fourth quarter of 2004.

Contractual Obligations and Material Commitments. The following table summarizes our contractual obligations and other material commitments as of December 31, 2006.

		Total*			Less than 1 year*			1-3 years		3-5 years		More than 5 years
Loan Commitments		$	3,852,333		$	3,852,333		—		—		—
Total		$	3,852,333		$	3,852,333		—		—		—

*: As of June 30, 2007, $550,333 remained

Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements, except for the obligations described above.

Recent Accounting Pronouncements.

Fair Value Measurements. In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair

value and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions should be applied prospectively, except for certain specifically identified financial instruments. The Manager does not expect the adoption of SFAS 157 to have a material impact on our financial position or results of operations."

Fair Value Accounting. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement 115 ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value and amends SFAS 115 to, and among other things, require certain disclosures for amounts for which the fair value option is applied. SFAS 159 is effective as of the beginning of an entity's first fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. The Manager does not expect the adoption of SFAS 157 to have a material impact on our financial position or results of operations.

Quantitative and Qualitative Disclosures About Market Risk

Our market risk results from changes in interest rates and, to the extent we must foreclose on a property securing a loan, the risks from changes in real estate values.

Interest Rate Risk

Our risk resulting from interest rate movements is limited to our variable rate borrowings (LIBOR-based) of approximately $23.5 million. All of our mortgage loans as of the date of this Registration Statement on Form 10 earn interest at fixed rates. Significant (200 or more basis points) changes in interest rates may affect the value of our investment in mortgage loans and the rates at which we reinvest funds obtained from loan repayments and new capital contributions from the members. In addition, interest rate decreases may encourage borrowers to refinance their loans with us at a time where we are unable to reinvest in loans of comparable value.

We do not hedge or otherwise seek to manage interest rate risk as, except as noted, our source of funding is members' capital. We do not enter into risk sensitive instruments for speculative or trading purposes.

The following table provides information about our financial instruments that are sensitive to changes in interest rates as of June 30, 2007. The presentation, for each category of information, aggregates the assets and liabilities and related weighted average interest rates by their maturity dates for maturities occurring in each of the years 2007 through 2011 and separately aggregates the information for all maturities arising after 2011.

Interest Earning Assets and Interest Bearing Liabilities,
Aggregated by Maturity Date
June 30, 2007

	2007			2008		2009		2010		2011		Thereafter	Total
Interest earning assets:
Money market accounts	$	501,174			—		—		—		—	—	$	501,174
Average interest rate		3.4%
Loans secured by trust deeds	$	1,743,296		$	19,495,000	$	71,898,194	$	13,101,425	$	4,498,000	—	$	111,031,915
Average interest rate		13.5%			12.7%		12.9%		12.8%		12.9%	—
Interest bearing liabilities:
Note payable	$	21,704,279			—	$	6,000,000		—		—	—	$	27,704,279
Average interest rate		10.6%	(1)				12.5%

(1): LIBOR plus 5.25%

Credit Risk

	As of December 31, 2006
	First Deeds of Trust			Second Deeds of Trust			Third Deeds of Trust			Mixed Deeds of Trust			Total
	Number	Amount		Number	Amount		Number	Amount		Number	Amount		Number	Amount
Commercial real estate	4	$	5,950,000	5	$	930,000	—		—	4	$	503,271	13	$	7,383,271
Residential real estate	—		—	1		1,090,000	—		—	—		—	1		1,090,000
Land	5		6,002,725	5		17,258,192	2		12,891,744	5		62,150,000	17		98,302,661
Mixed use properties	—		—	—		—	—		—	5		11,193,000	5		11,193,000

Total	9	$	11,952,725	11	$	19,278,192	2	$	12,891,744	14	$	73,846,271	36	$	117,968,932

	As of June 30, 2007
	First Deeds of Trust			Second Deeds of Trust			Third Deeds of Trust			Mixed Deeds of Trust			Total
	Number	Amount		Number	Amount		Number	Amount		Number	Amount		Number	Amount
Commercial real estate	2	$	2,820,000	4	$	3,838,296	—		—	—		—	6	$	6,658,296
Residential real estate	—		—	2		3,100,000	—		—	—		—	2		3,100,000
Land	6		6,760,425	4		12,315,000	2	$	13,791,744	5	$	57,378,450	17		90,245,619
Mixed use properties	1		10,000,000	1		40,000	—		—	3		988,000	5		11,028,000

Total	9	$	19,580,425	11	$	19,293,296	2	$	13,791,744	8	$	58,366,450	30	$	111,031,915

Type of Property	Loan to Value Ratio per lending policies		Loan to Value Ratio of Loans in Portfolio as of June 30, 2007		Loan to Value Ratio of Loans in Portfolio as of December 31, 2006
Commercial(1)	75	%	66	%	62	%
Residential (single family)	75	%	62	%	58	%
Land	60	%	47	%	43	%
Mixed Use	75	%	73	%	64	%

(1): Because LTV ratio lending policies do not apply to purchase money financings, we excluded from the June 30, 2007 LTV ratio for Commercial Property the LTV ratio relating to property securing a $5.4 million loan which we made to the Manager to enable the Manager to purchase property on

which we had foreclosed. The LTV ratio for the property securing this loan is greater than 100%. If the LTV ratio for this property is included in the LTV ratio table above for Commercial Property, the LTV would be 77% and 69% for June 30, 2007 and December 31, 2006, respectively.

ITEM 3. PROPERTIES.

Our principal executive office is located at 62 First Street, 4th Floor, San Francisco, California, 94105, and our telephone number is (415) 974-1100. The facility for the administrative and professional offices of the Manager. The facility, which is the consists of approximately 11,800 square feet of office space, which the Manager leases from Sixty-Two First Street, LLC, an affiliate of the Manager, for $25,728 per month. The lease expires on April 30, 2008 and is renewable for an additional one-year term with notice. The Manager believes that its existing facility is adequate for its current use.

ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

(a) We have no officers or directors, and all of the management powers are vested in the Manager. As of October 31, 2007, the Manager did not own any of our membership interests. The following table shows, as of October 31, 2007, the capital account balance of each person who is known to us to own more than 5% of the total members' capital.

Name and Address		Member's Capital Account Balance		Percentage of Total Fund Capital Account Balances
G. Samuels P.O. Box 129 Pleasanton, CA 94566		5,377,715		5.63	%

(b) The following table shows, as of October 31, 2007, the equity balance of each executive officer and director of the Manager.

Name		Member's Capital Account Balance		Percentage of Total Fund Capital Account Balances
Craig Raymond		1,406		Less than 1	%
Directors and executive officers as a group		1,406		Less than 1	%

ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.

We are a California limited liability company and have no directors or officers. All management powers are vested in the Manager, California Mortgage and Realty, Inc., which is a Delaware corporation. The following table sets forth certain information with respect to the executive officers and directors of the Manager:

Name	Age	Position
David Choo	44	Director and President
James Gala	55	Chief Executive Officer and Chief Financial Officer
Craig Raymond	63	Senior Vice President and Secretary

David Choo has been the President of the Manager from 1994 to the present and its sole director since 1998. He has also served as Chairman of the Manager since 1998 and as Secretary from 1994 to 1999. Mr. Choo became licensed as a California real estate broker in 1995. He has worked continually in the real estate investment industry since 1986. Mr. Choo is the immediate past president and a director of the California Mortgage Association and was previously a director of the California Trust Deed Broker's Association, a predecessor organization to the California Mortgage Association. He is a past member of the Mortgage Association of California and is a member of the Mortgage Banker's

Association. Mr. Choo received dual bachelor degrees in Economics and Computer Science from the University of California at Berkeley in 1984.

James Gala has been the Chief Executive Officer of the Manager since January 30, 2006 and was also elected to serve as Chief Financial Officer effective June 2006. Prior to joining the Manager, Mr. Gala was President and Chief Executive Officer of California Savings Bank from November 2004 to January 2006. Mr. Gala previously served as Chief Financial Officer of Fremont Bank from January 2003 to November 2004 and Senior Vice President, Loan Servicing & Post Closing, of Wells Fargo Home Mortgage from April 2001 to June 2002 and Senior Vice President, Servicing, from September 2000 to March 2001. Mr. Gala received a B.S. in Business Administration from Ohio State University in 1974.

Craig Raymond has been the Senior Vice President of the Manager since January 2005 and Secretary since 2000 and served as Vice President from 2000 to 2004. He served as advisor to numerous real estate investors, property managers, real estate and mortgage brokers and contractors for more than ten years before joining the Manager in August 1999. He was also an infantry officer in the U.S. Army for more than 20 years, specializing in training and fiscal management. Colonel Raymond received a B.S. in Business Administration from the University of California at Berkeley in 1966 and an M.A. in Management from Webster University in 1978.

ITEM 6. EXECUTIVE COMPENSATION.

We have no officers and directors and all of the management powers are vested in the Manager.

Compensation to the Manager and its Affiliates. The following summarizes the forms of compensation to be received by the Manager and its affiliates pursuant to our policies and our operating agreement. All of the amounts described below are payable regardless of our success or profitability. None of the following compensation was determined by arm's-length negotiations. The Manager retains the right to terminate all or any portion of its business relationship with us at any

time, in which event we would seek to retain one or more other firms to perform the various services rendered by the Manager as described below.

Form of Compensation Paid by Fund		Estimated Amount or Method of Compensation
Fees for Negotiating the Purchase of Discounted Loans from Third Parties(1)		Anticipated to average between 3% - 6% of the principal amount of each loan but may be higher or lower depending upon market conditions.
Loan Servicing Fee		Up to 2% of the principal amount of each Fund loan on an annual basis, payable monthly (i.e., ¹/6th of 1% per month), but only as interest is received by us.
Asset Management Fee		¹/12^th of 1% of Net Assets Under Management, payable monthly (i.e., 1% per year).(2)
Reimbursement of Expenses		Reimbursement for actual out-of-pocket organization, registration and syndication expenses and all of our operating and administrative expenses, including legal and accounting fees relating to this registration statement.
Commissions on Sales of Foreclosure Properties		Anticipated to average between 3% - 6% of the sales prices of such properties but payable only to the extent we receive the total amount of our investment in the property.
Form of Compensation Paid by Borrower
Origination, Forbearance and Renewal Fees(3)		Origination and renewal fees are anticipated to average between 3% and 6% of the principal amount of each loan conditions. Forbearance fees are anticipated to be between 1% and 1.5%. These fees may be higher or lower depending upon market conditions.
Loan Processing and Documentation Fees		Prevailing industry rates, of approximately $1,000 per loan for documentation fees and $1,000 per loan for loan processing fees. These fees may vary depending on Market conditions.

Footnotes from above:

(1): To the extent the Manager negotiates the purchase of a loan for us at a discount (i.e., for a purchase price lower than the par value of the loan) from non-affiliated third parties, the Manager may be paid a commission based upon the principal amount of the loan purchased; however, no such commission will exceed the amount of the discount obtained in connection with the loan.
(2): "Net Assets Under Management" means the total Fund capital, including cash, notes (at book value), real estate owned (at book value), accounts receivable, advances made to protect loan security, unamortized organizational expenses and any of our other assets valued at fair market value, less our liabilities. We will pay the Asset Management Fee to the Manager on the last day of each calendar month with respect to Net Assets Under Management as of the first day of the immediately preceding month.
(3): In the case of loans made under our finance lender's license, we will pay to the Manager an amount equal to any origination, forbearance or renewal fees that we receive from or is paid by borrowers. In the case of loans made under the Manager's real estate broker's license, the Manager may receive brokerage commissions payable solely by the borrower.

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Sale of Property to the Manager

Pursuant to the terms of our operating agreement, in the event we become the owner of any real property by foreclosure on a loan, we may sell such property to the Manager or an affiliate of the Manager, provided:

(a) no foreclosed property will be sold to the Manager or an affiliate of the Manager unless the Manager has first used its best efforts to sell any property at a fair price on the open market for at least 90 days;

(b) in the event any property is sold to the Manager or an affiliate of the Manager, the net purchase price must be (i) no less favorable to us (taking into account any avoided commissions or other cost savings) than any bona fide third-party offer received, and (ii) no less than the total amount of the our "investment" in the property; and

We foreclosed on one of our loans and formed a Nevada limited liability company called Fremont 4170, LLC ("Fremont 4170") in anticipation of the foreclosure sale. Fremont 4170 took fee simple title to the property in the foreclosure sale. The Manager conducted a market study to determine the best course of disposal for the property and concluded that because of a then pending lawsuit to enforce its title claim and general market conditions, a longer term disposition of the property, including potential change of the property use, would be preferable to maximize the sale value of this asset. The Manager also concluded that it would be more qualified to hold and dispose of the property since we do not normally hold or own real property. Because the Manager determined that the market value of the property at that time was less than our investment in the property, the Manager purchased Fremont 4170 from us for a total price of approximately $6 million, which was the total amount of our investment in the property. The Manager made a down payment of $604,642 in cash and delivered a promissory note and deed of trust in our favor for $5.4 million. The interest rate on the promissory note is 12.5% per annum and the note matures on January 1, 2010. David Choo, the sole director of the Manager and its president, has guaranteed the loan up to an amount of $2 million.

Loan Sales to the Manager

We may sell existing loans to the Manager or its affiliates, but only so long as we receive net sales proceeds from the sale equal to the total unpaid balance of principal, accrued interest and other charges owing under such loan, or the fair market value of such loan, whichever is greater. The Manager receives no fees or commissions in connection with these sales.

We may purchase existing loans from the Manager or its affiliates so long as:

(a) at the time of purchase the borrower is not in default under the loan; and

(b) no brokerage commissions or other compensation by way of premiums or discounts may be paid to the Manager or any of its affiliates by reason of such purchase (except loan origination fees earned upon initial funding of the loan).

The Manager regularly sells loans or portions of loans in our portfolio to and purchases loans or portions of loans for our portfolio from other funds that it manages. By selling loans or portions of loans, we are able to more efficiently invest amounts that we receive from repayments of the principal amount of loans and from the sale of our membership interests.

Payment of Sub-Servicing Fees to the Manager

In addition to acting as servicer for all of the loans in our loan portfolio, the Manager acts as sub-servicer for one loan we sold to ING. In connection with the sale, the Manager became the sub-servicer for the loan, and is paid a monthly sub-servicing fee of 2% per annum of the unpaid principal balance of the loan but only if the borrower makes all required interest payments on the loan on a current basis. To date, we and the Manager have received all monthly payments from ING. See "Item 1—Business—Our Mortgage Loan Porfolio."

Loan from Affiliate of the Manager

We have one loan outstanding with a balance of approximately $21.5 million, as of June 30, 2007, which we indirectly borrowed from Wells Fargo Foothill through Income Fund, an affiliate of the Manager, in order to make a loan of $48 million. Income Fund borrowed $25 million from Wells Fargo Foothill and used the loan proceeds to make a loan to us for $25 million. Our promissory note to Income Fund, as well as the Wells Fargo Foothill loan to Income Fund, matured on May 31, 2007. The Wells Fargo Foothill loan was renegotiated as of June 1, 2007 for interest only payments and extended to August 31, 2007. Wells Fargo Foothill and Income Fund entered into a forbearance agreement in which Wells Fargo Foothill agreed to not exercise remedies until October 31, 2007. The forbearance agreement also increased the interest rate on the loan to LIBOR plus 6.5% (as of September 30, 2007, the rate was 12.165%). Our note to Income Fund was correspondingly extended and its rate increased. Income Fund has also agreed not exercise remedies pending discussions with Wells Fargo Foothill. The Manager is currently in negotiations with the borrowers on the $48 million loan to enter into a forbearance agreement to forbear exercising remedies for six months on certain conditions. See "Item 1A—Risk Factors—We have and in the future may assign any portion of our loan portfolio as security to a third party lender, and if we fail to meet our payment or other obligation under the loan from the third party lender, we may risk losing the loans we assign as security to such lender and the lender may have recourse to our other assets, which would adversely affect our financial condition and the return on investment of our members."

ITEM 8. LEGAL PROCEEDINGS.

There are no legal proceedings to which we are a party or to which our property is subject, nor to the best of the Manager's knowledge are any material legal proceedings contemplated.

ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

(a) Market Information. There is no established trading market for our membership interests, and it is not anticipated that any such trading market will develop. We have no outstanding options, warrants or convertible securities with respect to our membership interests.

(b) Holders. We had approximately 910 members as of October 31, 2007.

(c) Dividends. As a limited liability company and a partnership for tax purposes, we do not pay dividends. We allocate our profits or losses, if any, on a monthly basis. Members elect whether to receive distributions monthly in cash, or to retain them in their capital accounts, thereby increasing their percentage interests. For 2006 and 2005, we paid distributions in cash to members of approximately $3.9 million and $1.6 million, respectively. Distributions retained in capital accounts for 2006 and 2005 totaled approximately $5.9 million and $2.7 million, respectively.

ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.

We began offering our membership interest in an intrastate offering under a permit issued by the California Department of Corporations on November 20, 2003. We continued to offer membership interests under renewed permits issued by the California Department of Corporations on November 22, 2004, November 10, 2005 and December 15, 2006. Each unit of membership interests was sold at $1,000 with a minimum investment of $2,000 for investment retirement account ("IRA") investors and $5,000 for all other investors. No commissions were paid to any broker-dealer in connection with the sale of any membership interest. We are currently not accepting any additional subscriptions for membership interests.

All membership interests have been sold pursuant to the exemption from registration under applicable federal securities laws provided by Section 3(a)(11) of the Securities Act and Rule 147 promulgated thereunder. See "Item 1—Business—Past Sales of Membership Interests."

ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.

The securities being registered are our membership interests which are equity interests held by members. We have offered our membership interests at a purchase price of $1,000 per unit with a minimum subscription of five units per member and two units for an IRA. However, the relative interests of each of the members—their percentage interests—are based on the ratio the capital account of each bears to the aggregate capital accounts of all the members.

The rights, duties and powers of our members are governed by our operating agreement and the Beverly-Killea Limited Liability Company Act set forth in Title 2.5 of the California Corporations Code (the "LLC Act"). The discussion below of such rights, duties and powers is qualified in its entirety by reference to our operating agreement and the LLC Act. The following is a summary of our operating agreement, which was effective as of November 20, 2003, and which is attached to this Registration Statement on Form 10 as Exhibit 3.1.

Rights and Liabilities of Members. Members in their capacities as such are not personally liable for our obligations or for any of our losses beyond the amount of their agreed upon capital contributions and their share of any of our undistributed net income and gains. Members, however, may be liable for return of distributions if necessary to discharge liabilities existing at the time of such distribution.

Members will have no control over our management except that, with the consent of the Manager, members representing a majority of the percentage interests may approve or disapprove any of the following matters: (a) our dissolution and termination; (b) our merger or consolidation with one or more other entities; (c) certain amendments of the operating agreement; and (d) removal of the Manager and election of a successor manager. In addition, upon the removal or retirement of the Manager, a majority of membership percentage interests may elect a replacement manager to continue our business.

Capital Contributions. Our initial membership interests are sold in units of $1,000 each, and no person may acquire less than five units (or two units for an IRA). To purchase units an investor must deliver a subscription agreement together with his or her cash contribution.

Rights, Powers and Duties of Manager; Deferred Compensation. Subject to the rights of the members to vote on the matters specified above, the Manager has complete charge of our business. The Manager is not required to devote full time to our affairs but only such time as the Manager may deem reasonably necessary for the conduct of our business. The Manager acting alone has the power and authority to act for and bind us.

The Manager is granted the special power of attorney of each member to execute, acknowledge, publish and file our operating agreement, our articles and any amendments or cancellation thereof

required under California law and any documents which may be required to effect our continuation, the admission of a new or substituted member, the amendment of our operating agreement or our dissolution or termination.

The Manager will receive substantial compensation in connection with its management duties (see "Item 6—Executive Compensation—Compensation to Manager and its Affiliates"). The Manager may, from time to time in its sole discretion and without any obligation to do so, waive, defer or assign to us any portion of such compensation in order to increase the investment return to members. In such event, the Manager will be entitled to recover this deferred compensation at a later time to the extent that our investment return on members' capital accounts during any subsequent period exceeds 8% per annum on a simple basis.

Profits and Losses. Our profits are allocated to members first in proportion to any losses previously allocated to them until the losses have been recouped. Thereafter, our profits and losses are allocated to our members generally in accordance with their respective percentage interests as of the first day of such month (which percentage interests are determined based on the relative percentage of each member's capital to the total members' capital); provided that if any membership interests are purchased, increased or decreased during such month, then the profits realized during that month are prorated in proportion to the number of days during such month that such member's capital account was outstanding on a weighted average basis.

Cash Distributions. When subscribing for membership interests, a subscriber must elect whether to receive monthly distributions equal to his or her percentage interests of cash available for distribution from us in cash or to allow his or her profits to be retained in his or her capital account. Members who elect to change their elections must give the Manager 30 days' prior notice. Any member who wants to change his or her election from receiving cash distributions to reinvesting may make this change in election only if there is then in effect a permit issued by the California Department of Corporations for the offering of membership interests and the member has received the most current version of our offering circular. The capital accounts of members who do not elect cash distributions (and their percentage interests) will increase over time relative to those who receive cash distributions.

Meetings. No regular meetings of members are required to be held, but the Manager or members representing 10% of our percentage interests may call a meeting. Members may vote in person or by proxy at the meeting. A majority of the percentage interests will constitute a quorum.

Accounting and Reports. The Manager will cause to be prepared and furnished to the members within 90 days after the end of each fiscal year an annual report of our operation, which may (but is not required to) be audited by an independent accounting firm. The members will also be furnished such information which members may need for preparation of their federal income tax returns within 90 days after the end of each fiscal year. Any members may inspect the following during reasonable business hours: (1) a current membership list, including the capital contributions, capital account and percentage interest of each member and economic interest owner; (2) the name and business or residence address of the Manager, (3) a copy of our articles; (4) copies of our federal, state and local income tax or information returns and reports for the six most recent taxable years; (5) a copy of our operating agreement; (6) copies of our financial statements, if any, for the six most recent fiscal years; and (7) our books and records relating to our internal affairs for at least the current and past four fiscal years.

Amendment of the Agreement. The operating agreement may be amended by the Manager alone (with respect to certain matters, including when there is a change in the character of our business, there is a false or erroneous statement or a if change in our operating agreement is required in order that it accurately represents the agreement among members), or upon the affirmative vote of a majority of the percentage interests with the written consent of the Manager.

Withdrawal from Fund. Upon not less than 60 days' written notice to the Manager, members may withdraw all or part of their capital accounts subject to the limitations discussed below.

We will not establish a reserve from which to fund withdrawals and, accordingly, our capacity to return a member's capital account is restricted to the availability of our cash flow, as determined in good faith by the Manager. For this purpose, cash flow is considered to be available only after all of our current expenses have been paid (including compensation to the Manager and its affiliates) and provision has been made to maintain adequate reserves to meet our anticipated expenses, to fund outstanding loan commitments and approved loans; and to pay all monthly cash distributions on a pro rata basis which must be paid to members who elected to receive such distributions upon subscription for units.

We are not required, and do not intend, to allow withdrawals if the aggregate distributions paid to all withdrawing members during any 12-month period would exceed 10% of the aggregate capital accounts of all members at the beginning of such period.

If our current cash flow is inadequate to return a member's capital account immediately, we are not required to liquidate any of our loans prior to maturity for the purpose of liquidating the capital account of a withdrawing member and we are merely required to continue paying whatever cash flow is available to withdrawing Members until their outstanding withdrawal requests have been satisfied on a first-come, first-served basis; provided that the Manager has the right to accord priority to the withdrawal requests of deceased members and ERISA plan investors.

The Manager also reserves the right to expel a member involuntarily at any time for any reason or no reason, by liquidating and distributing to the member such member's capital account balance, subject only to any outstanding unfulfilled withdrawal requests from other members.

The amount that a withdrawing member will receive from us is based on the withdrawing member's capital account. A capital account is a sum calculated for tax and accounting purposes, and may be greater than or less than the fair market value of such investor's membership interest. The fair market value of a member's interest will generally be irrelevant in determining amounts to be paid upon withdrawal.

Limitations on Transferability. The operating agreement places limitations upon transferability of membership interests. Among other requirements, a transferee may not become a substituted member without the consent of the Manager. A transferee who does not become a substituted member will own an economic interest which entitles him or her only to the share of income or return of capital to which the transferor would be entitled. Economic interest holders will have no voting rights.

In addition to the restrictions imposed by the operating agreement, additional restrictions are imposed by applicable securities laws. Under the Securities Act, the exemption from registration we relied on is the intrastate exemption provided by Section 3(a)(11). Rule 147 promulgated under that section requires that no resales may be made to residents outside of California during an offering of membership interests and for a nine-month period after the offering terminates. Additionally, such resales may require the prior written consent of the California Commissioner of Corporations.

Withdrawal or Removal of Manager. The Manager may withdraw as such on not less than six months written notice, in which event members holding a majority of the percentage interests shall elect a successor. Members holding a majority of the percentage interests may also by written consent remove the Manager with written notice to the Manager. On delivery of the notice or within 90 days thereafter, members holding a majority of the percentage interests may by written notice designate a successor, who shall become the new Manager upon written acceptance of the duties and responsibilities of a Manager.

Term of Fund. We will continue indefinitely until dissolved and terminated by (i) approval of members representing a majority of the percentage interests, with the written consent of the Manager; (ii) entry of a decree of judicial dissolution pursuant to the LLC Act; and (iii) operation of law. If at any time there are outstanding unfulfilled withdrawal requests from members representing a majority of the percentage interests, the Manager may treat that as a vote by the members to dissolve us.

Winding Up. Upon our dissolution, the Manager will wind up our affairs as follows: (1) no new loans will be made or purchased; and (2) the Manager will liquidate our remaining assets as promptly as is consistent with obtaining the fair market value thereof, either by sale to third parties (including the Manager or affiliates) or by servicing outstanding loans in accordance with their terms; and (3) all cash held by us as of the date of dissolution together with all sums of cash we receive during the winding up process will be applied and promptly distributed to members in proportion to the positive balances in the respective capital accounts, but only after all of our debts have been paid or adequately provided for.

In the event we dissolve at a time when there are outstanding unfulfilled withdrawal requests, such withdrawal requests will be of no further force or effect and all members will thereafter be entitled to receive their pro rata portion of all remaining liquidating distributions in accordance with their respective outstanding capital account balances after all of our debts have been paid or adequately provided for.

Due to high prevailing interest rates or other factors, we could suffer reduced earnings (or losses) if a substantial portion of its loan portfolio remains and must be liquidated quickly at the end of the five-year winding-up period. Members who complete a withdrawal prior to any such liquidation will not be exposed to this risk. Conversely, if prevailing interest rates have declined at a time when the loan portfolio must be liquidated, unanticipated profits could be realized by those members who retain their membership interests until such termination.

Merger with Other Business Entities. The Manager, upon the prior approval of members representing a majority of the percentage interests, will have the right to merge or consolidate us with one or more other entities, including our affiliates.

Arbitration. All controversies or claims related to the operating agreement, or any breach of the operating agreement, are required to be settled by arbitration in accordance with the procedures and requirements of the operating agreement.

ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Our operating agreement (which is attached to this Registration Statement on Form 10 as Exhibit No. 3.1) contains a provision addressing the liability and indemnification of the Manager. That section provides that the Manager, and persons affiliated with the Manager, will have no liability for any loss suffered by us or any member so long as the Manager or such other Person, in good faith, determined that such course of conduct was in our best interests and did not constitute fraud, bad faith or willful misconduct. Further, the Manager, and persons affiliated with the Manager, are entitled to be indemnified and held harmless by us against any loss, expense, claim or liability (including reasonable attorneys' fees) resulting from claims and legal proceedings relating to the performance or non performance of any act concerning our activities, including claims by third parties or members so long as the party to be indemnified determined in good faith that such course was in our best interests and did not constitute fraud, bad faith or willful misconduct.

Under California law, a manager is accountable to a limited liability company as a fiduciary, which means that a manager is required to exercise good faith and integrity with respect to company affairs. This fiduciary duty is in addition to those other duties and obligations of, and limitations on, the Manager which are set forth in the operating agreement.

ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our audited financial statements as of December 31, 2006 and 2005 and for each of the three years in the three-year period ended December 31, 2006 and our unaudited financial statements for the three-month periods ended June 30, 2007 and June 30, 2006 appear on pages F-3 to F-32 in this registration statement.

The following table sets forth certain unaudited quarterly financial data for each fiscal quarter within the past two fiscal years and for the six-month period ended June 30, 2007.

SELECTED QUARTERLY FINANCIAL DATA

CMR Mortgage Fund II, LLC

	First Quarter		Second Quarter			Third Quarter		Fourth Quarter		Year
Revenues (net of provision for loan losses/including Recovery)
2007	$	1,845,322	$	34,133			N/A		N/A		N/A
2006	$	2,435,816	$	2,811,776		$	1,211,953	$	3,072,179	$	9,531,724
2005	$	462,997	$	546,143		$	862,991	$	3,591,102	$	$4,715,285
Operating expenses
2007	$	354,335	$	673,282			N/A		N/A		N/A
2006	$	238,599	$	290,787		$	299,329	$	375,063	$	1,203,778
2005	$	18,360	$	74,688		$	36,455	$	1,103,925	$	1,233,428
Net income
2007	$	1,490,987	$	(639,149	)		N/A		N/A		N/A
2006	$	2,197,217	$	2,520,989		$	912,624	$	2,697,116	$	8,327,946
2005	$	444,637	$	471,455		$	826,536	$	2,415,046	$	4,157,674

ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

We have retained and appointed Perry-Smith LLP as our independent registered public accounting firm. Perry-Smith LLP has audited our balance sheet as of December 31, 2006 and 2005 and the related statements of income, changes in members' capital and cash flows for each of the years in the three-year period ended December 31, 2006, as stated in their Report of Independent Registered Public Accounting Firm, which is included in this registration statement.

There have been no disagreements between us and Perry-Smith LLP with respect to accounting and financial reporting or disclosure.

ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.

(a): List of financial statements filed.

Our audited financial statements as of December 31, 2006 and 2005 and for each of the three years in the three-year period ended December 31, 2006 and our unaudited financial statements as of June 30, 2007 and for the six-month periods ended June 30, 2007 and June 30, 2006 appear on pages F-3 to F-32 in this registration statement. The index to the financial statements appears on page F-1.

(b): Exhibits

Exhibit No.		Description
2.1		Articles of Organization filed with the California Secretary of State on September 5, 2003.
3.1		Operating Agreement, effective as of November 20, 2003.
4.1		Form of Subscription Agreement.
10.1*		Promissory Note with Allonge, dated May 26, 2006 from CMR Mortgage Fund II, LLC to CMR Income Fund, LLC.
10.2*		Pledge and Security Agreement, dated as of May 26, 2006, among CMR Mortgage Fund II, LLC, CMR Income Fund, LLC and Wells Fargo Foothill, Inc.
10.3		Subservicing Fee Agreement, between CMR Mortgage Fund II, LLC and California Mortgage and Realty, Inc.
10.4		Promissory Note, dated December 29, 2006 from California Mortgage and Realty, Inc. to CMR Mortgage Fund II, LLC.
10.5		General Guaranty and Indemnity Agreement, effective as of December 29, 2006, executed by David Choo.

*: CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FROM THE SEC WITH RESPECT TO CERTAIN PORTIONS OF THIS EXHIBIT.

INDEX TO FINANCIAL STATEMENTS

CMR Mortgage Fund II, LLC Financial Statements
Report of Independent Registered Public Accounting Firm		F-2
Balance Sheet at December 31, 2006 and 2005		F-3
Statement of Income for the Years Ended December 31, 2006, 2005 and 2004		F-4
Statement of Changes in Members' Capital for the Years Ended December 31, 2006, 2005 and 2004		F-5
Statement of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004		F-6
Notes to Financial Statements for the Year Ended December 31, 2006		F-7
Condensed Balance Sheet at June 30, 2007 (unaudited) and December 31, 2006		F-22
Condensed Statement of Income (unaudited) for the Six Months Ended June 30, 2007 and 2006		F-23
Condensed Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2007 and 2006		F-24
Notes to Condensed Interim Financial Statements (unaudited) for the Six Months Ended June 30, 2007		F-25

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Members and Manager
CMR Mortgage Fund II, LLC

We have audited the accompanying balance sheet of CMR Mortgage Fund II, LLC (Fund), which is managed by California Mortgage and Realty, Inc. (Manager) as of December 31, 2006 and 2005, and the related statements of income, changes in members' capital and cash flows for each of the years in the three-year period ended December 31, 2006. These financial statements are the responsibility of the Manager of the Fund. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CMR Mortgage Fund II, LLC as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

/s/ Perry-Smith LLP

San Francisco, California
October 29, 2007

F-2

CMR MORTGAGE FUND II, LLC

BALANCE SHEET

December 31, 2006 and 2005

			2006		2005
ASSETS
Cash and cash equivalents			$	4,138,948	$	4,556,991
Loans, secured by deeds of trust, net of allowance for loan losses of $684,845 in 2006 and $360,085 in 2005				115,262,678		69,290,973
Advances to borrowers				1,156,390		755,876
Due from related parties				2,365,375		205,210
Accrued interest receivable and other assets				2,779,409		649,662

		Total Assets	$	125,702,800	$	75,458,712

LIABILITIES AND MEMBERS' CAPITAL
Liabilities:
	Accounts payable		$	5,959	$	—
	Accrued expenses			55,090		—
	Accrued distributions			749,501		195,149
	Due to related party			341,412		654,960
	Deferred gain on sale of real estate to related party			1,263,195		—
	Note payable to related party			23,508,511		—
	Investors in applicant status			—		2,144,045

		Total Liabilities		25,923,668		2,994,154

Commitments and contingencies
Members' capital				99,779,132		72,464,558

		Total Liabilities and Members' Capital	$	125,702,800	$	75,458,712

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

F-3

CMR MORTGAGE FUND II, LLC

STATEMENT OF INCOME

For the Years Ended December 31, 2006, 2005 and 2004

				2006		2005		2004
Revenues:
	Interest income:
		Interest on loans		$	14,806,358	$	4,968,823	$	1,047,687
		Interest on advances to borrowers			207,343		546,696		—
		Other interest income			208,074		127,768		13,724

			Total interest income		15,221,775		5,643,287		1,061,411
		Loan servicing fees			2,361,457		675,792		164,617

			Total interest income, net of servicing fees		12,860,318		4,967,495		896,794
	Gain on sale of loan				165,664		—		—
	Gain on sale of real estate owned				141,447		—		—

			Total revenues, net of servicing fees		13,167,429		4,967,495		896,794
Interest expense					1,959,928		—		—
Provision for loan losses					1,675,777		252,210		107,875

			Net revenues		9,531,724		4,715,285		788,919

Operating expenses:
	Asset management fees				1,027,163		503,293		104,865
	Professional services				151,039		46,987		28,416
	Other operating expenses				25,576		7,331		5,514

			Total operating expenses		1,203,778		557,611		138,795

			Net income	$	8,327,946	$	4,157,674	$	650,124

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

F-4

CMR MORTGAGE FUND II, LLC

STATEMENT OF CHANGES IN MEMBERS' CAPITAL

For the Years Ended December 31, 2006, 2005 and 2004

						Members' Capital
	Investors in Applicant Status			Units		Members			Retained Earnings			Total Members' Equity
Balance January 1, 2004	$	—				$	—		$	—		$	—
Subscription proceeds received		25,803,656
Transfers to members' capital		(25,030,719	)	25,031			25,030,719			—			25,030,719
Net income				650						650,124			650,124
Purchase of additional membership units from earnings							286,712			(286,712	)		—
Distributions to members				(2,003	)		(1,639,842	)		(363,412	)		(2,003,254	)

Balance December 31, 2004		772,937		23,678			23,677,589			—			23,677,589
Subscription proceeds received		57,220,326
Transfers to members' capital		(55,849,218	)	55,849			55,849,218			—			55,849,218
Net income				4,158						4,157,674			4,157,674
Purchase of additional membership units from earnings							2,359,849			(2,359,849	)		—
Distributions to members				(11,220	)		(9,422,098	)		(1,797,825	)		(11,219,923	)

Balance December 31, 2005		2,144,045		72,465			72,464,558			—			72,464,558
Subscription proceeds received		42,296,243
Transfers to members' capital		(44,440,288	)	44,440			44,440,288			—			44,440,288
Net income				8,328						8,327,946			8,327,946
Purchase of additional membership units from earnings							4,027,524			(4,027,524	)		—
Distributions to members				(25,454	)		(21,153,238	)		(4,300,422	)		(25,453,660	)

Balance December 31, 2006	$	—		99,779		$	99,779,132		$	—		$	99,779,132

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

F-5

CMR MORTGAGE FUND II, LLC

STATEMENT OF CASH FLOWS

For the Years Ended December 31, 2006, 2005 and 2004

			2006			2005			2004
Cash flows form operating activities:
	Net income		$	8,327,946		$	4,157,674		$	650,124
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan losses		1,675,777			252,210			107,875
		Gain on sale of loan		(165,664	)		—			—
		Gain on sale of real estate to related party		(141,447	)		—			—
	Net changes in operating assets and liabilities:
		Accrued interest receivable and other assets		(2,129,747	)		(404,807	)		(244,855	)
		Accounts payable and accrued expenses		61,049			—			—
		Due from related parties		(2,160,165	)		1,349,444			(1,554,654	)
		Due to related parties		(313,548	)		511,627			143,333

	Net cash provided by operating activities			5,154,201			5,866,148			(898,177	)
Cash flows from investing activities:
	Investment in real estate owned			(3,657,275	)		—			—
	Proceeds from sale of real estate owned			604,642			—			—
	Proceeds from loan sale			19,110,000			—			—
	Advances to borrowers			(400,514	)		(741,543	)		(14,333	)
	Net increase in loans			(62,134,543	)		(48,076,058	)		(21,575,000	)

		Net cash used in investing activities		(46,477,690	)		(48,817,601	)		(21,589,333	)
Cash flows from financing activities:
	Contributions from members			44,440,288			55,849,218			25,030,719
	Distributions/withdrawals to members			(24,899,308	)		(11,024,774	)		(2,003,254	)
	(Decrease) increase in investors in applicant status			(2,144,045	)		1,371,108			772,937
	Proceeds from note payable to related party			25,000,000			—			—
	Repayment of note payable to related party			(1,491,489	)		—			—

		Net cash provided by financing activities		40,905,446			46,195,552			23,800,402
Net (decrease) increase in cash and cash equivalents				(418,043	)		3,244,099			1,312,892
Cash and cash equivalents at beginning of year				4,556,991			1,312,892			—

Cash and cash equivalents at end of year			$	4,138,948		$	4,556,991		$	1,312,892

Supplemental disclosure of cash flow information:
	Cash paid during the year for:
		Interest expense	$	1,715,177			—			—
		Franchise taxes	$	12,590		$	6,800		$	3,300
	Non-cash investing activities:
		Real estate acquired through foreclosure	$	(2,347,367	)		—			—
		Note receivable from Manager for sale of real estate owned	$	5,400,000			—			—

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

F-6

CMR MORTGAGE FUND II, LLC

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND GENERAL FUND PROVISIONS

Organization

CMR Mortgage Fund II, LLC (Fund) which is managed by California Mortgage and Realty, Inc. (Manager), a Delaware corporation, is a California Limited Liability Company organized on September 5, 2003 for the purpose of making or investing in business loans secured by deeds of trust on real properties—predominately commercial income-producing structures or land held by businesses—located primarily in California. The land can be income-producing (e.g., vineyards) or may be held for commercial or residential development. The Fund's loans are arranged and serviced by the Manager who is licensed as a California real estate broker and a California finance lender and broker. In addition, the Fund has the ability to invest in loans that were not originated by the Manager. Since inception, the Fund has only invested in one loan that was not originated by the Manager. The Manager provides certain operating and administrative services to the Fund. The Manager has complete control of the Fund's business, subject to the voting rights of the members on specified matters and on any other matters which the Manager wishes to submit to a vote. The Manager did not hold any membership interest in the Fund at December 31, 2006 and 2005. An affiliate of the Manager held a membership interest in the Fund at December 31, 2006 and 2005 for $303,607 and $277,569, respectively. The Fund commenced operations in February 2004.

Because the Fund is a California limited liability company, the liability of each member is limited to the member's investment. The rights, duties and powers of the members of the Fund are governed by the Fund's operating agreement (Operating Agreement) and the Beverly-Killea Limited Liability Company Act. The description of the Fund's general provisions contained in these financial statements provides only general information. Members should refer to the Fund's Operating Agreement and Offering Circular for a more complete description of the provisions.

The Fund is subject to applicable federal and state securities laws in its offer and sale of membership interests. Through December 31, 2006, the Fund has offered membership interests pursuant to the exemption from registration for intrastate offerings provided by Section 3(a)(11) of the Securities Act of 1933, as amended, and Rule 147. Under this exemption, membership interests must be offered and sold only to California residents, the Fund must restrict its investments in assets located outside California, and during an offering of membership interests and for a nine-month period after the offering terminates, members may only resell membership interests (or any portion thereof) purchased in the offering to California residents. Additionally, the Fund is limited in the offering of membership interests up to $150,000,000 (150,000 units), pursuant to a permit issued by the California Department of Corporations on November 20, 2003. As of June 1, 2006, the Fund is not accepting subscriptions for new membership interests.

General Fund Provisions

Subscription Proceeds and Fund Admission

Subscribed funds of potential investors are recorded as liabilities of the Fund until their unit proceeds are used to fund a loan or retire the capital of a withdrawing member at which time the subscribed units are included in members' capital. Subscription funds not able to be utilized by the Fund within ninety days from the date received are returned. Subscribed funds do not earn interest for the benefit of the potential investor. There were no subscribed units at December 31, 2006 because the Fund is not accepting new subscriptions.

F-7

Profits and Losses

Profits of the Fund are allocated among the members first in proportion to any losses previously allocated to them until the losses have been recouped and then on the basis of their relative capital account balances (Percentage Interests) as of the first day of the month; provided that if membership interests are purchased, increased or decreased during the month, the profits realized during the month will be prorated in proportion to the number of days during the month that each member held a capital account in the Fund on a weighted average basis. Losses of the Fund are allocated monthly as of the last day of the month to members in accordance with their Percentage Interests.

Distributions

Members of the Fund may elect to receive monthly cash distributions equal to their Percentage Interest of cash available for distribution or have those amounts added to their capital account and reinvested by the Fund. Subject to certain limitations, as described in the Operating Agreement, investors may change their election. As a result of this distribution or reinvestment option, a member's proportionate share of total members' capital will likely change over time. Accrued distributions represent the net income not yet distributed to those members who have elected to receive monthly cash distributions.

Liquidity and Withdrawals from the Fund

Members' capital consists of capital contributions, adjusted for net income and distributions to members. There is no public market for membership interests in the Fund and none is expected to develop in the foreseeable future. There are substantial restrictions on the transferability of membership interests and accordingly, an investment in the Fund is not liquid. The Operating Agreement provides that upon not less than sixty days' written notice to the Manager, members may withdraw all or part of their capital accounts from the Fund subject to certain limitations. The Fund's capacity to return members' capital is restricted to the availability of existing cash and future cash flows, as determined in good faith by the Manager. In the event that cash and cash flows are inadequate to return a member's capital account, the Fund is not required to liquidate its loans or other assets for the purpose of paying a member desiring to withdraw from the Fund. At the Manager's discretion and if cash is available, withdrawals are effected in less than sixty days.

Basis of Accounting and Use of Estimates

The financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America and prevailing practices within the industry.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Manager to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ significantly from these estimates.

F-8

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Segment Information

The Manager has determined that since all of the operations for products and services offered by the Fund are conducted from one location and because resources are not allocated based on the performance of different lending or transaction activities, it is appropriate to aggregate the operations of the Fund and report them as a single operating segment.

Cash and Cash Equivalents

For purposes of the statement of cash flows, cash and cash equivalents consist of cash on hand and on deposit with financial institutions. The Fund maintains its cash in accounts with financial institutions, which, at times, may exceed federally insured limits. Cash held in banks in excess of FDIC insured limits as of December 31, 2006 was $4,038,948 and as of December 31, 2005 was $4,456,991.

Loans Secured by Deeds of Trust

Loans originated by the Fund are stated at the principal balances outstanding. The initial investment in a loan purchased by the Fund is recorded at the net amount paid. Any discount or premium related to a purchased loan is recognized as an adjustment of interest income using the effective interest method. The unamortized balance of discounts or premiums is reported as a component of net loans. Interest is accrued daily based upon outstanding loan balances. Impaired and past-due loans accrue interest as long as the loans are in the process of collection and considered to be well-secured. Loans are placed on nonaccrual status at the earlier of the loan being twelve months past due, the Manager's determination that the primary source of repayment will come from the foreclosure and subsequent sale of the property securing the loan or when the loan is no longer considered well-secured. When loans are considered impaired, the accrual of interest is discontinued, however previously recorded accrued interest is not reversed. A loan may return to accrual status when all delinquent interest and principal become current in accordance with the original terms of the loan agreement.

A loan is considered impaired when, based on current information and events, it is probable that the Fund will be unable to collect all amounts due, including both principal and interest, in accordance with the contractual terms of the loan agreement. Loan impairment is measured based on the lesser of the carrying value of the loan, including principal balance, accrued interest, advances and other capitalized fees and costs, the present value of expected net future cash flows discounted at the loan's effective interest rate or the fair value of collateral if the loan is collateral-dependent. Payments received on impaired loans are applied to reduce principal to the extent necessary to ensure collection of principal. Subsequent payments on these loans, and payments received on nonaccrual loans for which the ultimate collectability of principal is not in doubt, are applied first to earned but unpaid interest and then to principal.

The Fund may retain part of the proceeds from a specific loan origination as an interest reserve to insure timely interest payments for up to the first year of the loan. The interest reserve funds are retained for the benefit of the borrower in a trust account maintained by Manager. As monthly interest payments become due, the Manager transfers funds from the trust account to the Fund. In the event of an early loan payoff, any unapplied interest reserves would be first applied to any accrued but unpaid interest and then as a reduction to the outstanding principal balance.

F-9

No significant loan origination fees, commitment fees or direct loan origination costs have been received by the Fund.

The Fund may acquire loans through a purchase for which differences may exist between the contractual cash flows and the cash flows expected to be collected due, at least in part, to credit quality. When the Fund acquires such loans, the yield that may be accreted (accretable yield) is limited to the excess of the Fund's estimate of undiscounted cash flows expected to be collected over the Fund's initial investment in the loan. The excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment to yield, loss, or a valuation allowance. Subsequent increases in cash flows expected to be collected generally are recognized prospectively through adjustment of the loan's yield over its remaining life. Decreases in cash flows expected to be collected are recognized as an impairment. The Fund may not "carry over" or create a valuation allowance in the initial accounting for loans acquired under these circumstances. At December 31, 2005, there was one loan being accounted for under this policy; there were no such loans at December 31, 2006.

In 2006, the Fund sold a loan with a principal balance of $19,500,000 and a stated interest rate of 13% with a scheduled maturity of September 2009. The Fund received proceeds of $19,500,000 less a fee of $390,000 and retained the right to receive 3% of future interest payments. The Manager of the Fund continues to service the loan and receives 2% of future interest payments. The Fund recorded an interest-only strip receivable, which is included in accrued interest receivable and other assets in the Balance Sheet, at its fair value of approximately $556,000 and a gain on sale of the loan of approximately $166,000. The unrealized holding gains and losses on the interest only strip were not significant at December 31, 2006. Unrealized gains and losses would be reported as a separate component of members' capital and as comprehensive income.

Advances

Advances are stated at principal balances outstanding to the Fund. The Manager has discretion to pay amounts to third parties on behalf of borrowers to protect the Fund's interest in the loan. Advances include, but are not limited to, the payment of interest and principal payments on a senior lien to prevent foreclosure by the senior lien holder, property taxes, property insurance premiums, and attorney fees. Advances accrue interest until repaid by the borrower.

Allowance for Loan Losses

The allowance for loan losses is an estimated amount that the Manager believes will be adequate to absorb losses inherent in the portfolio based on evaluations of collateral values, collectability, prior loss experience, including accrued interest, fees and other advances, and other factors. The allowance is established through a provision charged to expense. Loans are charged against the allowance when the Manager believes that the collectability of the principal is unlikely.

The Manager reviews the adequacy of the allowance for loan losses at least quarterly, including consideration of the relative risks in the portfolio and current economic conditions that may affect the borrowers' ability to pay. Classified loans and loans determined to be impaired are evaluated by the Manager for specific risk of loss. The allowance is adjusted based on that review if, in the Manager's judgment, changes are warranted. The allowance for loan losses at December 31, 2006 and 2005 reflects the Manager's estimate of probable losses in the loan portfolio.

F-10

Income Taxes

The Fund, as a limited liability company, is classified and treated as a partnership solely for federal and state income taxation purposes. Taxes based on the operating results of the Fund are, therefore, determined and payable at the member level, whether or not any actual distribution is made to such member during the year. However, the Fund is subject to an annual minimum franchise tax and gross receipts fee by the State of California.

Real Estate Owned

Real estate owned includes real estate acquired in full or partial settlement of loan obligations plus capitalized construction and other development costs incurred while preparing the real estate for sale. When property is acquired, any excess of the Fund's carrying value of the loan over the fair market value of the property, less estimated costs to sell it, is charged against the allowance for loan losses. Following foreclosure, valuations are periodically performed, with any subsequent write-downs recorded as a separate valuation allowance and charged to other operating expenses. The maintenance of the real estate owned, including expenses associated with the property's disposition, is expensed as incurred. Gains or losses on dispositions are recorded in other operating income or expense. 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 and potential financing. The Fund did not have any other real estate holdings at December 31, 2006 or 2005.

Impact of New Financial Accounting Standards

Fair Value Measurements

In September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions should be applied prospectively, except for certain specifically identified financial instruments. The Manager does not expect the adoption of SFAS 157 to have a material impact to the Fund's financial position or result of operations.

Fair Value Accounting

In February 2007, the FASB issued FAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement 115" (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value and amends SFAS 115 to, and among other things, require certain disclosures for amounts for which the fair value option is applied. This statement is effective as of the beginning of an entity's first fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. The Manager does not expect the adoption of SFAS 159 to have a material impact to the Fund's financial position or result of operations.

F-11

3. RELATED PARTY TRANSACTIONS

California Mortgage and Realty, Inc, as the sole Manager of the Fund, is responsible for all management decisions related to the operations and investments of the Fund. In accordance with the Operating Agreement and other loan-servicing agreements with the Fund, the Manager is entitled to receive fees for the various services it provides and to be reimbursed for certain costs incurred on behalf of the Fund.

Loan Origination Fees

In consideration for the review, selection, evaluation, negotiation and extension of Fund investments, the Manager receives loan brokerage, origination, renewal or forbearance fees (Loan Origination Fees). These Loan Origination Fees are paid directly by the borrowers to the manager and, therefore, are not included in the operations of the Fund. During 2006, 2005, these fees were $5,173,356 and $4,327,753, respectively. There were no fees for 2004.

Loan Servicing Fees

The Manager is entitled to receive a monthly fee for loan servicing of up to 2% per annum (1/6^th of 1% per month) of the outstanding principal balance of each loan. The fee is payable monthly as the Fund receives interest payments from borrowers. Loan servicing fees during 2006, 2005 and 2004 were $2,361,457, $675,792 and $164,617, respectively.

Asset Management Fees

The Manager is entitled to receive a monthly fee for management services provided to the Fund equal to 1% per annum (1/12^th of 1% per month) of net assets under management. Net assets as defined by the Operating Agreement, is equal to total members' capital as of the first day of the month, which is payable on the last day of the month. Asset management fees during 2006, 2005 and 2004 were $1,027,163, $503,293 and $104,865, respectively.

Operating Expenses

The Manager may also be reimbursed by the Fund for all operating expenses and other costs it incurs on behalf of the Fund. There were no operating expenses or other costs incurred by the Manager for which reimbursement was sought during 2006, 2005 or 2004.

Other Fees

The Operating Agreement between the Fund and the Manager provides for other fees such as loan processing and documentation fees. Such fees are incurred by the borrowers and are paid directly to the Manager; therefore are not included in the operations of the fund.

Lending Arrangements

At December 31, 2006, the Fund had a $5,400,000 loan to the Manager used to purchase real estate held for sale from the Fund pursuant to the terms in the Fund's Offering Circular (see Note 9).

In 2006, the Fund originated a $48,000,000 loan by deeds of trust (Loan) (see Note 5 and 9). As part of this transaction, the Fund invested $23,000,000 of its own capital in the Loan, and also entered into an agreement with CMR Income Fund, LLC, a related party, to borrow $25,000,000 under a note

F-12

payable secured by the Fund's interest in the Loan including all liens on properties securing the Loan. At December 31, 2006, the related party loan payable balance was $23,508,511. In conjunction with the loan, costs of $419,570 were deferred and are being amortized over the term of the loan. Amortization of $244,750 was recognized in 2006. The remaining unamortized amount of $174,820, which will be recognized in 2007, was included in accrued interest receivable and other assets in the Balance Sheet.

4. ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses were as follows:

	Year Ended December 31,
	2006			2005		2004
Balance, beginning of year	$	360,085		$	107,875	$	—
Provision charged to operations		1,675,777			252,210		107,875
Losses charged to allowance		(1,351,017	)		—		—

Balance, end of year	$	684,845		$	360,085	$	107,875

Loans ninety days or more past due:

	As of December 31,
	2006		2005
Number of loans		4	—
Total principal balance	$	13,397,985	—

These loans are considered well-secured and in the process of collection and therefore, are still accruing interest.

Impaired and nonaccrual loans:

	As of December 31,
	2006		2005
Number of loans		4		3
Total principal balance plus advances and accrued interest	$	4,437,234	$	4,900,000
Interest income recognized during the year	$	179,055	$	287,938
Foregone interest income	$	71,541	$	482,805
Specific loan loss reserve	$	95,000		—

All of the impaired and nonaccrual loans are currently in the process of foreclosure. When a loan is placed on nonaccrual, the accrual of interest is discontinued, however previously recorded accrued interest is not reversed. Depending on the borrowers' ability to bring a loan current through payment, refinancing by a third party or the Fund, and other legal courses of action available to the borrower and the Fund, the foreclosure of properties may be postponed or not completed. At December 31, 2006 and 2005 there were no outstanding commitments to lend additional funds to borrowers whose loans were identified as impaired.

The average balance of principal plus advances and accrued interest of impaired and nonaccrual loans during the years ended December 31, 2006, and 2005 was $3,683,822, $5,139,534, respectively.

There were no impaired and nonaccrual loans at December 31, 2004.

F-13

5. LOANS SECURED BY DEEDS OF TRUST, CONCENTRATIONS AND CHARACTERISTICS

All of the Fund's loans are fixed rate loans with interest rates that range from 12.50% to 13.00% at December 31, 2006 and 10.00% to 13.00% at December 31, 2005.

Concentrations of Credit Risk

While the Manager may consider the income level and general credit worthiness of a borrower to determine a borrower's ability to repay the loan according to its terms, such considerations are typically subordinate to a determination that the value of secured collateral will provide a sufficient source of funds for loan repayment. A significant portion of our loans are secured by two or more real estate parcels, which may be secured by differing positions for the deeds of trust. When the collateral deed trust types are different for a loan (e.g. secured by a combination of first, second and/or third trust deeds), the loan is categorized as "mixed". The Fund's loan portfolio as of December 31, 2006 and 2005 had the following characteristics:

Loan Portfolio in Dollars as of December 31, 2006:

		First Trust Deeds		Second Trust Deeds		Third Trust Deeds		Mixed Trust Deeds		Totals
Commercial real estate		$	5,430,000	$	830,000	$	—	$	103,271	$	6,363,271
Residential real estate			—		1,090,000		—		—		1,090,000
Improved and unimproved land			6,395,555		16,214,227		12,891,744		61,299,794		96,801,320
Mixed use Properties			—		100,000		—		11,592,932		11,692,932

	Total	$	11,825,555	$	18,234,227	$	12,891,744	$	72,995,997	$	115,947,523

Loan Portfolio in Dollars as of December 31, 2005:

		First Trust Deeds		Second Trust Deeds		Third Trust Deeds		Mixed Trust Deeds		Totals
Commercial real estate		$	7,770,621	$	9,172,000	$	550,000	$	1,842,604	$	19,335,225
Residential real estate			—		200,000		—		—		200,000
Improved and unimproved land			12,143,333		15,308,333		—		—		27,451,666
Mixed use Properties			10,400,000		—		—		12,264,167		22,664,167

	Total	$	30,313,954	$	24,680,333	$	550,000	$	14,106,771	$	69,651,058

F-14

Number of Loans in the Portfolio as of December 31:

		2006					2005
		First Trust Deeds	Second Trust Deeds	Third Trust Deeds	Mixed Trust Deeds	Totals	First Trust Deeds	Second Trust Deeds	Third Trust Deeds	Mixed Trust Deeds	Totals
Commercial real estate		3	4	—	2	9	3	7	1	1	12
Residential real estate		—	1	—	—	1	—	1	—	—	1
Improved and unimproved land		6	5	2	5	18	5	2	—	—	7
Mixed use Properties		—	1	—	7	8	2	—	—	7	9

	Total	9	11	2	14	36	10	10	1	8	29

Schedule of Maturities as of December 31, 2006:

		First Trust Deeds		Second Trust Deeds		Third Trust Deeds		Mixed Trust Deeds		Totals
December 31,
2007		$	55,000	$	820,000	$	—	$	300,000	$	1,175,000
2008			30,000		4,045,000		10,000,000		11,089,932		25,164,932
2009			3,218,588		7,948,790		2,891,744		61,399,794		75,458,916
2010			8,143,052		1,090,000		—		156,271		9,389,323
2011			378,915		4,330,437		—		50,000		4,759,352

	Total	$	11,825,555	$	18,234,227	$	12,891,744	$	72,995,997	$	115,947,523

Schedule of Maturities as of December 31, 2005:

		First Trust Deeds		Second Trust Deeds		Third Trust Deeds		Mixed Trust Deeds		Totals
December 31,
2006		$	7,593,121	$	2,137,000	$	550,000	$	2,250,000	$	12,530,121
2007			75,000		620,000		—		—		695,000
2008			21,185,833		9,058,333		—		2,714,167		32,958,333
2009			50,000		9,900,000		—		2,000,000		11,950,000
2010			1,410,000		2,965,000		—		7,142,604		11,517,604

	Total	$	30,313,954	$	24,680,333	$	550,000	$	14,106,771	$	69,651,058

F-15

Number of Loans in the Portfolio by Maturity Date as of December 31:

		2006					2005
		First Trust Deeds	Second Trust Deeds	Third Trust Deeds	Mixed Trust Deeds	Totals	First Trust Deeds	Second Trust Deeds	Third Trust Deeds	Mixed Trust Deeds	Totals
2006							2	1	1	1	5
2007		1	3	—	1	5	1	2	—	—	3
2008		2	1	1	3	7	5	2	—	3	10
2009		2	5	1	6	14	1	4	—	1	6
2010		2	1	—	3	6	1	1	—	3	5
2011		2	1	—	1	4

	Total	9	11	2	14	36	10	10	1	8	29

The scheduled maturities for 2007 include $810,000 in loans that are past maturity at December 31, 2006.

It is the Fund's experience that loans may be refinanced or repaid before the maturity date therefore; the above tabulation for scheduled maturities is not a forecast of future cash receipts.

Loans vary by size and over time the mix in the portfolio changes. The portfolio size has grown each year since inception of the fund. During 2006 the portfolio concentrated to fewer borrowers. The largest quartile of loans increased by 15.9% of the total portfolio from 68.7% as of December 31, 2005 to 84.6% at December 31, 2006. Expressed as average dollar size of loans, the largest quartile increased by more than four million dollars from $6,839,255 as of December 31, 2005 to $10,902,513 as of December 31, 2006.

Loan Portfolio Summarized by Quartile as of December 31:

	2006							2005
Quartile	Count	Total		Average		Percent of Total		Count	Total		Average	Percent of Total
1	9	$	185,186		20,576	0.16	%	8	$	1,795,000	224,375	2.58	%
2	9		2,100,000		233,333	1.81	%	7		6,177,500	882,500	8.87	%
3	9		15,539,716		1,726,635	13.40	%	7		13,803,771	1,971,967	19.82	%
4	9		98,122,621		10,902,513	84.63	%	7		47,874,787	6,839,255	68.73	%

Total	36	$	115,947,523	$	3,220,765	100.00	%	29		69,651,058	2,401,761	100.00	%

Loans are primarily secured by property in California. As of December 31, 2006, 89.7% of the collateral was spread across 15 counties in California and five other states. The largest concentration of loans was two loans to one borrower totaling $50,150,000 which was 43.3% of the portfolio. The collateral was in two counties in California. No other loans were secured by property in these two counties.

F-16

As of December 31, 2005, 81.4% of the collateral was spread across 14 counties in California and three other states. The largest concentration of loans was two loans to one borrower totaling $17,616,666 which was 25.3% of the portfolio. The collateral was in two counties in California. No other loans were secured by property in these two counties.

The Offering Circular specifies that no more than 25% of total Fund capital (members' equity) will be invested in any one loan, which is calculated at the time the investment is made. In 2006, we funded a $48,000,000 loan and the Fund subsequently indirectly borrowed $25,000,000 from Wells Fargo Foothill, Inc. (Wells Fargo) through CMR Income Fund LLC, an affiliate of the Manager (see Note 9). Although the $48,000,000 loan to the borrower was 47.5% of the total Fund capital at the time the loan was made, the amount of Fund capital that was invested in the loan was $23,000,000, which was 22.7% of the total Fund capital when the investment was made. The percentage of total Fund capital invested in this loan may grow if Fund capital is reduced as a result of withdrawals by members from their capital accounts. We have also subsequently made two additional loans for 2.1% of Fund capital to the borrower, which are secured by the same property. The Manager believes this transaction is in compliance with the provisions of the Offering Circular.

6. REAL ESTATE OWNED

During 2006, the Fund foreclosed on one commercial property held as loan collateral and sold the acquired property to the Manager. The net realizable value of the property at the time of foreclosure required that the Fund record a loan loss of $1,351,017. The Manager bought the property from the Fund at the net realizable value plus the recognized loss which made the fund financially whole as compared to the net book value of the loan including principal, advances and accrued but unpaid interest just prior to foreclosure. The terms of the sale to the manager, as permitted by the Fund's Offering Circular, included a 10% down payment and a secured note for $5,400,000. The resultant gain on the sale of the property to the manager is being recognized on an installment sale basis. As of December 31, 2006 the gain recognized was $141,447 and the deferred gain on the sale was $1,263,195. The loan matures on January 1, 2010 and the loan terms call for interest-only payments at 12.5% per annum. Additionally, the sole stockholder of the Manager has personally guaranteed to indemnify the Fund against any losses sustained by the Fund related to the loan up to a maximum amount of $2,000,000.

In accordance with the Fund's Offering Circular, the Manager may, at his discretion, but is not obligated to purchase foreclosed real estate owned from the Fund.

7. COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance-Sheet Risk

The Fund is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its borrowers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet.

Commitments to extend credit are arrangements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration

F-17

dates or other termination clauses and may require the payment of a fee payable to the manager. Since some of the commitments are expected to expire without being drawn upon and certain commitments may be funded through other resources provided by the Manager, the total commitment amount does not necessarily represent future cash requirements to the Fund. There were no outstanding credit commitments as of December 31, 2006 or 2005.

Contingencies

The Fund is subject to legal proceedings and claims that arise in the ordinary course of business. In the opinion of Manager, the amount of ultimate liability with respect to such actions will not materially affect the financial position or results of operations of the Fund.

On December 1, 2006 the Fund received a notice from the SEC indicating that they were conducting an inquiry into certain matters of the Fund. In conjunction with this inquiry certain information has been requested from the Fund. The Manager of the Fund is currently in the process of responding to the inquiry and has and will continue to cooperate with the SEC in response to their requests. The Manager believes that there will not be a material impact to the financial position or operations of the Fund.

The Fund is in the process of preparing a registration statement on Form 10 pursuant to Section 12 of the Securities and Exchange Act of 1934, which was due April 30, 2006 because the number of investors in the Fund exceeded 500 as of December 31, 2005. Upon completion of the SEC registration, the Fund will have ongoing reporting and other requirements, including complying with the provisions of the Sarbanes-Oxley Act of 2002, including reporting on internal control over financial reporting, and will result in higher professional fees.

8. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made as of a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Fund's entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments.

Because no market exists for a significant portion of the Fund's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair value presented.

The following methods and assumptions were used by the Fund to estimate the fair value of its financial instruments at December 31, 2006 and 2005:

Cash and cash equivalents: For cash and cash equivalents, the carrying amount is estimated to be fair value.

Loans and Advances: The fair values for fixed rate loans or advances are estimated using discounted cash flow analyses, using interest rates offered at each reporting date for loans with similar

F-18

terms to borrowers of comparable creditworthiness adjusted for the allowance for credit losses. The carrying amount of the loans and accrued interest receivable approximates its fair value.

Note payable: The fair value of the note payable is estimated by discounting its future cash flows using rates at each reporting date for similar instruments. The carrying amount of accrued interest payable approximates its fair value.

The following table summarized these items at December 31:

		2006				2005
		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
	Cash and cash equivalents	$	4,138,948	$	4,138,948	$	4,556,991	$	4,556,991
	Loans	$	115,262,678	$	115,262,678	$	69,290,973	$	69,290,973
	Accrued interest receivable	$	2,240,024	$	2,240,024	$	926,398	$	926,398
Financial liabilities:
	Note payable	$	23,508,511	$	23,627,773	$	—	$	—
	Accrued interest payable	$	232,500	$	232,500	$	—	$	—

9. DUE FROM/TO RELATED PARTIES

Due from related parties consisted of the following as of December 31:

	2006		2005
Due from Manager	$	4,447	$	—
Due from escrowed interest reserve trust account		2,360,928		205,210

	$	2,365,375	$	205,210

In addition, the Fund had a $5,400,000 loan due from the Manager which is included in loans secured by deeds of trust in the Balance Sheet as of December 31, 2006 (see Note 6).

Due to related party consisted of the following as of December 31:

			2006		2005
Due to Manager:
	Mortgage servicing fees payable		$	341,412	$	100,770
	Asset management fees payable			—		554,190

		Total due to manager	$	341,412	$	654,960

Due to Related Parties:
	Due to CMR Income Fund, LLC		$	23,508,511	$	—

F-19

During 2006, the Fund originated a $48,000,000 loan secured by deeds of trust (Loan) (see Note 5). As part of this transaction, the Fund invested $23,000,000 of its own capital in the Loan, and also entered into an agreement with CMR Income Fund, LLC, a related party, to borrow $25,000,000 under a note payable from Wells Fargo Foothill, Inc. The loan is secured by the Fund's interest in the Loan including all liens on properties securing the Loan. The loan terms require interest only payments at Libor plus 6.5% (11.8494% at December 31, 2006). The loan matured on May 31, 2007 and was extended to August 31, 2007. As of report date, the loan is in forbearance. At December 31, 2006, the related party loan payable balance was $23,508,511.

During 2006, the fund foreclosed on one loan and sold the acquired property to the Manager. The Manager bought the property from the Fund at the net realizable value plus the recognized loss which made the fund financially whole as compared to the net book value of the loan including principal, advances and accrued but unpaid interest just prior to foreclosure. The loan matures on January 1, 2010 and the loan terms call for interest-only monthly payments at 12.5% per annum. Additionally, the sole stockholder of the Manager has personally guaranteed to indemnify the Fund against any losses sustained by the Fund related to the loan up to a maximum amount of $2,000,000 (see Note 6).

10. SUBSEQUENT EVENT—REAL ESTATE FORECLOSURE

On June 7, 2007, the Fund completed the foreclosure on one of the four properties considered impaired as of December 31, 2006 (see Note 4). The foreclosure resulted in a loss of approximately $1,400,000 and through the foreclosure, the Fund assumed a $6,000,000 senior loan obligation secured by a first deed of trust on the property. The loan matures on January 1, 2009 and the loan terms call for interest-only monthly payments at 12.5% per annum. The Manager is currently evaluating the best course of action to dispose of the property for the benefit of the Fund.

F-20

CMR MORTAGE FUND II, LLC

(A CALIFORNIA LIMITED LIABILITY COMPANY)

CONDENSED INTERIM FINANCIAL STATEMENTS

AS OF JUNE 30, 2007 AND DECEMBER 31, 2006 AND

FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

The accompanying interim condensed financial statements as of June 30, 2007 and for the six months ended June 30, 2007 and 2006 included in this filing have not been reviewed by the Fund's independent registered public accounting firm in accordance with professional standards for conducting such reviews. During 2007, in connection with preparation of the Registration Statement on Form 10, it was determined that the Fund's prior auditors were not independent with respect to SEC rules and regulations. The Fund changed auditors and they are in the process of reviewing the interim condensed financial statements as required.

F-21

CMR MORTGAGE FUND II, LLC

CONDENSED STATEMENT OF BALANCE SHEET

(UNAUDITED)

			June 30, 2007		December 31, 2006
ASSETS
Cash and cash equivalents			$	364,880	$	4,138,948
Loans, secured by deeds of trust, net of allowance for loan losses of $1,360,160 in 2007 and $684,845 in 2006				108,915,862		115,262,678
Advances to borrowers				2,163,035		1,156,390
Due from related parties				904,869		2,365,375
Accrued interest receivable and other assets				3,185,959		2,779,409
Real estate owned				6,600,000		—

		Total Assets	$	122,134,605	$	125,702,800

LIABILITIES AND MEMBERS' CAPITAL
Liabilities:
	Accounts payable		$	104,712	$	5,959
	Accrued expenses			289,840		55,090
	Accrued distributions			724,746		749,501
	Due to related party			1,096,440		341,412
	Deferred gain on sale of real estate to related party			1,263,195		1,263,195
	Note payable to related party			21,704,279		23,508,511
	Notes Payable			6,000,000		—

		Total Liabilities		31,183,212		25,923,668
Commitments and contingencies
Members' capital				90,951,393		99,779,132

		Total Liabilities and Members' Capital	$	122,134,605	$	125,702,800

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

F-22

CMR MORTGAGE FUND II, LLC

CONDENSED STATEMENT OF INCOME

(UNAUDITED)

				For the Six Months Ended June 30,
				2007		2006
Revenues:
	Interest income:
		Interest on loans		$	6,926,279	$	6,687,474
		Interest on advances to borrowers			167,750		85,974
		Other interest income			93,356		73,830

			Total interest income		7,187,385		6,847,278
		Loan servicing fees			1,156,278		1,054,186

			Total interest income, net of servicing fees		6,031,107		5,793,092
Interest expense					1,522,402		324,500
Provision for loan losses					2,629,250		221,000

			Net revenues		1,879,455		5,247,592

Operating expenses:
	Asset management fees				493,575		478,358
	Professional services				525,815		40,020
	Other operating expenses				8,227		11,008

			Total operating expenses		1,027,617		529,386

			Net income	$	851,838	$	4,718,206

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

F-23

CMR MORTGAGE FUND II, LLC

CONDENSED STATEMENT OF CASH FLOWS

(UNAUDITED)

			For the Six Months Ended June 30,
			2007			2006
Cash flows from operating activities:
	Net income		$	851,838		$	4,718,206
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan losses		2,629,250			221,000
	Net changes in operating assets and liabilities:
		Accrued interest receivable and other assets		(406,550	)		(1,327,245	)
		Accounts payable and accrued expenses		333,503			47,531
		Due from related parties		1,460,506			(13,586,924	)
		Due to related parties		755,028			79,666

	Net cash provided by (used in) operating activities			5,623,575			(9,847,766	)
Cash flows from investing activities:
	Net decrease (increase) advances to borrowers			(1,006,645	)		425,287
	Net decrease (increase) in loans			3,117,566			(42,644,371	)

		Net cash provided by (used in) investing activities		2,110,921			(42,219,084	)
Cash flows from financing activities:
	Contributions from members			2,405,133			38,804,751
	Distributions/withdrawals to members			(12,109,465	)		(8,459,443	)
	(Decrease) increase in investors in applicant status			—			2,311,986
	Proceeds from note payable to related party			—			25,386,006
	Repayment of note payable to related party			(1,804,232	)		—

		Net cash provided by (used in) financing activities		(11,508,564	)		58,043,300
Net (decrease) increase in cash and cash equivalents				(3,774,068	)		5,976,450
Cash and cash equivalents at beginning of period				4,138,948			4,556,991

Cash and cash equivalents at end of period			$	364,880		$	10,533,441

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

F-24

CMR MORTGAGE FUND II, LLC

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

1. ORGANIZATION AND GENERAL FUND PROVISIONS

Condensed Interim Financial Statements

The accompanying are unaudited condensed interim financial statements as of June 30, 2007 and for the six months ended June 30, 2007 and 2006 have been prepared pursuant to generally accepted accounting principles for interim reporting. Accordingly, certain disclosures normally presented in the notes to the annual financial statements have been omitted. However, these condensed interim financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in our opinion, are necessary for a fair presentation of the results for the interim periods presented and therefore, we believe that the disclosures are adequate to make the information not misleading.

These unaudited condensed interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the prevailing practices in the industry on a basis consistent with, and should be read in conjunction with, the audited financial statements as of and for the year ended December 31, 2006, and the notes thereto included elsewhere in the accompanying Form 10 and filed with the Securities and Exchange Commission.

The results of operations for the six months ended June 30, 2007, may not be indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2007.

Use of Estimates

We are required 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 period. Significant estimates used by us in preparation of the financial statements include the allowance for loan losses and contingencies. Actual results could differ significantly from those estimates.

2. RELATED PARTY TRANSACTIONS

Loan Origination Fees

Loan Servicing Fees

The Manager is entitled to receive a monthly fee for loan servicing of up to 2% per annum (1/6th of 1% per month) of the outstanding principal balance of each loan. The fee is payable monthly as the

F-25

Fund receives interest payments from borrowers. Loan servicing fees for the six months ended June 30, 2007 and 2006 were $1,156,278 and $1,054,186, respectively.

Asset Management Fees

The Manager is entitled to receive a monthly fee for management services provided to the Fund equal to 1% per annum (1/12th of 1% per month) of net assets under management. Net assets as defined by the Operating Agreement, is equal to total members' capital as of the first day of the month, which is payable on the last day of the month. Asset management fees for the six months ended June 30, 2007 and 2006 were $493,575 and $478,358, respectively.

Lending Arrangements

At June 30, 2007, the Fund had a $5,400,000 loan to the Manager used to purchase real estate held for sale from the Fund pursuant to the terms in the Fund's Offering Circular.

In 2006, the Fund originated a $48,000,000 loan by deeds of trust. As part of this transaction, the Fund invested $23,000,000 of its own capital in the Loan, and also entered into an agreement with CMR Income Fund, LLC, a related party, to borrow $25,000,000 under a note payable secured by the Fund's interest in the Loan including all liens on properties securing the loan. At June 30, 2007, the related party loan payable balance was $21,704,279. In conjunction with the loan, costs of $419,570 were deferred and are being amortized over the term of the loan. Amortization of $244,750 was recognized in 2006. The remaining unamortized amount of $174,820 was recognized during the first six months of 2007.

3. ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses were as follows:

	For the Six Month Period Ended:
	June 30, 2007			Dec. 31, 2006			June 30, 2006
Balance, beginning of period	$	684,845		$	581,085		$	360,085
Provision charged to operations		2,629,250			1,454,777			221,000
Losses charged to allowance		(1,953,935	)		(1,351,017	)		—

Balance, end of period	$	1,360,160		$	684,845		$	581,085

Loans ninety days or more past due:

	As of June 30,
	2007		2006
Number of loans		6		2
Total principal balance	$	22,810,000	$	2,156,000

These loans are considered well-secured and in the process of collection and therefore, are still accruing interest.

F-26

Impaired and nonaccrual loans:

	As of June 30,
	2007		2006
Number of loans		3		0
Total principal balance	$	12,034,333	$	—
Interest income recognized during the year	$	89,226	$	—
Foregone interest income	$	232,855	$	—
Specific loan loss reserve	$	805,000	$	—

All of the impaired and nonaccrual loans are currently in the process of foreclosure. When a loan is placed on nonaccrual, the accrual of interest is discontinued, however previously recorded accrued interest is not reversed. Depending on the borrower's ability to bring a loan current through payment, refinancing by a third party or the Fund, and other legal courses of action available to the borrower and the Fund, the foreclosure of properties may be postponed or not completed. At June 30, 2007 and 2006 there were no outstanding commitments to lend additional funds to borrowers whose loans were identified as impaired.

4. LOANS SECURED BY DEEDS OF TRUST, CONCENTRATIONS AND CHARACTERISTICS

All of the Fund's loans are fixed rate loans with interest rates that range from 12.00% to 13.95% at June 30, 2007 and 11.99% to 13.50% at June 30, 2006.

Concentrations of Credit Risk

While the Manager may consider the income level and general creditworthiness of a borrower to determine a borrower's ability to repay the loan according to its terms, such considerations are typically subordinate to a determination that the value of secured collateral will provide a sufficient source of funds for loan repayment. A significant portion of our loans are secured by two or more real estate parcels, which may be secured by differing positions for the deeds of trust. When the collateral deed trust types are different for a loan (e.g., secured by a combination of first, second and/or third trust deeds), the loan is categorized as "mixed." The Fund's loan portfolio as of June 30, 2007 and 2006 had the following characteristics:

Loan Portfolio in Dollars as of June 30, 2007

		First Trust Deeds		Second Trust Deeds		Third Trust Deeds		Mixed Trust Deeds		Totals
Commercial real estate		$	2,820,000	$	3,838,296	$	—	$	—	$	6,658,296
Residential real estate			—		3,100,000		—		—		3,100,000
Improved and unimproved land			6,760,425		12,315,000		13,791,744		57,378,450		90,245,619
Mixed use Properties			10,000,000		40,000		—		988,000		11,028,000

	Total	$	19,580,425	$	19,293,296	$	13,791,744	$	58,366,450	$	111,031,915

F-27

Loan Portfolio in Dollars as of June 30, 2006:

		First Trust Deeds		Second Trust Deeds		Third Trust Deeds		Mixed Trust Deeds		Totals
Commercial real estate		$	701,000	$	2,120,000	$	—	$	528,271	$	3,349,271
Residential real estate			—		—		—		—		—
Improved and unimproved land			13,271,025		10,405,000		13,550,000		1,500,000		38,726,025
Mixed use Properties			10,000,000		100,000		—		64,108,000		74,208,000

	Total	$	23,972,025	$	12,625,000	$	13,550,000	$	66,136,271	$	116,283,296

Number of Loans in the Portfolio as of June 30:

		2007					2006
		First Trust Deeds	Second Trust Deeds	Third Trust Deeds	Mixed Trust Deeds	Totals	First Trust Deeds	Second Trust Deeds	Third Trust Deeds	Mixed Trust Deeds	Totals
Commercial real estate		2	4	—	—	6	2	5	—	1	8
Residential real estate		—	2	—	—	2	—	—	—	—	—
Improved and unimproved land		6	4	2	5	17	8	3	2	1	14
Mixed use Properties		1	1	—	3	5	1	1	—	9	11

	Total	9	11	2	8	30	11	9	2	11	33

Schedule of Maturities as of June 30, 2007:

December 31,		First Trust Deeds		Second Trust Deeds		Third Trust Deeds		Mixed Trust Deeds		Totals
2007		$	55,000	$	1,688,296	$	—	$	—	$	1,743,296
2008			10,020,000		557,000		8,000,000		918,000		19,495,000
2009			1,300,000		7,358,000		5,791,744		57,448,450		71,898,194
2010			8,201,425		4,900,000		—		—		13,101,425
2011			4,000		4,790,000		—		—		4,794,000

	Total	$	19,580,425	$	19,293,296	$	13,791,744	$	58,366,450	$	111,031,915

F-28

Schedule of Maturities as of June 30, 2006:

December 31,		First Trust Deeds		Second Trust Deeds		Third Trust Deeds		Mixed Trust Deeds		Totals
2006		$	—	$	60,000	$	—	$	2,250,000	$	2,310,000
2007			55,000		130,000		—		2,700,000		2,885,000
2008			10,045,000		7,835,000		4,000,000		2,755,000		24,635,000
2009			11,562,600		2,700,000		9,550,000		57,850,000		81,662,600
2010			2,305,425		—		—		581,271		2,886,696
2011			4,000		1,900,000		—		—		1,904,000

	Total	$	23,972,025	$	12,625,000	$	13,550,000	$	66,136,271	$	116,283,296

Number of Loans in the Portfolio by Maturity Date as of June 30:

		2007					2006
		First Trust Deeds	Second Trust Deeds	Third Trust Deeds	Mixed Trust Deeds	Totals	First Trust Deeds	Second Trust Deeds	Third Trust Deeds	Mixed Trust Deeds	Totals
2006							—	1	—	1	2
2007		1	1	—	—	2	1	2	—	1	4
2008		2	1	1	2	6	2	1	1	3	7
2009		2	4	1	6	13	6	3	1	4	14
2010		3	3	—	—	6	1	—	—	2	3
2011		1	2	—	—	3	1	2	—	—	3

	Total	9	11	2	8	30	11	9	2	11	33

The scheduled maturities for the portfolio as of June 30, 2007 includes two loans totaling $1,743,296 that are past maturity. The scheduled maturities for the portfolio as of June 30, 2006 includes one loan for $2,250,000 that is past maturity.

It is the Fund's experience that loans may be refinanced or repaid before the maturity date therefore; the above tabulation for scheduled maturities is not a forecast of future cash receipts.

Loans vary by size and over time the mix in the portfolio changes. The portfolio size has grown each calendar year since inception of the fund.

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Loan Portfolio Summarized by Quartile as of June 30:

		2007					2006
Quartile		Count	Total	Average	Percent of Total		Count	Total	Average	Percent of Total
	1	7	224,000	32,000	0.20	%	8	447,000	55,875	0.38	%
	2	8	4,595,000	574,375	4.14	%	9	6,138,571	682,063	5.28	%
	3	8	19,263,721	2,407,965	17.35	%	8	16,855,425	2,106,928	14.50	%
	4	7	86,949,194	12,421,313	78.31	%	8	92,842,300	11,605,288	79.84	%

Total		30	111,031,915	3,701,064	100.00	%	33	116,283,296	3,523,736	100.00	%

5. REAL ESTATE OWNED

During the six months ended June 30, 2007, the Fund foreclosed one of the four properties considered impaired as of December 31, 2006. The net realizable value of the property of $6,600,000 at the time of foreclosure required that the Fund record a loan loss of $1,953,935. The Fund assumed a $6,000,000 senior loan obligation secured by a first deed of trust on the property. The loan matures on January 1, 2009 and the loan terms call for interest-only monthly payments at 12.5% per annum. The Manager is currently evaluating the best course of action to dispose of the property for the benefit of the Fund.

In accordance with the Fund's Offering Circular, the Manager may, at his discretion, but is not obligated to purchase foreclosed real estate owned from the Fund.

6. COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance-Sheet Risk

Commitments to extend credit are arrangements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee payable to the manager. Since some of the commitments are expected to expire without being drawn upon and certain commitments may be funded through other resources provided by the Manager, the total commitment amount does not necessarily represent future cash requirements to the Fund. There were no outstanding credit commitments as of June 30, 2007 or 2006.

Contingencies

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7. DUE FROM/TO RELATED PARTIES

Due from related parties consisted of the following as of June 30:

	2007		2006
Due from Manager	$	51,428	$	668
Due from Affiliated Funds		—		10,656,493
Due from escrowed interest reserve trust account		853,441		3,134,973

	$	904,869	$	13,792,134

In addition, the Fund had a $5,400,000 loan due from the Manager which is included in loans secured by deeds of trust in the Balance Sheet as of June 30, 2007.

Due to related party consisted of the following as of June 30:

			2007		2006
Due to Manager:
	Mortgage servicing fees payable		$	638,158	$	252,976
	Asset management fees payable			199,329		481,651

		Total due to manager	$	837,487	$	734,627

Due to Related Parties:
	Due to Affiliated Funds		$	258,953	$	—
	Due to CMR Income Fund, LLC			21,704,279		25,386,006

			$	21,963,232	$	25,386,006

During 2006, the Fund originated a $48,000,000 loan secured by deeds of trust. As part of this transaction, the Fund invested $23,000,000 of its own capital in the loan, and also entered into an agreement with CMR Income Fund, LLC, a related party, to borrow $25,000,000 under a note payable from Wells Fargo Foothill, Inc. The loan is secured by the Fund's interest in the Loan including all

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liens on properties securing the Loan. The loan terms require interest only payments at Libor plus 6.25% (10.57% at June 30, 2007). The loan was extended to August 31, 2007. As of the filing of the SEC Form 10, the loan is in forbearance at Libor plus 6.5% (11.6275% at October 31, 2007). At June 30, 2007, the related party loan payable balance was $21,704,279.

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SIGNATURES

Pursuant to the requirements of Section 12 of the Exchange Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

		CMR Mortgage Fund II, LLC
		By:	California Mortgage and Realty, Inc., its Manager
		By:	/s/ DAVID CHOO Name: David Choo Title: President

Dated: November 9, 2007

S-1

EXHIBIT INDEX

Exhibit No.		Description
2.1		Articles of Organization filed with the California Secretary of State on September 5, 2003.
3.1		Operating Agreement, effective as of November 20, 2003.
4.1		Form of Subscription Agreement.
10.1	*	Promissory Note with Allonge, dated May 26, 2006 from CMR Mortgage Fund II, LLC to CMR Income Fund, LLC.
10.2	*	Pledge and Security Agreement, dated as of May 26, 2006, among CMR Mortgage Fund II, LLC, CMR Income Fund, LLC and Wells Fargo Foothill, Inc.
10.3		Subservicing Fee Agreement, between CMR Mortgage Fund II, LLC and California Mortgage and Realty, Inc.
10.4		Promissory Note, dated December 29, 2006 from California Mortgage and Realty, Inc. to CMR Mortgage Fund II, LLC.
10.5		General Guaranty and Indemnity Agreement, effective as of December 29, 2006, executed by David Choo.

*: CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FROM THE SEC WITH RESPECT TO CERTAIN PORTIONS OF THIS EXHIBIT.

QuickLinks

TABLE OF CONTENTS

ITEM 1. BUSINESS.

Mortgage Loans—Delinquencies As of June 30, 2007

ITEM 1A. RISK FACTORS.

SELECTED FINANCIAL DATA CMR Mortgage Fund II, LLC
Results of Operations Six months ended June 30, 2007 and 2006
Results of Operations Years Ended December 31, 2006, 2005, and 2004
Mortgage Loans—Delinquencies As of June 30, 2007
Interest Earning Assets and Interest Bearing Liabilities, Aggregated by Maturity Date June 30, 2007

ITEM 3. PROPERTIES.

ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.

ITEM 6. EXECUTIVE COMPENSATION.

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

ITEM 8. LEGAL PROCEEDINGS.

ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.

ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.

ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

SELECTED QUARTERLY FINANCIAL DATA CMR Mortgage Fund II, LLC

ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.

Exhibit 2.1

	State of California Kevin Shelley Secretary of State	File # 200326110116 ENDORSED - FILED In the office of the Secretary of State of the State of California
		SEP 05 2003
LIMITED LIABILITY COMPANY
ARTICLES OF ORGANIZATION		KEVIN SHELLEY
		Secretary of state
A $70.00 filing fee must accompany this form.

IMPORTANT — Read instructions before completing this form.		This Space For Filing Use Only

1. NAME OF THE LIMITED LIABILITY COMPANY (END THE NAME WITH THE WORDS “LIMITED LIABILITY COMPANY”, “LTD. LIABILIY CO., OR THE ABBREVIATIONS “LLC” OR “L.L.C”.)

CMR Mortgage Fund II, LLC

2. THE PURPOSE OF THE LIMITED LIABILITY COMPANY IS TO ENGAGE IN ANY LAWFUL ACT OR ACTIVITY FOR WHICH A LIMITED LIABILITY COMPANY MAY BE ORGANIZED UNDER THE BEVERLY-KILLEA LIMITED LIABILITY COMPANY ACT.

3. CHECK THE APPROPRIATE PROVISION BELOW AND NAME THE AGENT FOR SERVICE OF PROCESS.

x AN INDIVIDUAL RESIDING IN CALIFORNIA. PROCEED TO ITEM 4.

o A CORPORATION WHICH HAS FILED A CERTIFICATE PURSUANT TO SECTION 1505. PROCEED TO ITEM 5.

AGENT’S NAME: Mark D. Lubin

4. ADDRESS OF THE AGENT FOR SERVICE OF PROCESS IN CALIFORNIA, IF AN INDIVIDUAL:

ADDRESS c/o Stein & Lubin LLP, 600 Montgomery Street

CITY

San Francisco

STATE CA

ZIP CODE 94111

5. THE LIMITED LIABILITY COMPANY WILL BE MANAGED BY: (CHECK ONE)

x ONE MANAGER

o MORE THAN ONE MANAGER

o ALL LIMITED LIABILITY COMPANY MEMBER(S)

6. OTHER MATTERS TO BE INCLUDED IN THIS CERTIFICATE MAY BE SET FORTH ON SEPARATE ATTACHED PAGES AND ARE MADE A PART OF THIS CERTIFICATE. OTHER MATTERS MAY INCLUDE THE LATEST DATE ON WHICH THE LIMITED LIABILITY COMPANY IS TO DISSOLVE.

7. NUMBER OF PAGES ATTACHED, IF ANY:

8. TYPE OF BUSINESS OF THE LIMITED LIABILITY COMPANY. (FOR INFORMATIONAL PURPOSES ONLY)

Mortgage Pool

9. IT IS HEREBY DECLARED THAT I AM THE PERSON WHO EXECUTED THIS INSTRUMENT, WHICH EXECUTION IS MY ACT AND DEED.

	/s/ Brian F. Freyermuth			September 2, 2003
	SIGNATURE OF ORGANIZER			DATE

	Brian F. Freyermuth
	TYPE OR PRINT NAME OF ORGANIZER

10. RETURN TO:

	NAME	Brian F. Freyermuth
	FIRM	c/o Stein & Lubin LLP
	ADDRESS	600 Montgomery Street
	CITY STATE	San Francisco, CA
	ZIPCODE	94111
SEC/STATE FORM LLC-1 (Rev. 06/2003)-FILING FEE $70.00			APPROVED BY SECRETARY OF STATE

EX-3.1 3 a2180921zex-3_1.htm EXHIBIT 3.1

Exhibit 3.1

EXHIBIT A

THE LIMITED LIABILITY COMPANY MEMBERSHIP INTEREST UNITS REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968, AS AMENDED. SUCH UNITS MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED TO ANY PERSON AT ANY TIME WITHOUT SUCH REGISTRATION AND QUALIFICATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE MANAGER OF THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED. THERE ARE OTHER SUBSTANTIAL RESTRICTIONS ON TRANSFER, AS SET FORTH IN THE OPERATING AGREEMENT.

IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED BY THE COMMISSIONER’S RULES.

OPERATING AGREEMENT

CMR MORTGAGE FUND II, LLC

THIS OPERATING AGREEMENT (“Agreement”) is made and entered into effective as of November 20, 2003, by and among Bellevue Capital Management, Inc., a Delaware corporation doing business as California Mortgage and Realty, Inc. (“Manager”), Craig Raymond, an individual (the “Initial Member”), and such other persons as may be added pursuant to the terms hereof (“Members”).

ARTICLE I

DEFINITIONS

Unless stated otherwise, the terms set forth in this Article I shall, for all purposes of this Agreement, have the meanings as defined herein:

1.01 “Affiliate” shall mean, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person, (ii) any Person owning or controlling ten percent (10%) or more of the outstanding voting securities of such Person, (iii) any officer, director or general partner of such Person, or (iv) any Person who is an officer, director, general partner, trustee or holder of ten percent (10%) or more of the voting securities of any Person described in clauses (i) through (iii) of this sentence.

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1.02 “Agreement” shall mean this Operating Agreement, as the same may hereafter be amended from time to time.

1.03 “Articles” shall mean the Articles of Organization for the Company originally filed with the California Secretary of State and as amended from time to time.

1.04 “Bankruptcy” shall mean: (a) the filing of an application by a Member for, or his or her consent to, the appointment of a trustee, receiver, or custodian of his or her other assets; (b) the entry of an order for relief with respect to a Member in proceedings under the United States Bankruptcy Code, as amended or superseded from time to time; (c) the making by a Member of a general assignment for the benefit of creditors; (d) the entry of an order, judgment, or decree by any court of competent jurisdiction appointing a trustee, receiver, or custodian of the assets of a Member unless the proceedings and the person appointed are dismissed within ninety (90) days; or (e) the failure by a Member generally to pay his or her debts as the debts become due within the meaning of Section 303(h)(1) of the United States Bankruptcy Code, as determined by the Bankruptcy Court, or the admission in writing of his or her inability to pay his or her debts as they become due.

1.05 “Capital Account” shall mean, with respect to any Member, the Capital Account maintained for such Member in accordance with the following provisions:

(a) To each Member’s Capital Account there shall be credited such Member’s Capital Contributions, such Member’s distributive share of Profits, and any items in the nature of income or gain (from unexpected adjustments, allocations or distributions) that are specially allocated to a Member and the amount of any Company liabilities that are assumed by such Member or that are secured by any Company property distributed to such Member.

(b) To each Member’s Capital Account there shall be debited the amount of cash, such Member’s distributive share of Losses, and any items in the nature of expenses or losses that are specially allocated to a Member and the amount of any liabilities of such Member that are assumed by the Company or that are secured by any property contributed by such Member to the Company.

In the event any interest in the Company is transferred according to the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest.

In the event the Gross Asset Values of the Company assets are adjusted pursuant to Section 1.09, the Capital Accounts of all Members shall be adjusted simultaneously to reflect the aggregate net adjustment as if the Company recognized gain or loss equal to the amount of such aggregate net adjustment.

The provisions of this Section 1.05 and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such regulations. In the event it is necessary to modify the manner in which the Capital Accounts are computed in order to comply with such regulations, the Manager shall make such modifications. The Manager shall adjust the amounts debited or credited to the Capital Accounts

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with respect to (i) any property contributed to the Company or distributed to any Member and (ii) any liabilities that are secured by such contributed or distributed property or that are assumed by the Company in the event the Manager shall determine that such adjustments are necessary or appropriate pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv). The Manager shall also make appropriate modifications if unanticipated events cause this Agreement not to comply with Treasury Regulations Section 1.704-1(b).

1.06 “Cash Available for Distribution” shall mean an amount of cash equal to the excess of accrued income from operations and investment of, or the sale or refinancing or other disposition of, Company assets during any calendar month over the accrued operating expenses, depreciation and amortization of the Company during such month, including any adjustments for bad debt reserves or deductions (including reasonable reserves) as the Manager may deem appropriate, all determined in accordance with generally accepted accounting principles.

1.07 “Code” shall mean the Internal Revenue Code of 1986, as amended, and corresponding portions of any subsequent federal revenue laws.

1.08 “Company” shall mean CMR Mortgage Fund II, LLC.

1.09 “Depreciation” shall mean, for each Fiscal Year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis.

1.10 “Economic Interest” shall mean the right to receive distributions of the Company’s assets and allocations of income, gain, loss, deduction, credit and similar items from the Company pursuant to this Agreement and the Act, but shall not include any other rights of a Member, including, without limitation, the right to vote or participate in the management of the Company, or except as provided in Section 17106 of the Corporations Code, any right to information concerning the business and affairs of the Company.

1.11 “Economic Interest Owner” shall mean the owner of an Economic Interest who is not a Member.

1.12 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

1.13 “Fiscal Year” shall mean a calendar year ending December 31.

1.14 “Gross Asset Value” shall mean, with respect to any asset, the asset’s adjusted basis for federal income tax purposes, except as follows:

(a) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by the contributing Member and the Company;

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(b) The Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values, as determined by the Manager, as of the following times: (i) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (ii) the distribution by the Company to a Member of more than a de minimis amount of Company property other than money, unless all Members receive simultaneous distributions of undivided interests in the distributed property in proportion to their interests in the Company; and (iii) the termination of the Company for federal income tax purposes pursuant to Code Section 708(b)(1)(B); and

(c) If the Gross Asset Value of an asset has been determined or adjusted pursuant to Sections 1.14(a) or 1.14(b) hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses.

1.15 “Members” shall mean the Initial Member and the purchasers of Units admitted to the Company as Members, and “Member” shall mean any one of the Members.

1.16 “Membership Interest” shall mean a Member’s entire interest in the Company and all rights, benefits and privileges pertaining thereto.

1.17 “Majority Interest of the Members” shall mean one or more Percentage Interests of Members, or a specified group of Members, which taken together exceed fifty percent (50%) of the aggregate of all Percentage Interests, or of all Percentage Interests held by such specified group of Members, on the first day of the current calendar month.

1.18 “Manager” shall mean Bellevue Capital Management, Inc., a Delaware corporation qualified to do business in California under the name “California Mortgage and Realty, Inc.,” or any person or entity substituted in place thereof pursuant to this Agreement.

1.19 “Net Assets Under Management” means the total Company’s capital, including cash, notes (at book value), real estate owned (at book value), accounts receivable, advances made to protect loan security, unamortized organizational expenses and any other Company assets valued at fair market value, less Company liabilities.

1.20 “Percentage Interest” shall mean the respective percentage interest of a Member determined as of the first day of each calendar month by dividing a Member’s current Capital Account by the total outstanding Capital Accounts of all Members.

1.21 “Person” shall mean both natural and legal persons, including any unincorporated association or entity, as the context may require.

1.22 “Profits” and “Losses” shall mean, for each Fiscal Year or other period, an amount equal to the Company’s taxable income or loss for such Fiscal Year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments:

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(a) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits and Losses pursuant to this Section 1.22 shall be added to such taxable income or loss;

(b) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.22, shall be subtracted from such taxable income or loss;

(c) Gain or loss resulting from any disposition of Company property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; and

(d) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or other period, computed in accordance with Section 1.09 hereof.

(e) Notwithstanding any other provision of this Section 1.22, any items in the nature of income or gain or expenses or losses, which are specially allocated, shall not be taken into account in computing Profits or Losses.

1.23 “Units” shall mean the Membership Interests in the Company issued to Members upon their admission to the Company, pursuant to the Company’s 2002 Offering Circular and any supplements, amendments or restatements thereof or pursuant to any subsequent private or public offering of Membership Interests in the Company.

ARTICLE II

ORGANIZATION OF THE COMPANY

2.01 Formation. The parties hereto hereby agree to form a limited liability company, pursuant to the provisions of the Beverly-Killea Limited Liability Company Act, codified in the California Corporations Code, Section 17000 et seq., as the same may be amended from time to time (the “Act”).

2.02 Name. The name of the Company shall be “CMR Mortgage Fund II, LLC.”

2.03 Place of Business. The principal place of business of this Company shall be located at 1539 Webster Street, Oakland, California 94612, until changed by designation of the Manager, with notice to all Members.

2.04 Purpose. The primary purpose of this Company shall be to make and invest in loans to members of the general public secured by deeds of trust on real property located in the State of California and to do any and all things relating or incidental thereto.

2.05 Term. The Company shall be deemed to be formed and its term shall commence as of the day the Articles are filed with the California Secretary of State, and shall continue

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indefinitely until dissolved and terminated pursuant to the provisions of this Agreement or by operation of law.

2.06 Power of Attorney. Each of the Members irrevocably constitutes and appoints the Manager, acting by and through any of its executive officers, as his true and lawful attorney-in-fact, with full power and authority for him, and in his name, place and stead, to execute, acknowledge, publish and file:

(a) This Agreement, the Articles, and any amendments or cancellation thereof required under the laws of the State of California;

(b) Any certificates, instruments and documents, including, without limitation, fictitious business name statements, as may be required by, or may be appropriate under, the laws of any state or other jurisdiction in which the Company is doing or intends to be business; and

(c) Any documents which may be required to effect the continuation of the Company, the admission of an additional or substituted Member, the amendment of this Agreement, or the dissolution and termination of the Company.

2.07 Nature of Power of Attorney. The foregoing grant of authority is a special power of attorney coupled with an interest, is irrevocable, and shall survive the death of the undersigned or the delivery of an assignment by the undersigned of a Membership Interest, provided that where the assignee thereof has been approved by the Manager for admission to the Company as a substituted Member, the Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling the Manager to execute, acknowledge and file any instrument necessary to effect such substitution.

ARTICLE III

THE MANAGER

3.01 Management by the Manager, Generally. Subject to any provisions of the Articles and this Agreement relating to actions required to be approved by the Members, if any, the business, property and affairs of the Company shall be managed and all powers of the Company shall be exercised by or under the direction of the Manager. In addition to the general management authority provided under this Section and without in any way limiting the generality of the foregoing, the Manager shall have all necessary powers to manage and carry out the purposes, business and affairs of the Company, including, without limitation, the power to exercise and to authorize and direct the Company’s or the Manager’s officers (if any) to exercise, on behalf and in the name of the Company, all of the powers described in California Corporations Code Section 17003, including, without limitation, the following powers and authority:

(a) To expend Company funds in furtherance of the business of the Company and to acquire and deal with assets upon such terms as it deems advisable, from Affiliates and other persons;

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(b) To offer additional Units for sale from time to time to determine the terms of the offering of Units, including the price thereof and the amount of discounts allowable or commissions to be paid and the manner of complying with applicable law;

(c) To employ, at the expense of the Company, such agents, employees, independent contractors, attorneys and accountants as the Manager deems reasonable and necessary for any Company purpose;

(d) To effect necessary insurance for the proper protection of the Company, the Manager or Members;

(e) To prosecute, defend, pay, collect, compromise, arbitrate, or otherwise adjust any and all claims or demands of or against the Company;

(f) To bind the Company in all transactions involving the Company’s property or business affairs, including the preparation and execution of all loan documents, the funding of loans, and the purchase and sale of notes;

(g) To amend this Agreement with respect to the matters described in Subsections 12.04(a) through (g) below;

(h) To determine the accounting method or methods to be used by the Company, which methods may be changed at any time by written notice to all Members;

(i) To open accounts in the name of the Company in one or more banks, savings and loan associations or other financial institutions or money market funds, and to deposit Company funds therein, subject to withdrawal upon the signature of the Manager or any person authorized by the Manager;

(j) To sell from time to time all or any portion of the Company’s assets, or any undivided or beneficial interests therein, including without limitation the securitization, offer and sale of senior participating interests in the Company’s mortgage loan portfolio, all upon such terms and conditions as the Manager shall deem appropriate in its sole business judgment; and

(k) To retain such advisors and professionals, execute all instruments and documents and do all other things necessary or appropriate in the judgment of the Manager to effectuate any of the foregoing.

3.02 Fiduciary Duty. The Manager shall have fiduciary responsibility for the safekeeping and use of all funds and assets of the Company, and the Manager shall not employ such funds or assets in any manner except for the exclusive benefit of the Company.

3.03 Allocation of Time to Company Business. The Manager shall not be required to devote full time to the affairs of the Company but shall devote whatever time, effort and skill the Manager may deem to be reasonably necessary for the conduct of the Company’s business. The Manager may engage in any other businesses including businesses related to or competitive with the Company.

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3.04 Exculpation and Indemnification. Neither the Manager, nor its shareholders, officers, directors, employees or agents, shall have any liability whatsoever to the Company or to any Member for any loss suffered by the Company or any Member which arises out of any action or inaction of the Manager or any of its shareholders, officers, directors, employees or agents, so long as the Manager or such other Person, in good faith, determined that such course of conduct was in the best interests of the Company and did not constitute fraud, bad faith or willful misconduct. The Manager and its shareholders, officers, directors, employees and agents and the employees and agents of the Company shall be entitled to be indemnified and held harmless by the Company, at the expense of the Company, against any loss, expense, claim or liability (including reasonable attorneys’ fees, which shall be paid as incurred) resulting from the assertion of any claim or legal proceeding relating to the performance or nonperformance of any act concerning the activities of the Company, including claims or legal proceedings brought by a third party or by Members, on their own behalf or as a Company derivative suit, so long as the party to be indemnified determined in good faith that such course was in the best interests of the Company and did not constitute fraud, bad faith or willful misconduct; provided, that any such indemnity shall be paid solely from the assets of the Company. Nothing herein shall prohibit the Company from paying in whole or in part the premiums or other charge for any type of indemnity insurance in which the Manager or other agents or employees of the Manager or the Company are indemnified or insured against liability or loss arising out of their actual or asserted misfeasance or nonfeasance in the performance of their duties or out of any actual or asserted wrongful act against, or by, the Company including, but not limited to, judgments, fines, settlements and expenses incurred in the defense of actions, proceedings and appeals therefrom.

3.06 Removal of the Manager; Election of Successor Manager. The Manager may be removed upon the following terms and conditions:

(a) The Manager may be removed by the written consent of a Majority Interest of the Members. Members may exercise such right by presenting to the Manager a written notice, which shall be executed by the Members and their signatures acknowledged, to the effect that the Manager is removed effective on the date set forth in such notice.

(b) Concurrently with delivery of such notice or within ninety (90) days thereafter by written notice similarly given, a Majority Interest of the Members may also designate a successor Manager.

(c) Substitution of a new Manager, if any, shall be effective upon written acceptance of the duties and responsibilities of a Manager by the new Manager. Upon effective substitution of a new Manager, this Agreement shall remain in full force and effect except for the change in the Manager and the business of the Company shall be continued by the new Manager.

3.07 Retirement by Manager. The Manager may withdraw (“retire”) from the Company upon not less than six (6) months written notice of same to the Members. In the event that the Manager retires, the Members shall elect a successor manager by a Majority Interest of the Members.

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ARTICLE IV

THE MEMBERS – CAPITAL CONTRIBUTIONS

4.01 Capital Contributions of Members. The Members shall contribute to the capital of the Company an amount equal to One Thousand Dollars ($1,000) for each Unit subscribed for, with a minimum subscription of 5 Units per Member (including subscriptions from entities of which such Member is the sole beneficial owner); provided, that the minimum subscription for an individual retirement account (“IRA”) shall be 2 Units; provided further that the Initial Member shall only contribute the sum of One Thousand Dollars ($1,000) to the capital of the Company and his Capital Account shall be credited in such amount. The total initial capitalization of the Company shall be a minimum of $250,000; provided, however, the Manager reserves the right to issue additional Units from time to time in the future without approval of the Members. The capital contributions of Members shall be made in cash. Notwithstanding any provision of this Agreement to the contrary, at any time after the minimum capitalization of $250,000 is received by the Company, the Initial Member may request that the Company redeem his Membership Interest for an amount equal to the positive balance in his Capital Account.

4.02 Admission to Company; Subscription Account. Subscription funds received by the Manager from Persons for the purchase of Units shall not earn interest for the subscribing Member and shall be placed into a segregated subscription account at a bank or savings association selected by the Manager. Subscribers for Units whose subscription funds are placed in the subscription account shall not be admitted to the Company as Members until such time as all or a portion of their subscription funds are transferred to the Company. Subscription funds received by the Manager shall be held in a deposit account that may bear interest for the benefit of the Funds until being transferred to the Company. When the Company has located a suitable lending opportunity, and only if funds are not available in the Company to fund such loan (after making reasonable allowances for loss and contingency reserves), then funds from the subscription account shall be transferred to the Company for the purpose of funding the loan, at which time Units will be issued and the subscribing Person will be admitted to the Company as a Member. The Manager has the right to admit only a portion of an investor’s subscription funds at any given time; however, in no case will the Manager admit less than the required minimum subscription of an investor. Generally, subscription funds shall be considered for transfer to the Company on a first-in, first-out basis; however, the Manager reserves the right to admit non-ERISA plan investors before ERISA plan investors in order for the Company to remain exempt from the application of Title 29 of the Code of Federal Regulations Part 2510 relating to the definition of plan assets for purposes of ERISA (the “ERISA Plan Asset Regulations.”) In the event only a portion of a subscribing Person’s funds are required to fund a Company loan, then all or a portion of funds invested by such subscribing Person shall be transferred to the Company at the same time and new Units shall be issued therefor. Any subscription funds remaining in the subscription account after the expiration of ninety (90) days from the date any such subscription funds were first received by the Manager shall be returned to the subscribing Person.

4.03 Election to Compound Earnings or Receive Cash Distributions. Upon subscription for Units, a subscribing Person will elect whether to receive monthly cash distributions from the Company or to allow his or her earnings to compound. A Member may elect to switch from compounding earnings to receiving monthly cash distributions, or vice versa, upon thirty (30) days notice to the Manager; provided, however, that a Member may only

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switch from receiving cash distributions to compounding earnings if there is then in effect a permit issued by the California Department of Corporations for the offering of Units and provided further that such Member shall have received the most current version of the Company’s Offering Circular. Notwithstanding the foregoing, the Manager at any time shall have the right to immediately commence making monthly distributions to one or more ERISA plan Members who previously had elected to compound earnings if necessary in order for the Company to remain exempt from the application of the ERISA Plan Asset Regulations. Income allocable to Members who elect to compound their earnings will be retained by the Company for purposes of making or investing in further mortgage loans or for other proper Company purposes, and the amount of such allocable income will be credited to their Capital Accounts.

4.04 No Participation in Management. Except as expressly provided herein, the Members shall take no part in the conduct or control of the Company business and shall have no right or authority to act for or bind the Company. Economic Interest Owners shall have no voting rights whatsoever.

4.05 Rights and Powers of Members. A Majority Interest of the Members shall have the right to vote upon, and to approve or disapprove, the following matters, and no others, all of which matters shall also require the prior written consent of the Manager:

(a) dissolution and termination of the Company;

(b) amendment to this Agreement, provided that this Subsection (b) shall not apply to the matters set forth in Section 12.04 below, with respect to which matters the Manager alone may amend this Agreement without the vote of the Members;

(d) removal of the Manager and election of a successor Manager, in the manner and subject to the conditions described in Sections 3.06 and 3.07 above.

4.06 Meetings. No regular meetings of Members are required to be held, but meetings of Members may be called, noticed and held, and voting procedures shall be followed in accordance with the provisions of Section 17104 of the Act.

4.07 Limited Liability of Members. Units are non-assessable, and no Member shall be personally liable for any of the expenses, liabilities, or obligations of the Company or for any of the losses thereof beyond the amount of such Member’s agreed upon Capital Contribution to the Company and such Member’s share of any undistributed net income and gains of the Company; provided, that each Member shall remain liable to return to the Company any distributions that such Member is obligated to return pursuant to Section 17254 of the Act.

ARTICLE V

PROFITS AND LOSSES: CASH DISTRIBUTIONS

5.01 Losses. Losses shall be allocated among the Members as of the last day of each calendar month in accordance with their respective Percentage Interests.

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5.02 Profits. Profits shall be allocated among the Members as of the last day of each calendar month during any Fiscal Year in the following order of priority:

(a) First, to all of the Members in the same proportions as the Losses, if any, that were previously allocated to them pursuant to Section 5.01 above, until all such Losses have been recouped;

(b) Thereafter, to the Members in accordance with their respective Percentage Interests; provided, however, that if any Membership Interest is purchased, increased or decreased prior to the end of such calendar month, then Profits realized during such month shall be prorated in proportion to the number of days during such month that the Members’ Capital Accounts were outstanding on a weighted average basis.

5.03 Cash Available for Distribution. Cash Available for Distribution shall be distributed only to those Members who elect in writing to receive such distributions during the term of the Company in accordance with Section 4.03. Cash Available for Distribution distributable to those Members who elected to receive cash distributions as aforesaid shall be distributed to them in cash as soon as practicable after the end of each calendar month. Cash Available for Distribution allocable to the remaining Members shall be retained by the Company and credited to their respective Capital Accounts as of the first day of the succeeding calendar month. Total Cash Available for Distribution as of the close of business on the last day of each calendar month during any Fiscal Year shall be allocated among and promptly distributed or credited to the Members in accordance with their respective Percentage Interests.

5.04 Cash Distributions Upon Dissolution. Upon dissolution and termination of the Company, all Cash Available for Distribution shall thereafter be distributed to Members in accordance with the provisions of Article IX below.

5.05 Special Allocation Rules.

(a) For purposes of this Agreement, a loss or allocation (or item thereof) is attributable to non-recourse debt which is secured by Company property to the extent of the excess of the outstanding principal balance of such debt (excluding any portion of such principal balance which would not be treated as an amount realized under Code Section 1001 and Paragraph (a) of Code Section 1.001-2 if such debt were foreclosed upon) over the adjusted basis of such property. This excess is herein defined as “Minimum Gain” (whether taxable as capital gain or as ordinary income) as more explicitly set forth in Treasury Regulation 1.704-1(b)(4)(iv)(c). Notwithstanding any other provision of Article V, the allocation of loss or deduction (or item thereof) attributable to non-recourse debt which is secured by Company property will be allowed only to the extent that such allocation does not cause the sum of the deficit Capital Account balances of the Members receiving such allocations to exceed the minimum gain determined at the end of the Company taxable year to which the allocations relate. Any Member with a deficit Capital Account balance resulting in whole or in part from allocations of loss or deduction (or item thereof) attributable to non-recourse debt which is secured by Company property shall, to the extent possible, be allocated income or gain (or item thereof) in an amount not less than the minimum gain at a time no later than the time at which the minimum gain is reduced below the sum of such deficit capital account balances. This

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Section is intended and shall be interpreted to comply with the requirements of Treasury Regulation Section 1.704-1(b)(4)(iv)(e).

(b) In the event any Member receives any adjustments, allocations or distributions, not covered by Section 5.05(a), so as to result in a deficit Capital Account, items of Company income and gain shall be specially allocated to such Members in an amount and manner sufficient to eliminate the deficit balances in their Capital Accounts created by such adjustments, allocations or distributions as quickly as possible. This Section shall operate a qualified income offset as utilized in Treasury Regulation Section 1.704-1(b)(2)(ii)(d).

(c) Syndication expenses for any Fiscal Year or other period shall be specially allocated to the Members in proportion to their respective Percentage Interests, provided that if additional Members are admitted to the Company on different dates, all syndication expenses shall be divided among the Persons who own Units from time to time so that, to the extent possible, the cumulative syndication expenses allocated with respect to each Unit at any time is the same amount. In the event the Manager shall determine that such result is not likely to be achieved through future allocations of syndication expenses, the Manager may allocate a portion of Profits or Losses so as to achieve the same effect on the Capital Accounts of the Members, notwithstanding any other provision of this Agreement.

ARTICLE VI

ACCOUNTING AND REPORTS

6.01 Books and Records. The Manager shall cause the Company to keep the following books and records, which shall be maintained at the Company’s principal place of business and shall be available for inspection and copying by, and at the sole expense of, the Members (but not Economic Interest Holders), or their duly authorized representatives, during reasonable business hours:

(a) A current list of the full name and last known business or residence address of each Member and Economic Interest Owner set forth in alphabetical order, together with the Capital Contributions, Capital Account and Percentage Interest of each Member and Economic Interest Owner;

(b) A current list of the full name and business or residence address of each Manager;

(c) A copy of the Articles and any and all amendments thereto together with executed copies of any powers of attorney pursuant to which the Articles or any amendments thereto have been executed;

(d) Copies of the Company’s federal, state, and local income tax or information returns and reports, if any, for the six most recent taxable years;

(e) A copy of this Agreement and any and all amendments thereto together with executed copies of any powers of attorney pursuant to which this Agreement or any amendments thereto have been executed;

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(f) Copies of the financial statements of the Company, if any, for the six most recent Fiscal Years; and

(g) The Company’s books and records as they relate to the internal affairs of the Company for at least the current and past four Fiscal Years.

6.02 Financial Reports and Returns. The Manager shall cause to be prepared and distributed to each Member the following:

(a) Within ninety (90) days after the end of each Fiscal Year of the Company, an annual report which shall contain a balance sheet of the Company as of the end of each Fiscal Year, an income statement and a report of the activities of the Company during such Fiscal Year, including a statement of changes in financial position for that Fiscal Year, which financial statements may (but are not required to be) audited by an independent certified public accounting firm in accordance with generally accepted accounting principles.

(b) Within ninety (90) days after the end of each Fiscal Year of the Company, such other information which the Members may need for preparation of their federal income tax returns.

6.03 Tax Matters Partner. In the event the Company is subject to administrative or judicial proceedings for the assessment or collection of deficiencies for federal taxes or for the refund of overpayments of federal taxes arising out of a Member’s distributive share of profits, the Manager shall act as the Tax Matters Partner (“TMP”) and shall have all the powers and duties assigned to the TMP under Sections 6221 through 6232 of the Code and the Treasury Regulations thereunder. The Members agree to perform all acts necessary under Section 6231 of the Code and Treasury Regulations thereunder to designate the Manager as the TMP.

ARTICLE VII

TRANSFER OF COMPANY INTERESTS

7.01 Restrictions on Transfers. Notwithstanding any provision to the contrary contained herein, the following restrictions shall apply to any and all proposed sales, assignments or transfers of Membership Interests and Economic Interests, and any proposed sale, assignment or transfer in violation of same shall be void ab initio:

(a) No Member shall make any transfer or assignment of all or any part of his Membership Interest without the prior written consent of the Manager, which consent may be withheld in the sole discretion of the Manager.

(b) No Member shall make any transfer or assignment of all or any part of his Economic Interest without the prior written consent of the Manager, which consent shall not be unreasonably withheld.

(c) No Member shall make any transfer or assignment of all or any part of his Membership Interest or Economic Interest if said transfer or assignment would, when considered with all other transfers during the same applicable twelve-month period, cause a termination of the Company for federal or California state income tax purposes.

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(d) No Member shall be entitled to sell, assign, transfer or convey his Membership Interest or Economic Interest to any person or entity other than a bona fide resident of the State of California for a period of nine months after the termination of the offering of Units pursuant to which such Membership Interest (or the Membership Interest associated with such Economic Interest) was acquired.

(e) No Member shall be entitled to sell, assign, transfer or convey his Membership Interest or Economic Interest to any Person unless such transfer complies with Section 260.141.11 of the Rules of the California Commissioner of Corporations if such Section of such Rules is applicable at the time of the proposed transfer.

(f) Instruments evidencing a Membership Interest or Economic Interest shall bear and be subject to a legend condition in substantially the following form:

THE UNITS REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED NOR HAVE THEY BEEN QUALIFIED UNDER THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968, AS AMENDED. SUCH UNITS MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED TO ANY PERSON AT ANY TIME WITHOUT SUCH REGISTRATION AND QUALIFICATION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE MANAGER OF THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED. THERE ARE OTHER SUBSTANTIAL RESTRICTIONS ON TRANSFER, AS SET FORTH IN THE OPERATING AGREEMENT.

7.02 Transfer of Membership Interests and Substitution. No assignee of the whole or any portion of a Membership Interest in the Company shall have the right to become a substituted Member in place of his assignor unless the following conditions are first met:

(a) The assignor shall designate such intention in the instrument of assignment;

(b) The written consent of the Manager to such substitution shall be obtained, which consent may be withheld in the sole discretion of the Manager and which, in any event, shall not be given if the Manager determines that such sale or transfer may jeopardize the continued ability of the Company to qualify as a “partnership” for federal income tax purposes or that such sale or transfer may jeopardize the status of the original sale of said interest pursuant to the non-public and intrastate offering exemptions from registration or qualification under the

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Securities Act of 1933, as amended (the “1933 Act”) or the California Corporate Securities Law of 1968, as amended (the “1968 Law”);

(d) The assignor and assignee named therein shall execute and acknowledge such other instruments as the Manager may deem necessary to effectuate such substitution, including but not limited to a power of attorney with provisions more fully described in this Agreement;

(e) The assignee shall accept, adopt and approve in writing all of the terms and provisions of this Agreement as the same may have been amended;

(f) Such assignee shall pay or, at the election of the Manager, obligate himself to pay all reasonable expenses (including reasonable attorneys’ fees) not exceeding $500 connected with such substitution; and

(g) The Company has received, if requested, a legal opinion in form and substance satisfactory to the Manager that such transfer will not violate the registration provisions of the 1933 Act or the qualification requirements of the 1968 Law, which opinion shall be furnished at the Member’s expense.

7.03 Repurchase of Membership Rights Upon Transfer of Economic Interest. Upon and contemporaneously with any transfer, assignment, conveyance or sale (whether arising out of an attempted charge upon that Member’s Economic Interest by judicial process, a foreclosure by a creditor of the Member or otherwise) of a Member’s Economic Interest which does not at the same time transfer the balance of the rights associated with the Membership Interest transferred by the Member (including, without limitation, the rights of the Member to vote or participate in the management of the business, property and affairs of the Company), the Company shall purchase from the Member, and the Member shall sell to Company, for a purchase price equal to $0.001 (1/10^th cent) per Unit of Membership Interest, the Economic Interest of which has been transferred, all remaining rights and interests retained by the Member that immediately before the transfer, assignment, conveyance or sale were associated with the transferred Economic Interest. Such purchase and sale shall not, however, result in the release of the Member from any liability to the Company as a Member. Each Member acknowledges and agrees that the right of the Company to purchase such remaining rights and interests from a Member is not unreasonable under the circumstances existing as of the date hereof.

For example, if a Member who holds five Units of Membership Interest assigns the Economic Interests pertaining to two Units in accordance with this Article VII, and if the transferee is not admitted as a substituted Member for any reason, such transferee shall hold the two Units of Economic Interest so transferred as an Economic Interest Owner and the transferring Member shall sell the balance of the rights associated with those two Units to the Company for the sum of two dollars ($2.00) and the transferring Member shall retain three Units of Membership Interest.

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ARTICLE VIII

WITHDRAWAL FROM COMPANY

8.01 Withdrawal by Members. No Member shall have the right to withdraw from the Company, receive cash distributions or otherwise obtain the return of all or any portion of his Capital Account balance except as provided below and except for monthly distributions of Cash Available for Distribution, if any, to which such Member may be entitled pursuant to Section 5.03 above. A Member may withdraw, or partially withdraw, from the Company upon not less than sixty (60) days prior written notice to the Manager subject however to the following limitations:

(a) A Member desiring to withdraw from the Company shall give written notice of same (“Notice of Withdrawal”) to the Manager, and such Member’s Capital Account as of the date of such notice shall be liquidated and distributed to such Member as soon as reasonably practical, but in no event less than sixty (60) days, subject to subsections (c), (d) and (e) below.

(b) Furthermore, commencing with the end of the calendar month in which such Notice of Withdrawal is given, any current Cash Available for Distribution allocable to the Capital Account (or portion thereof) being withdrawn shall also be distributed in cash to the withdrawing Member in the manner provided in Section 5.03 above.

(i) The Company will not establish a reserve from which to fund withdrawals and, accordingly, the Company’s capacity to return a Member’s Capital Account is restricted to the availability of Company cash flow in any given calendar quarter, as determined in good faith by the Manager. For this purpose, cash flow is considered to be available only after all current Company expenses have been paid (including compensation to the Manager and its Affiliates) and provision has been made for maintaining adequate reserves to meet anticipated Company expenses, funding of all and outstanding loan commitments and approved loans, and payment of all monthly cash distributions on a pro rata basis which must be paid to Members who elected to receive such distributions upon subscription for Units. The Company shall not be obligated to sell or liquidate any mortgage loans prior to maturity for the purpose of generating funds to liquidate the Capital Accounts of withdrawing Members.

(ii) If current cash flow is inadequate to promptly liquidate all Capital Accounts with respect to which Notices of Withdrawal have been received, then the priority of distributions among withdrawing Members shall be determined by the chronological order in which their respective Notices of Withdrawal were received by the Manager; provided, that the Manager shall have the discretion to accord priority to Notices of Withdrawal received from Deceased Members and ERISA Plan Investors as described in Section 8.01(e) below.

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(d) In no event shall the Fund be required to liquidate the Capital Accounts of Withdrawing Members to the extent that the aggregate distributions paid to all withdrawing Members during any twelve-month period would exceed an amount equal to ten percent (10%) of the aggregate Capital Accounts of all Members at the beginning of such period.

(e) Notwithstanding any provision herein to the contrary, the Company may give priority to the return of the Capital Accounts of certain Members, as follows:

(i) Upon the death of the sole beneficiary of a corporate pension or profit-sharing plan, Individual Retirement Account or other employee benefit plan subject to ERISA or upon the death of a Member (the “Deceased Member”), the return of such Deceased Member’s Capital Account may be given priority over the return of other withdrawing Members’ Capital Accounts, in the Manager’s sole and absolute discretion, but such priority liquidation shall be limited to $50,000 per calendar quarter.

(ii) The Manager, in its sole and absolute discretion, shall also have the right at any time to immediately return all or a portion of the Capital Account of one or more ERISA plan investors (the “ERISA Plan Investors”) in order to ensure that the Company remains exempt from the ERISA Plan Asset Regulations. The return of such ERISA Plan Investors’ Capital Accounts shall have priority over the return of all other withdrawing Members’ Capital Accounts, including those of Deceased Members.

(f) Notwithstanding the foregoing, the Capital Account of a withdrawing Member shall remain subject to adjustment as described in Section 1.05 above until it is fully liquidated. Any reduction in a Capital Account by reason of an allocation of Losses, if any, shall reduce all subsequent liquidation payments proportionately. In no event shall any Member receive cash distributions upon withdrawal from the Company if the effect of such distribution would be to create a deficit in such Member’s Capital Account.

8.02 Effect of Dissolution. If at any time there are outstanding unfulfilled Notices of Withdrawal from a Majority Interest of the Members, the Manager shall have the right, but not the obligation to deem that to constitute a vote by the Members to dissolve the Company pursuant to Section 9.01 and to concur with such vote. If the Company dissolves pursuant to Section 9.01 below at a time when any Members who have previously given Notices of Withdrawal have not yet received the return of their respective full Capital Accounts, then in such event the winding up provisions of Section 9.02 below shall apply and the distribution provisions of Subsection 9.02(c) shall be controlling, such that liquidation payments shall thereafter be made proportionately to all Members pursuant to Subsection 9.02(c) and no further payments shall be made pursuant to Subsection 8.01(a) above.

8.03 Expulsion of a Member. The Manager shall have the right, subject only to the priorities of withdrawing Members with outstanding unfulfilled Notice of Withdrawal as set forth in Section 8.01 above, to expel a Member from the Company at any time, for any reason or no reason, without the Member’s consent, by liquidating and distributing to the Member his, her or its entire Capital Account balance as of the end of the immediately preceding calendar month.

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ARTICLE IX

DISSOLUTION OF THE COMPANY;

MERGER OF THE COMPANY

9.01 Events Causing Dissolution. The Company shall dissolve upon occurrence of the earlier of the following events:

(a) The vote (including a deemed vote pursuant to Section 8.02 above) of a Majority Interest of the Members to dissolve, with the concurrence of the Manager; or

(b) An entry of a decree of judicial dissolution pursuant to Section 17351 of the California Corporations Code.

9.02 Winding Up. Upon the occurrence of an event of dissolution, the Company shall not immediately be terminated, but shall continue until its affairs have been wound up. Upon dissolution of the Company, unless the business of the Company is continued as provided above, the Manager will wind up the Company’s affairs as follows:

(a) No new loans shall be made or purchased;

(b) Except as may be agreed upon by the Manager and a Majority Interest of Members in connection with a merger or consolidation described in Section 9.03, the Manager shall liquidate the assets of the Company as promptly as is consistent with recovering the fair market value thereof, either by sale to third parties (including the Manager or Affiliates) or by servicing the Company’s outstanding loans in accordance with their terms; provided, however, the Manager shall liquidate all Company assets for the best price reasonably obtainable in order to completely wind up the Company’s affairs within five (5) years after the date of dissolution;

(c) Except as may be agreed upon by the Manager and a Majority Interest of Members in connection with a merger or consolidation described in Section 9.03, all sums of cash held by the Company as of the date of dissolution (including liquid assets which shall be converted to cash), together with all sums of cash received by the Company during the winding up process from any source whatsoever, shall be applied and promptly distributed to the Members in proportion to the positive balances in their respective outstanding Capital Accounts, but only after all the Company’s debts have been paid or otherwise adequately provided for.

(d) Upon the completion of the liquidation of the Company and distribution of liquidation proceeds, the Manager shall cause to be filed a Certificate of Dissolution as required by the Act and shall furnish to each of the Members a statement setting forth the receipts and disbursements of the Company during such liquidation, the amount of proceeds from such liquidation distributed with respect to Company Interests and the amount of proceeds paid or distributed to Members.

9.03 Merger or Consolidation of the Company. The Company may be merged or consolidated with one or more other entities, which may be Affiliates of the Company, provided that the principal terms of any such merger or consolidation are first approved by the Manager and by the affirmative vote of a Majority Interest of the Members. In any such merger or consolidation, the Company may be either a disappearing or surviving entity.

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ARTICLE X

TRANSACTIONS BETWEEN THE COMPANY,

THE MANAGER AND AFFILIATES

10.01 Loan Origination or Brokerage Fees. In consideration for its services rendered in connection with locating, underwriting, negotiating and closing loan investments by the Company, the Manager or its affiliates shall be entitled to receive one (but not both) of the following forms of compensation for each such loan:

(a) With respect to loans made or arranged by the Manager pursuant to its real estate broker’s license, a loan brokerage commission or origination, renewal or forbearance fee, which in any event shall be payable solely by the borrower and not by the Company; and

(b) With respect to loans arranged by the Manager and made or renewed or forbeared by the Company pursuant to the Company’s finance lender’s license, the Company shall pay to the Manager compensation for its services as Manager an amount equal to all origination, commitment, renewal or forbearance fees received by the Company from the borrowers of such loans.

10.02 Loan Servicing and Asset Management Fees. The Manager may act as servicing agent with respect to all Company loans and may manage all of the Company’s assets. In consideration for such collection and management efforts, the Manager shall be entitled to receive the following compensation from the Company:

(a) A monthly servicing fee not exceeding two percent per annum (i.e. one-sixth (1/6) of one percent (0.16666%) monthly) of the total unpaid principal balance of each loan serviced, payable only as interest is received by the Company; and

(b) A monthly asset management fee equal to one-twelfth-second (1/12) of one percent (.08333%) of the Net Assets Under Management as of the last day of each calendar month with respect to Net Assets Under Management as of the first day of the immediately preceding month.

10.03 Sale of Real Estate to the Manager or its Affiliates. In the event the Company becomes the owner of any real property by foreclosure on a Company loan, the Company may sell such property to the Manager or an Affiliate of the Manager provided:

(a) No foreclosed property will be sold to the Manager or an Affiliate thereof unless the Manager has first used its best efforts to sell any property at a fair price on the open market for at least ninety (90) days.

(b) In the event any property is sold to the Manager or its Affiliate, the net purchase price must be (i) no less favorable to the Company (taking into account any avoided commissions or other cost savings) than any bona fide third-party offer received, and (ii) no less than the total amount of the Company’s “investment” in the property. The Company’s investment includes, without limitation, the following: the unpaid principal amount of the Company’s loan, unpaid interest accrued to the date of foreclosure, expenditures made to protect

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the Company’s interest in the property such as payments to senior lienholders and for insurance and taxes, costs of foreclosure (including attorneys’ fees actually incurred to prosecute the foreclosure or to obtain relief from stays in bankruptcy), and any advances made by the Manager, if any, on behalf of the Company for any of the foregoing.

10.04 Loan Processing Fees. The Manager or an Affiliate of the Manager may provide certain document preparation, notarial and credit investigation services, for which services the Manager or such Affiliate shall be entitled to receive such fees as are permitted by law and as are generally prevailing in the geographical area where the property securing the loan is located. To the extent such loan processing fees are paid to the Company on a loan transaction closed for the Company by the Manager under the Company’s California finance lender’s license, an amount equal to all such fees received by the Company shall be paid to the Manager by the Company as additional compensation.

10.05 Sale of Loans to Manager or Affiliates. The Company may sell existing loans to the Manager or its Affiliates, but only so long as the Company receives net sales proceeds from such sale in an amount equal to the total unpaid balance of principal, accrued interest and other charges owing under such loan, or the fair market value of such loan, whichever is greater. Notwithstanding the foregoing, the Manager shall be under no obligation to purchase any loans from the Company or to guarantee any payments under any Company loan.

10.06 Purchase of Loans from Manager or Affiliates. The Company may purchase existing loans from the Manager or Affiliates, provided that the following conditions are met:

(a) At the time of purchase the borrower shall not be default under the loan; and

(b) No brokerage commissions or other compensation by way of premiums or discounts shall be paid to the Manager or Affiliates by any person by reason of such purchase (except loan origination fees earned upon the initial funding of such loan).

10.07 Reimbursement of Manager for Certain Expenses. The Manager shall be reimbursed by the Company for all organizational syndication and operating expenses incurred on behalf of the Company, including without limitation, out-of-pocket general and administrative expenses of the Company, accounting and audit fees, legal fees and expenses, postage, and preparation of reports to Members.

10.08 Recovery of Deferred Compensation. In the event the Manager (or any of its Affiliates) from time to time in its sole discretion waives, defers or assigns to the Fund any of the foregoing compensation to which the Manager may be entitled (“Deferred Compensation”), the Manager shall subsequently be entitled to recover such Deferred Compensation without interest if and to the extent that the Company earns an investment return on Members’ capital during any subsequent period exceeding 8% per annum on a simple basis. The Manager shall have no obligation to waive, defer or assign to the Fund all or any portion of such compensation.

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ARTICLE XI

ARBITRATION

11.01 Arbitration. Any action to resolve any controversy or claim arising out of or related to this Agreement, or the breach hereof, however characterized, shall be resolved through a binding, non-public arbitration before an adjudicator selected as provided in this Article XI.

11.02 Demand for Arbitration. Any party desiring to bring any action under this Agreement shall give written notice to the other party, which notice shall state with particularity the nature of the dispute and the demand for relief, making specific reference by paragraph number and title, if applicable, of the provisions of this Agreement pertaining to the dispute.

11.03 Appointment of Arbitrator. The parties shall endeavor to agree, within thirty (30) days of the above-described notice, upon a mutually acceptable adjudicator to resolve the dispute. The adjudicator shall be a single former judge of the Superior Court or the Court of Appeal of the State of California or member in good standing with the California State Bar currently employed by or associated with the office of JAMS/ENDISPUTE (“JAMS”) located in or nearest to Oakland, California. If the parties cannot agree upon the adjudicator within such thirty (30)-day period, then JAMS, in its sole discretion, shall provide a list of three adjudicators with the qualifications set forth above. Within ten (10) days of JAMS providing the above-described list, each of the parties shall be entitled to strike one name from the list and so notify JAMS. JAMS, in its sole discretion, thereafter shall select as adjudicator any one of the persons remaining on the list, and the person so selected shall thereafter serve as adjudicator. If for any reason JAMS is unable or unwilling to make such an appointment, either party may apply to the Superior Court of the State of California in and for the County of Alameda for appointment of any former judge of the Superior Court or the Court of Appeal of the State of California to serve as adjudicator. The appointment of an adjudicator, whether by JAMS or by the Superior Court pursuant to the foregoing, shall be made, and the adjudicator shall serve, without further objection from either party, except on the ground of conflict of interest, if any, pursuant to the same rules that would apply if the former judge were serving as an active member of the Superior Court or Court of Appeal.

11.04 Hearing. The hearing shall take place at a mutually acceptable location in Oakland, California and shall be conducted pursuant to the provisions of the California Arbitration Act commencing with California Code of Civil Procedure Section 1280, the rules and procedures established by JAMS, and such other rules and procedures as may be determined by the adjudicator; provided, however, that: (1) at the hearing, any relevant evidence may be presented by either party, and the formal rules of evidence applicable to judicial proceedings shall not govern; and (2) discovery between the parties prior to the arbitration hearing shall be limited to the mutual exchange of relevant documents. Interrogatories, requests for admissions, and depositions of witnesses shall not be permitted.

11.05 Arbitration Award. In resolving the dispute, the adjudicator shall apply the pertinent provisions of this Agreement without departure therefrom in any respect, and the adjudicator shall not have the power to change any of the provisions of the Agreement. The adjudicator shall try all of the issues, including any issues that may be raised concerning arbitrability of the dispute, subject-matter and personal jurisdiction, and any and all other issues,

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whether of fact or of law, and shall hear and decide all motions and matters of any kind. The adjudicator shall not be required to prepare a written statement of decision as to any interlocutory decision, but at the conclusion of the arbitration shall prepare a written statement of decision thereon which shall be final and binding upon the parties, and upon which judgment may be entered in accordance with applicable law in any court having jurisdiction thereof. Any interlocutory decisions by the adjudicator likewise shall be final and binding, except that the adjudicator shall have the power to reconsider such.

11.06 Costs of Arbitration. The prevailing party in any dispute regarding or arising out of this Agreement shall be entitled to an award of its reasonable attorneys’ fees in addition to any other relief to which it is entitled.

11.07 WAIVERS. THE PARTIES HEREBY FREELY WAIVE THE RIGHT TO TRIAL BY JUDGE OR JURY, THE RIGHT TO APPEAL, FULL PRETRIAL DISCOVERY AND APPLICATION OF THE RULES OF EVIDENCE.

ARTICLE XII

MISCELLANEOUS

12.01 Covenant to Sign Documents. Without limiting the power of attorney granted by Sections 2.08 and 2.09 above, each Member covenants, for himself and his successors and assigns, to execute, with acknowledgement or verification, if required, any and all certificates, documents and other writings which may be necessary or expedient in the creation of the Company and the achievement of its purposes, including, without limitation, all such filings, records or publications necessary or appropriate in the judgment of the Manager to comply with the applicable laws of any jurisdiction in which the Company shall conduct its business.

12.02 Notices. Except as otherwise expressly provided for in this Agreement, all notices which any Member may desire or may be required to give any other Member shall be in writing and shall be deemed duly given when delivered personally or when deposited in the United States mail, first-class postage prepaid, addressed to the Member’s address as shown in the books of the Company pursuant to written notification to the Manager. Notices to the Manager or to the Company shall be delivered to the Company’s principal place of business, as set forth in Section 2.03 above or as hereafter charged as provided herein.

12.03 Right to Engage in Competing Business. Nothing contained herein shall preclude any Member from purchasing or lending money upon the security of any other property or rights therein, or in any manner investing in, participating in, developing or managing any other venture of any kind, without notice to the other Members, without participation by the other Members, and without liability to them or any of them. Each Member waives any right he may have against the Manager for capitalizing on information received as a consequence of the Manager’s management of the affairs of this Company.

12.04 Amendment. This Agreement is subject to amendment by the affirmative vote of a Majority Interest of the Members with the written concurrence of the Manager. Notwithstanding anything to the contrary contained in this Agreement, the Manager shall have the right to amend this Agreement, without the vote or consent of any of the Members, when:

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(a) There is a change in the name of the Company or the amount of the contribution of any Member;

(b) A person is substituted as a Member;

(d) A person is admitted as a successor or additional Manager in accordance with the terms of this Agreement;

(e) There is a change in the character of the business of the Company;

(f) There is a false or erroneous statement in this Agreement; or

(g) A change in this Agreement is required in order that it shall accurately represent the agreement among the Members.

12.05 Governing Law. This Agreement shall be governed by and shall be interpreted and enforced in accordance with the substantive laws of the State of California.

12.06 Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes any and all prior agreements and representations, either oral or in writing, between the parties hereto with respect to the subject matter contained herein.

12.07 Waiver. No waiver by any party hereto of any breach of, or default under, this Agreement by any other party shall be construed or deemed a waiver of any other breach of or default under this Agreement, and shall not preclude any party from exercising or asserting any rights under this Agreement with respect to any other breach or default.

12.08 Severability. If any term, provision, covenant or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

12.09 Captions. Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference an in no way define, limit, extend or describe the scope of this Agreement.

12.10 Number and Gender. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders, and the word “person” shall include a natural person, firm, partnership, corporation, trust, association of other form of legal entity. Any consent or action required or permitted to be given or made by a Manager may be given or made by any Manager.

12.11 Counterparts. This Agreement may be executed in counterparts, any or all of which may be signed by the Manager on behalf of the Members as their attorney-in-fact.

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12.12 Legal Representation.

(a) Counsel to the Company may also be counsel to the Manager or any Affiliate of the Manager. The Manager may execute on behalf of the Company and the Members any consent to the representation of the Company that counsel may request pursuant to the California Rules of Professional Conduct or similar rules in any other jurisdiction (“Rules”). Each Member acknowledges that Company counsel does not represent any Member and Company counsel shall owe no duties directly to any Member. Notwithstanding any adversity that may develop, in the event any dispute or controversy arises between any Members and the Company, or between any Members or the Company, on the one hand, and the Manager (and its Affiliates), on the other hand, then each Member agrees that Company counsel may represent either the Company or such Manager (or his Affiliate), or both, in any such dispute or controversy to the extent permitted by the Rules, and each Member hereby consents to such representation.

(b) Each Member further acknowledges that Company counsel has represented only the interests of the Manager and not the Members in connection with the formation of the Company and the preparation and negotiation of this Agreement, and each Member acknowledges that it has been afforded the opportunity to consult with independent counsel with regard thereto.

IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the day and year first above written.

MANAGER:	BELLEVUE CAPITAL MANAGEMENT, INC.
	a Delaware corporation dba
	CALIFORNIA MORTGAGE AND REALTY, INC.


	By:	/s/ Henry Park

	Its:	Vice President


INITIAL MEMBER:	/s/ Craig Raymond
	Craig Raymond


MEMBERS:	/s/ Craig Raymond
	Craig Raymond, Vice President of California Mortgage and Realty Inc., as Attorney-In-Fact for the persons listed on Schedule A attached hereto

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SCHEDULE A

MEMBERS

Name and Address	Date of Admission	Capital Contribution

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EX-4.1 4 a2180921zex-4_1.htm EXHIBIT 4.1

Exhibit 4.1

FORM OF SUBSCRIPTION AGREEMENT

CMR Mortgage Fund II

Name:
$		, 2006
	(Leave Date Blank)

	CMR Investor No.

THE MEMBERSHIP INTEREST UNITS REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). SUCH INTERESTS MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED TO ANY PERSON AT ANY TIME IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH UNITS UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE MANAGER OF THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED. IN ADDITION, IN NO EVENT MAY UNITS BE OFFERED FOR SALE, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED TO ANY PERSON WHO IS NOT A RESIDENT OF CALIFORNIA FOR A PERIOD OF NINE MONTHS FROM THE DATE OF THE LAST SALE THEREOF BY THE COMPANY.

SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY

CMR MORTGAGE FUND II, LLC

The undersigned hereby applies to become a member in CMR Mortgage Fund II, LLC, a California limited liability company having its principal place of business at 62 First Street, 4^th Floor, San Francisco, California 94105 (the “Company”), and subscribes to purchase the number of Units herein indicated in accordance with the terms and conditions of the Company’s Offering Circular dated December 15, 2006 as supplemented from time to time (the “Offering Circular”), and the Operating Agreement attached thereto as Exhibit A (the “Operating Agreement”).

1. REPRESENTATIONS AND WARRANTIES. The undersigned represents and warrants as follows:

(a) I have received, read and fully understood the current Offering Circular for the offer and sale of Units by the Company, and in making this investment I am relying only on the information provided in the Offering Circular. I have not relied on any statements or representations inconsistent with those contained in the Offering Circular.

(b) I understand that the Units are being offered and sold without registration under the Securities Act of 1933, as amended in reliance upon the exemption from such registration requirements for intrastate offerings. I acknowledge and understand that the availability of this

exemption depends in part upon the accuracy of the representations and warranties contained herein, which I hereby make with the intent that they may be relied upon by the Manager. I understand that the Company has obtained a permit from the California Department of Corporations to offer and sell the Units in California but has not registered or qualified the Units for offer or sale under the securities laws of any other state. This Subscription Agreement is made pursuant to, and is subject to, the terms and conditions of the qualification approved by the California Commissioner of Corporations for the Company.

(c) My principal residence is in the State of California or I am a non-U.S. citizen residing in a foreign nation. Except as hereafter provided, if I am acting as the trustee of a trust or on behalf of any other business entity, both the principal office and the principal place of business of such trust or other entity are located in the State of California or in a foreign nation. If I am acting as the trustee or custodian of a Keogh plan, Individual Retirement Account or other retirement plan and I am not a resident of California, then all of the following requirements are satisfied: (i) all participants or beneficiaries of such retirement plan have their principal residence in California; (ii) all investment decisions regarding such plan are made by such resident participants and/or beneficiaries; and (iii) I perform only ministerial functions with respect to the investment of plan assets, with no independent authority or discretion to make investment decisions.

(d) I understand that Units may not be sold or otherwise disposed of without the prior written consent of the Manager, which consent may be granted or withheld in its sole discretion, and that any such transfer is also subject to the prior written consent of the California Commissioner of Corporations and to numerous other restrictions described in the Offering Circular and in the Operating Agreement. I have liquid assets sufficient to assure myself (i) that investment in these Units will not cause me undue financial difficulties and (ii) that I can provide for my current needs and possible personal contingencies or, if I am the trustee of a retirement trust, that the limited liquidity of the Units will not cause difficulty in meeting the trust’s obligations to make distributions to plan participants in a timely manner.

(e) I understand that an investment in the Units involves certain risks.

(f) I am 18 years of age or older.

(g) By virtue of my own investment acumen and experience or financial advice from my independent advisors (other than a person receiving commissions by reason of my purchase of Units), I am capable of evaluating the risks and merits of an investment in the Units.

(h) I am purchasing the Units solely for my own account, and not with a view to or for a sale in connection with any distribution of the Units.

2. POWER OF ATTORNEY. The undersigned hereby irrevocably constitutes and appoints the Manager as his, her or its true and lawful attorney-in-fact, with full power of substitution and with full power and authority for him, her or it and in his, her or its name, place and stead, to execute, acknowledge, publish and file:

(a) The Operating Agreement, the Articles of Organization of the Company and any amendments thereto or cancellations thereof required under the laws of the State of California;

(b) Any other certificates, instruments and documents as may be required by, or may be appropriate under, the laws of any state or other jurisdiction in which the Company is doing or intends to do business; and

(c) Any documents which may be required to effect the continuation of the Company, the admission of an additional or substituted Member, or the dissolution and termination of the Company.

The power of attorney granted above is a special power of attorney coupled with an interest, is irrevocable, and shall survive the death of a Member or the delivery of an assignment of Units by a Member; provided, that where the assignee thereof has been approved by the Manager for admission to the Company as a substituted Member, such power of attorney shall survive the delivery of such assignment for the sole purpose of enabling the Manager to execute, acknowledge, file and record any instrument necessary to effect such substitution.

3. ACCEPTANCE. This Subscription Agreement will be accepted or rejected by the Manager within thirty (30) days of its receipt by the Company. Upon acceptance, this subscription will become irrevocable, and will obligate the undersigned to purchase the number of Units indicated below, for the purchase price of $1,000 per Unit. The Manager will return a countersigned copy of this Subscription Agreement to accepted subscribers, which copy (together with my canceled check) will be evidence of my purchase of Units.

4. PAYMENT OF SUBSCRIPTION PRICE. The full purchase price for units is $1,000 per Unit and is payable in cash concurrently with delivery of this Subscription Agreement. I understand that my subscription funds will not earn interest for my account and will be held by the Manager which may earn interest for the account of the Company in a segregated subscription account at a financial institution selected by the Manager, until my funds are needed by the Company to fund a mortgage loan, and only then will I actually be admitted to the Company. In the interim, my subscription funds will not earn interest in the subscription account.

5. ACKNOWLEDGMENT. I understand the meaning and legal consequences of the representations and warranties I have made herein, and that the Manager is relying on such representations and warranties in making a determination whether to accept or reject this subscription.

PLEASE READ THE FOLLOWING PARAGRAPHS CAREFULLY AND
INITIAL WHERE INDICATED AFTER HAVING DONE SO

The undersigned agrees to indemnify and hold CMR Mortgage Fund II, LLC and its Manager, Members and their respective affiliates, agents and employees harmless from and against any and all claims, demands, liabilities, and damages (including, without limitation, all attorneys’ fees which shall be paid as incurred) which any of them may incur, in any manner or to any person, by reason of the falsity, incompleteness or misrepresentation of any information furnished by the undersigned herein or in any document submitted herewith. The effect of the foregoing is that the undersigned will be financially responsible for all losses, damages, expenses and liabilities incurred by the Company, its Manager and their related parties as a result of a breach of any of the representations and warranties made by the undersigned.

THE UNDERSIGNED HAS READ CAREFULLY AND UNDERSTANDS THE FOREGOING INDEMNIFICATION PROVISION AND ITS EFFECT.


	(INITIAL)		(INITIAL)

6. INVESTOR INFORMATION.

As custodian for
		(If Applicable)

As trustee of
		(If Applicable)

		Investor or Beneficial Owner:
		Name of Trust (if any):

		Address:

	Telephone	(Home)
		(Work)
		(FAX)

Social Security or Taxpayer I.D. No.:

Please indicate which of the following is accurate:

(a) My net worth is as follows (check which is applicable)

	o		(i) I have a net worth (exclusive of home, furnishings and automobiles) of $250,000 plus an annual gross income of $65,000; or
	o		(ii) I have a net worth (exclusive of my home, furnishings and automobiles) of $500,000; or
	o		(iii) I am a trustee or other fiduciary of a fiduciary account such as a pension or profit-sharing plan, Individual Retirement Account, or 401(k) plan (an “ERISA Plan”), and the suitability standards of (i) or (ii) above are met either by the ERISA Plan itself or by the plan participant who directly or indirectly supplies the funds for investment by such ERISA Plan.
	o		(iv) I am investing on behalf of a fiduciary account other than an ERISA Plan (such as a family trust or a custodial account for the benefit of a minor), and the suitability standards of (i) or (ii) above are met by either: (i) all beneficiaries of the account; or (ii) the trustee or custodian if that person is the donor of the funds for investment; or (iii) the donor of the funds for investment if the only beneficiaries of the fiduciary account are the donor’s ancestors, descendants or spouse.

(b) The amount of my investment in Units as set forth in this Agreement (check whichever is applicable):

	o		(i) does not exceed ten percent (10%) of my net worth (exclusive of my home, furnishings and automobile); or
	o		(ii) if I am a trustee or fiduciary of an ERISA Plan, the amount of the investment in Units does not exceed ten percent (10%) of the net worth of such ERISA Plan itself or of the plan participant who directly or indirectly supplies the funds for investment to such ERISA Plan.
	o		(iii) If I am investing on behalf of a fiduciary account other than an ERISA Plan (such as a family trust or a custodial account for the benefit of a minor), the amount of the investment in Units does not exceed ten percent (10%) of the net worth of any of the following: (i) all beneficiaries of the account; (ii) the trustee or custodian if that person is the donor of the funds for investment; or (iii) the donor of the funds for investment if the only beneficiaries of the fiduciary account are the donor’s ancestors, descendants or spouse.

Total Purchase Price ($1,000 per Unit; $5,000 minimum; $2,000 IRA minimum): $ _____________

Number of Units to be Purchased ($$$ divided by 1,000): _____________

[May be fractional. $35,124.41 would be 35.12441 shares]

Monthly Income to be*: COMPOUNDED ________ or DISTRIBUTED _______ * (An election to receive cash distributions may later be changed to an election to compound only if there is then in effect a permit issued by the California Commissioner of Corporations qualifying the offering. In addition, the Manager reserves the right to make cash distributions to previously compounding investors as described in the Offering Circular.)

Make check payable to “CMR Mortgage Fund II, LLC” and return with this Subscription Agreement to 62 First Street, Fourth Floor — San Francisco, CA 94105

IN WITNESS WHEREOF, the undersigned hereby agrees to become a Member in CMR Mortgage Fund II, LLC upon the terms and conditions set forth in the Operating Agreement.

Dated: , 2006


Signature of Investor or Beneficial Owner		Signature of Trustee, if any


Signature of Investor Spouse (if named in section 6)

[IF IRA OR ERISA PLAN, THEN BOTH TRUSTEE AND BENEFICIAL OWNER(S) MUST SIGN.]



Signature of Custodian, if applicable

As Custodian for ___________________ Under the California Uniform Transfers to Minors Act

ACCEPTANCE

The foregoing Subscription Agreement is hereby accepted by CMR Mortgage Fund II, LLC.

Dated: _________, 2006	CMR MORTGAGE FUND II, LLC, a California limited liability company

		By:	California Mortgage and Realty Inc., Manager

			By:

EX-10.1 5 a2180921zex-10_1.htm EXHIBIT 10.1

Exhibit 10.1

PROMISSORY NOTE

San Francisco, California		$25,000,000.00
May 26, 2006

For value received, the undersigned (“Borrower”) promises to pay to the order of CMR INCOME FUND, LLC, a Nevada limited liability company (together with any of its successors and assigns and/or any other holder of this Note, “Lender”) to the Cash Management Account, established pursuant to Section 2.6 of the Loan Agreement (as defined below), or at such other place as the Lender may designate from time to time in writing, in lawful money of the United States, the principal sum of TWENTY FIVE MILLION DOLLARS ($25,000,000.00), with interest at the rate, and with principal and interest due and payable without claim, notice, presentment or demand, all as set forth below.

1. Use of Proceeds. Lender, California Mortgage and Realty, Inc., a Delaware corporation and Wells Fargo Foothill, Inc., a California corporation (“Wells Fargo”) are parties to that certain Loan and Security Agreement, dated as of August 11, 2005 (“Original Loan Agreement”), whereunder Wells Fargo agreed to make certain extensions of credit from time to time to or for the account of Lender. Thereafter the Original Loan Agreement was amended pursuant to that certain First Amendment to Loan and Security Agreement of even date herewith (together with the original Loan Agreement the “Loan Agreement”), pursuant to which Wells Fargo has agreed to make an additional term loan of Twenty Five Million Dollars ($25,000,000) to Lender (the “Term Loan”) on the terms and conditions set forth in the Loan Agreement to enable the Lender to fund the advance being made to the Borrower pursuant to this Promissory Note. All of the loan proceeds payable to Borrower hereunder shall be used, together with additional funds provided by Borrower, to fund that certain Promissory Note, dated of even date herewith in the original principal amount of $48,000,000, executed by each of ***, payable to the order of Borrower (the “*** Note”), which *** Note is secured by a first lien in certain unimproved real property located in *** County and *** County, California (the “*** Property”), a second lien in certain real property located in *** County, California (the “*** Property”), and certain real property located in *** County, Arizona (the “*** Property”). All capitalized terms not otherwise defined herein shall have the meanings given in the Loan Agreement.

2. Interest and Maturity Date. The unpaid principal amount hereof shall bear interest at a per annum rate equal to the rate of interest payable by the Lender on the Term Loan as set forth in Section 17 of the Loan Agreement (i.e., the LIBOR Rate, plus six and one-half percent (6.5%)), and shall be payable in arrears, on the first day of each month, commencing July 1, 2006, through and until May 31, 2007 (the “Maturity Date”).

All in accordance with the obligations of the Lender for repayment of the Term Loan under Section 17 of the Loan Agreement.

*** INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

3. Security Interest. This Note is secured by a Pledge and Security Agreement of even date herewith (the “Pledge”), whereby Borrower has pledged to Lender all of Borrower’s right, title and interest in the *** Note including all liens on the *** Property, the *** Property and the *** Property now or hereinafter held by Borrower. Notwithstanding the foregoing and upon the occurrence of an Event of Default, Lender shall have full recourse against the assets of Borrower and shall not be limited to the remedies under the Pledge and Lender shall not be required first to exhaust Lender’s remedies under the Pledge before pursuing any remedies available to Lender under this Note, at law, or in equity.

4. Payment In Full Upon Maturity Date. On the Maturity Date, the entire unpaid principal balance and all accrued interest shall be due and payable.

5. Prepayments. Borrower may prepay all or any part of the principal balance at any time without charge or premium.

6. Application of Payments. All payments received, whether delivered directly to the Cash Management Account or to the Lender, shall be applied in this order: first, to amounts other than interest and principal, if any, owing under this Note or under the Term Loan under the Loan Agreement; second, to accrued interest; third, to principal; except that, after the occurrence and during the continuation of any Event of Default, all amounts received shall be applied in such order as Lender, in its sole discretion, may elect. Borrower waives the application of Sections 1479 and 2822(a) of the California Civil Code and any other statute or rule of law that would otherwise direct, or permit Borrower to direct, the order of application of payments made by Borrower or amounts otherwise received by Lender.

7. No Waiver By Acceptance of Overdue or Partial Payments. If Lender accepts payment of any overdue amount, or partial payment of an amount due and the remainder of such amount is unpaid, such acceptance shall in no event: (a) constitute a cure or waiver of Borrower’s default with respect to such overdue or unpaid amount; (b) prevent Lender from exercising any of its rights and remedies with respect to Borrower’s default; or (c) constitute a waiver of Lender’s right to require full and timely payment of amounts becoming due thereafter or to exercise any of Lender’s rights and remedies for any failure to so pay.

8. Default. Each of the following events (“Events of Default”) constitute defaults under this Note:

(a) a default in the payment of any amount due hereunder within any applicable cure period; and

(b) the occurrence of any “Event of Default” as defined in the Pledge securing this Note or evidencing the loan reflected hereby that remains uncured following any applicable notice and cure period.

9. Acceleration Upon Default. Upon the occurrence of an Event of Default, Lender may, at its election, declare the entire balance of principal and accrued interest immediately due

*** INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

and payable. A delay by Lender in exercising any right of acceleration after an Event of Default shall not constitute a waiver of the Event of Default or of the right of acceleration or any other right or remedy for such Event of Default. The failure by Lender to exercise any right of acceleration as a result of an Event of Default shall not constitute a waiver of the right of acceleration or any other right or remedy with respect to any other Event of Default, whenever occurring.

10. Default Interest Rate. Upon the occurrence and during the continuation of an Event of Default, the outstanding principal balance due hereunder shall bear interest at a per annum rate equal to four (4) percent above the per annum rate of interest otherwise applicable hereunder; provided; however that such default interest shall only be due to the extent such default interest is due and owing on the Term Loan as set forth in the Loan Agreement.

11. Enforcement Fees and Costs. Borrower shall immediately reimburse Lender for all fees and costs, including reasonable attorneys’ fees and actual experts’ fees and costs, incurred by Lender for: (a) enforcement of this Note or any of its terms, or the exercise of any rights or remedies hereunder and/or at law, in equity or otherwise, whether or not any action or proceeding is filed; (b) representation of Lender in any bankruptcy, insolvency, reorganization or other debtor-relief or similar proceeding of or relating to Borrower, to any person liable (by way of guaranty, assumption, endorsement or otherwise) upon any of the obligations of this Note; or (c) representation of Lender in any action or proceeding relating to any security for this Note, whether commenced by Lender or any other person, including foreclosure, receivership, lien or stop-notice enforcement, bankruptcy, eminent domain and probate actions or proceedings. All such fees and costs shall bear interest until paid at the rate applicable from time to time under this Note.

12. Waivers By Maker and Other Parties. The makers, endorsers, guarantors and sureties of this Note hereby waive diligence, demand, presentment, notice of non-payment, notice of dishonor, protest and notice of protest, agree that the time for performance of any obligation under this Note may be extended from time to time without notice, consent to the release without notice of any party liable hereon or herefor, consent to the addition without notice of parties liable hereon or herefor, and consent to the acceptance without notice of further security for this Note, including other types of security, all without in any way affecting their liability, and waive the right to plead any and all statutes of limitations as a defense to this Note, any guaranty hereof or any agreement to pay the obligations hereof, to the full extent permitted by law.

13. Time of the Essence. Time is of the essence with respect to the payment and performance of the obligations of this Note.

14. No Oral Waivers or Modifications. No provision of this Note may be waived or modified orally, but only in a writing signed by Lender.

15. Governing Law. This Note shall be governed by and construed under the internal laws of the State of California, without regard to conflict of law provisions.

16. Severability. Every provision of this Note is intended to be several. If any provision of this Note is determined by a court of competent jurisdiction to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall not affect the other provisions hereof, which shall remain binding and enforceable.

17. Limitation Upon Interest. All agreements between the Borrower and Lender, now existing or hereafter arising, are hereby expressly limited so that in no event whatsoever shall the amount paid or agreed to be paid to Lender hereof for the use, forbearance or detention of money to be loaned hereunder or otherwise, or for the performance or payment of any covenant or obligation contained herein, exceed the maximum amount permissible under applicable law. If from any circumstance whatsoever fulfillment of any provision hereof exceeds the limit of validity prescribed by law, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if from any such circumstance Lender hereof shall ever receive as interest under this Note or otherwise an amount that would exceed the highest lawful rate, such amount that would be excessive interest shall be applied to the reduction of the principal amount owing hereunder (without charge for prepayment) and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal, such excess shall be refunded to Borrower.

18. Headings. Headings herein are used for convenience of reference only and do not define or limit the scope of provisions of this Note.

19. Successors and Assigns. This Note binds Borrower and its successors, assigns, heirs, administrators and executors, and inures to the benefit of Lender and its successors, assigns, participants, heirs, administrators and executors.

[Signature Page Follows Immediately]

IN WITNESS WHEREOF, Borrower has caused this Promissory Note to be duly executed and delivered by its officer thereunto duly authorized as of the day and year first above written.

BORROWER:	CMR MORTGAGE FUND II, LLC,
	a California limited liability company,


	By		CALIFORNIA MORTGAGE AND REALITY,
			INC., a Delaware corporation,
			Its Manager,


	By	/s/ Craig Raymond
	Its	Senior Vice President

ALLONGE

(Promissory Note Endorsement)

Loan No.

This Allonge is affixed to that certain Promissory Note, dated May 26, 2006, in the original principal amount of $25,000,000.00, executed by CMR Mortgage Fund II, LLC, a California limited liability company, payable to the order of CMR Income Fund, LLC.

Pay to the order of: Wells Fargo Foothill, Inc.

Dated: May 26, 2006

	CMR Income Fund, LLC,
	a Nevada Limited Liability Company

By:	/s/ Henry Park
Name:		Henry Park
Title:		Manager

EX-10.2 6 a2180921zex-10_2.htm EXHIBIT 10.2

Exhibit 10.2

PLEDGE AND SECURITY AGREEMENT

THIS PLEDGE AND SECURITY AGREEMENT, dated as of May 26, 2006 (this “Agreement”), is made by CMR MORTGAGE FUND II, LLC, a California limited liability company (“Pledgor”), in favor of CMR INCOME FUND, LLC, a Nevada limited liability company (“CMR Income Fund”), and WELLS FARGO FOOTHILL, INC., a California corporation (“WFF”) (CMR Income Fund and WFF are referred to collectively as “Secured Party”).

RECITALS

A. Secured Party, California Mortgage and Realty, Inc., a Delaware corporation and WFF are parties to that certain Loan and Security Agreement, dated as of August 11, 2005 (“Original Loan Agreement”), whereby WFF agreed to make certain extensions of credit from time to time to or for the account of Secured Party.

B. Contemporaneously herewith, WFF is making an additional term loan of Twenty Five Million Dollars ($25,000,000) to Secured Party (the “Additional Advance”) on the terms and conditions set forth in a First Amendment to Loan Agreement of even date herewith to enable the Secured Party to fund a loan (the “Loan”) to Pledgor in the original principal amount of Twenty Five Million Dollars ($25,000,000.00), which Loan is evidenced by that certain Promissory Note dated as of even date herewith executed by Pledgor and payable to the order of Secured Party (together with all extensions, amendments, renewals, substitutions, consolidations or modifications thereof, the “Note”).

B. In connection with and as a condition to making the Additional Advance and the Loan, WFF and Secured Party have required Pledgor to execute and deliver this Agreement granting a security interest in the collateral described herein. Pledgor expects to derive substantial benefit from Secured Party’s making of the Loan and is willing to execute and deliver this Agreement and perform its respective obligations hereunder in order to induce Secured Party to make the Loan.

NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE 1

DEFINITIONS

1.1 Certain Terms. In addition to all of the other capitalized terms defined herein, the following terms shall the following meanings:

“Code” means the Uniform Commercial Code, as in effect form time to time in the State of California.

“Collateral” is defined in Section 2.1.

“Distributions” means any payments of interest, principal, late fees or other amounts received in connection with the Collateral.

“Event of Default” means (i) any default by Pledgor hereunder, or (ii) any default, not cured within any applicable grace period, with respect to any of the Obligations.

“Obligations” means (1) all principal, interest, fees and expenses owing with respect to the Note, (2) all principal, interest, fees and expenses owing with respect to the Additional Advance; in each case whether direct or indirect, absolute or contingent, liquidated or unliquidated, voluntary or involuntary, due or to become due, or whether or not jointly owed with others, or whether now existing or hereafter incurred.

“Proceeds” means all proceeds (as such term is defined in Section 9102(64) of the Code) with respect to the Collateral, and all proceeds of such proceeds, and, in any event, shall include all Distributions with respect thereto.

1.2 Code Definitions. Unless otherwise defined herein or the context otherwise requires, terms for which meanings are provided in the Code are used in this Agreement, including in its preamble and recitals, with such meanings.

ARTICLE 2

PLEDGE AND SECURITY AGREEMENT

2.1 Grant of Security Interest. As collateral security for the prompt and complete payment and performance of the Obligations when due, Pledgor hereby (i) pledges, transfers, hypothecates and assigns to Secured Party, and (ii) grants to Secured Party, a continuing first priority lien on and security interest in, all of Pledgor’s right, title, and interest in and to the following, whether now or hereafter existing or acquired (the “Collateral”):

(a) Promissory Note, dated as of May 25, 2006, in the original principal amount of Forty Eight Million Dollars ($48,000,000), executed by *** payable to the order of Pledgor (the “*** Note”), the Deeds of Trust (as defined in the *** Note), the Other Security Documents (as defined in the *** Note) and any and all other documents evidencing or securing the *** Note (collectively, the “Loan Documents”); and

(b) all Proceeds of any of the foregoing.

2.2 Delivery of Collateral. Pledgor shall deliver to Secured Party all notes, loan agreements, deeds of trusts, assignments of deeds of trust or other writings representing or evidencing any Collateral, which writings shall be in suitable form for

*** INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

transfer by delivery, and shall be accompanied by all necessary instruments of transfer or assignment, duly executed in blank, all in form and substance satisfactory to Secured Party.

2.3 Continuing Security Interest. This Agreement shall create a continuing security interest in the Collateral and shall:

(a) remain in full force and effect until each and every one of the Obligations has been fully and indefeasibly paid and performed in accordance with the terms of the applicable Loan Document(s),

(b) be binding upon Pledgor and its, successors, transferees, and assigns, and

(c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors and assigns.

Upon the full and indefeasible payment of the Obligations, the security interest granted herein shall terminate and all rights to the Collateral shall revert to Pledgor. Upon any such termination, Secured Party will, at Pledgor’s sole expense, deliver to Pledgor, without any representations, warranties or recourse of any kind whatsoever, all Collateral held by Secured Party hereunder, and execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES

Pledgor hereby represents and warrants, as of the date hereof, that:

3.1 Ownership, No Liens, etc. Pledgor is (or, in the case of after acquired Collateral, at the time Pledgor acquires rights therein, will be) the record legal and beneficial owner of, and has (or, in the case of after acquired Collateral, at the time Pledgor acquires rights therein, will have) good and marketable title to (and has full right and authority to pledge and assign) such Collateral, free and clear of all claims, liens, options and encumbrances of any kind, except for the security interests granted pursuant hereto in favor of Secured Party.

3.2 Valid Security Interest. This Agreement will be effective to create, as security for the Obligations, a valid security interest and grants to Secured Party a valid first priority security interest in such Collateral.

3.3 Enforceability, No Default, Approval, etc. The execution and delivery of this Agreement and the performance of Pledgor’s obligations hereunder will not conflict with or result in a breach of the terms or provisions of any existing law or existing rule, regulation or order of any court or governmental body binding on or affecting Pledgor, and this Agreement constitutes the valid and legally binding

obligations of Pledgor and is fully enforceable against Pledgor in accordance with its terms. Further, the execution, delivery and performance of this Agreement by Pledgor will not cause a violation of or a default under (y) any mortgage, lease or other agreement, oral or written, to which or Pledgor is a party or by which any of their respective assets are subject, or (z) any pending litigation, judgment, decree, arbitration award, governmental order, statute, rule or regulation to which or Pledgor is subject, nor will this Agreement cause a dissolution or other termination of or Pledgor. No approval by, authorization of, or filing with any federal, state or other governmental commission, agency or authority or any other person or entity is necessary in connection with the execution, delivery and performance by Pledgor of this Agreement or the other Loan Documents to which Pledgor is a party or to perfect the security interests granted herein.

3.4 No Setoff, etc. There are no setoffs, counterclaims or defenses with respect to the Collateral and no agreement, oral or written, has been made with any other person or party under which any deduction or discount may be claimed with respect to such Collateral and Pledgor does not know of any fact which would prohibit or prevent Pledgor assigning or granting a security interest in the Collateral.

3.5 Accuracy of Information. All information heretofore, herein or hereafter supplied to Secured Party by or on behalf of Pledgor with respect to the Collateral is true and correct.

ARTICLE 4

COVENANTS

4.1 Protect Collateral; Further Assurances, etc. Pledgor shall: (a) promptly furnish Secured Party with any information or documents which Secured Party may request concerning the Collateral; (b) promptly notify Secured Party of any material change in any fact or circumstances warranted or represented by Pledgor in this Agreement or in any other instrument furnished by Pledgor to Secured Party in connection with the Collateral or the Obligations; (c) promptly notify Secured Party of any claim, action or proceeding affecting title, or any other matter relating to the Collateral, or any part thereof, or the security interest created herein, and at Secured Party’s request, appear in and defend, at Pledgor’s expense, any such claim, action or proceeding; (d) promptly make such further assurances as may be reasonably necessary to establish proof of Pledgor’s title to the Collateral; (e) promptly furnish Secured Party with true copies of all notices of default sent or received by Pledgor with respect to any agreements relating to the Collateral; and (f) not, without Secured Party’s prior written consent, create any other security interest in, assign, pledge or otherwise encumber the Collateral or any part thereof, or permit any part of the Collateral to be or become subject to any lien, attachment, execution, sequestration, other legal or equitable process, or encumbrance of any kind or character other than the security interests created by this Agreement.

ARTICLE 5

SECURED PARTY

5.1 Secured Party Appointed Attorney-in-Fact. Pledgor hereby irrevocably appoints Secured Party as Pledgor’s attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time in Secured Party’s discretion after an Event of Default exists, to take any action and to execute any instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement including, without limitation:

(a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral;

(b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above;

(c) to file any claims or take any action or institute any proceedings which Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral;

(d) to perform the affirmative obligations of Pledgor hereunder (including all obligations of Pledgor pursuant to Section 4.1);

(e) to execute and deliver for and on behalf of Pledgor any and all instruments, documents, agreements, and other writings necessary or advisable for the exercise on behalf of Pledgor of any rights, benefits or options created or existing under or pursuant to the Collateral; and

(f) to execute endorsements, assignments or other instruments of conveyance and transfer.

Pledgor hereby acknowledges, consents, and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest, which power of attorney shall remain in full force and effect until this Agreement is terminated and the security interests created hereby are released in accordance with the terms hereof.

5.2 Secured Party May Perform. If Pledgor fails to perform any agreement contained herein, Secured Party may perform, or cause performance of, such agreement, and the expenses of such person incurred in connection therewith shall be payable by Pledgor pursuant to Section 6.4.

ARTICLE 6

REMEDIES

6.1 Certain Remedies. If any Event of Default exists:

(a) Secured Party may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Code (whether or not the Code applies to the affected Collateral) and also may, without notice except as specified below, sell the Collateral or any part thereof at one or more public or private sales, at any of Secured Party’s offices or elsewhere, and upon such other terms and in such manner as Secured Party may deem commercially reasonable. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days’ prior notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.

(b) Secured Party may:

(i) transfer all or any part of the Collateral into the name of Secured Party or its nominee,

(ii) endorse any checks, drafts, or other writings in Pledgor’s name to allow collection of the Collateral,

(iii) take control of any Proceeds of the Collateral, and

(iv) execute (in the name, place, and stead of Pledgor) endorsements, assignments, stock powers, and other instruments of conveyance or transfer with respect to all or any of the Collateral.

6.2 Compliance with Restrictions. Pledgor agrees that in any sale of any of the Collateral whenever any Event of Default exists, Secured Party is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of any law (including compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualifications, and restrict such prospective bidders and purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental authority, and Pledgor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall Secured Party be liable nor accountable to Pledgor for any discount allowed by reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. Pledgor further agrees that disposition of the Collateral pursuant to any private sale made as provided above may be at prices and on other terms less favorable that if the Collateral were sold at public sale, and that Secured Party has no obligation to delay the sale of any

Collateral for public sale under the Securities Act of 1933, as amended. If any consent, approval or authorization of any governmental authority shall be necessary to effectuate any sale or other disposition of the Collateral, or any part thereof, Pledgor will execute such applications and other instruments as may be required in connection with securing any such consent, approval or authorization, and will other-wise use its best efforts to secure the same

6.3 Application of Proceeds. All cash Proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral, after first deducting the costs and expenses of sale, including reasonable attorneys’ fees and costs and reasonable costs of Secured Party’s agents, to the payment of the Obligations in such order as Secured Party shall elect, in its sole discretion, it being understood that this Agreement shall remain in full force and effect and Secured Party shall retain all rights hereunder, until the date on which all of the Obligations have been indefeasibly satisfied in full, after deducting all such costs and expenses. If, after any sale of the Collateral pursuant to this Article VI, there shall be a balance remaining after the payment of all of the items described above, such balance shall be paid to persons or entities entitled by law to receive such balance to allocate among themselves, without any liability resulting therefrom on the part of Secured Party.

6.4 Indemnity and Expenses. Pledgor hereby indemnifies and holds harmless Secured Party from and against any and all claims, losses, liabilities, costs and expenses in any way relating to, arising out of or resulting from this Agreement or any documents contemplated hereby or transactions contemplated hereby or thereby (including, without limitation, any such claims, losses, liabilities, costs and expenses resulting from enforcement of this Agreement, Secured Party being the registered or record owner of the Collateral, any trading authorizations given to Pledgor and any service fees and commissions payable with respect to the Collateral). Upon demand, Pledgor will pay to Secured Party the amount of any and all expenses including reasonable attorneys’ fees and cost (whether in a bankruptcy proceeding, related to a suit or action or any reviews of or appeals from a judgment or decree therein or in connection with nonjudicial action), which Secured Party may incur in connection with:

(a) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral;

(b) the exercise or enforcement of any of the rights of Secured Party hereunder; or

6.5 Remedies Cumulative. All remedies of Secured Party hereunder are cumulative and are in addition to any other remedies provided for at law or in equity and may, to the extent permitted by law, be exercised concurrently or separately, and the exercise of any one remedy shall not be deemed an election of such remedy or to preclude the exercise of any other remedy. No failure on the part of Secured Party to

exercise and no delay in exercising any right, remedy, power or privilege hereunder shall operate as a waiver thereof or in any way modify or be deemed to modify the terms of this Agreement or of the obligations secured hereby, nor shall any single or partial exercise by Secured Party of any right, remedy, power or privilege preclude any other or further exercise of the same or any other right, remedy, power or privilege. Except as otherwise specifically required herein, notice of the exercise of any right, remedy, power or privilege granted to Secured Party by this Agreement is not required to be given. Secured Party may exercise any one or more of its rights, remedies, powers and privileges at its option without regard to the adequacy of its security.

ARTICLE 7

MISCELLANEOUS PROVISIONS

7.1 Notices. All notices, requests, demands and other communications which are required or may be given under this Agreement shall be in writing or by facsimile, signed by or on behalf of the party sending the notice, and delivered personally, by private messenger service, nationally recognized overnight courier (e.g., Federal Express, Airborne or Express Mail), or by United States mail, certified with return receipt requested. Notices shall be deemed served at the time of personal delivery, at the time of delivery by a private messenger service, or upon receipt or rejection when mailed as provided above, postage prepaid, addressed to the party to whom such notice is sent at its address set forth below:

	To Pledgor:	CMR MORTGAGE FUND II, LLC c/o California
		Mortgage and Realty, Inc. 62 First Street, Fourth
		Floor San Francisco, California 94105 Attention:
		Mr. David Choo Telephone: (415) 974-1100
		Facsimile: (415) 974-1143

	To Secured Party:	CMR INCOME FUND, LLC
		c/o Manager: Henry Park
		62 First Street, Fourth
		Floor San Francisco,
		California 94105
		Attention: Mr. David
		Choo Telephone: (415) 974-1100
		Facsimile:
		(415) 974-1143

7.2 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof.

7.3 Assignment. Secured Party may transfer or assign this Agreement and Secured Party’s rights hereunder, the Note and the other Loan Documents, in one or more transactions, without releasing Pledgor, or any portion of the Collateral and upon such assignment, negotiation or transfer, the assignee or holder shall be entitled to all the

rights, powers, privileges and remedies of Secured Party to the extent assigned or transferred. Pledgor may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Secured Party.

7.4 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California applicable to contracts made and wholly performed in the State of California without regard to conflicts or choice of laws rules.

7.5 Amendments. This Agreement may not be modified, amended or supplemented and any of the terms hereof may be waived only by a written instrument executed by all of the parties hereto.

7.6 Severability. All provisions of this Agreement shall be considered as separate terms and conditions, and in the event any one shall be held illegal, invalid or unenforceable, all the other provisions hereof shall remain in full force and effect as if the illegal, invalid or unenforceable provision were not a part hereof.

7.7 No Liability. Neither Secured Party nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of Pledgor or otherwise.

7.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument.

7.9 Pledgor’s Waivers.

(a) Rights of Secured Party. Pledgor authorizes Secured Party to perform any or all of the following acts at any time in its sole discretion, all without notice to Pledgor, without affecting Pledgor’s obligations under this Agreement or any other Loan Documents and without affecting the liens and encumbrances against the Collateral in favor of Secured Party:

(i) Secured Party may take and hold security for the Obligations, accept additional or substituted security, and subordinate, exchange, enforce, waive, release, compromise, fail to perfect and sell or otherwise dispose of any such security.

(ii) Secured Party may direct the order and manner of any sale of all or any part of any security now or later to be held for the Obligations, and Secured Party (or its nominees or designees) may also bid at any such sale.

(iii) Secured Party may apply any payments or recoveries from any borrower, Pledgor or any other source, and any proceeds of any security, to the obligations under the Loan Documents in such manner, order and priority as Secured

Party may elect.

(iv) Secured Party may release any borrower or any other person or entity of its liability for the Obligations or any part thereof.

(v) Secured Party may substitute, add or release any one or more guarantors or endorsers.

(b) Absolute Obligations. Pledgor expressly agrees that until all Obligations are paid and performed in full and each and every term, covenant and condition of this Agreement and each other Loan Document is fully performed, Pledgor shall not be released of its obligations, waivers and agreements set forth herein or in any other Loan Document, nor shall the validity, enforceability or priority of the liens and encumbrances against the Collateral in favor of Secured Party be affected in any manner by or because of:

(i) Any act or event which might otherwise discharge, reduce, limit or modify Pledgor’s obligations hereunder or under the other Loan Documents or the liens and encumbrances against the Collateral in favor of Secured Party;

(ii) Any waiver, extension, modification, forbearance, delay or other act or omission of Secured Party or any failure to proceed promptly or otherwise as against any borrower, Pledgor, or any other person or entity or any security;

(iii) Any action, omission or circumstance which might increase the likelihood that Secured Party might enforce the rights granted under this Agreement or under the other Loan Documents or which might affect the rights or remedies of Pledgor as against any borrower; or

(iv) Any dealings occurring at any time between any borrower and Secured Party, whether relating to the Obligations or otherwise.

Pledgor hereby expressly waives and surrenders any defense to the performance of the obligations under this Agreement and under all other Loan Documents or to the enforcement of the liens and encumbrances against the Collateral in favor of Secured Party based upon any of the foregoing acts, omissions, agreements, waivers or matters described in this subsection. It is the purpose and intent of this Agreement that the obligations of Pledgor under this Agreement and under all other Loan Documents shall be absolute and unconditional under any and all circumstances.

(i) Any constitutional or other right to a judicial hearing prior to the time Secured Party takes possession or disposes of the Collateral upon an Event of Default as provided herein;

(ii) All statutes of limitations as a defense to any action or proceeding brought against Pledgor or the Collateral by Secured Party, to the fullest extent permitted by law;

(iii) Any right it may have to require Secured Party to proceed against any Borrower or any other person or entity, proceed against or exhaust any security held from, any Borrower or any person or entity, or pursue any other remedy in Secured Party’s power to pursue;

(iv) Any defense: (A) based on any legal disability of any other person or entity, (B) based on any release, discharge, modification, impairment or limitation of the liability of any other person or entity to Secured Party from any cause, whether consented to by Secured Party or arising by operation of law, (C) arising out of or able to be asserted as a result of any case, action or proceeding before any court or other governmental authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of any other person or entity or any of their affiliates, or any general assignment for the benefit of creditors, composition, marshalling of assets for creditors or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; in each case as undertaken under any U.S. Federal or State law (each of the foregoing described in this clause (C) being referred to herein as an “Insolvency Proceeding”); or (D) arising from any rejection or disaffirmance of the Obligations, or any part thereof, or any security held therefor, in any such Insolvency Proceeding;

(v) Any defense based on any action taken or omitted by Secured Party in any Insolvency Proceeding involving any other person or entity, including any election to have Secured Party’s claim allowed as being secured, partially secured or unsecured, any extension of credit by Secured Party to any other person or entity in any Insolvency Proceeding, and the taking and holding by Secured Party of any security for any such extension of credit;

(vi) All presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, notices of intention to accelerate, notices of acceleration, notices of acceptance of this Agreement or any other Loan Document and of the existence, creation, or incurring of new or additional indebtedness, and demands and notices of every kind; and

(vii) Any defense based on or arising out of any defense that any Borrower or any of its respective affiliates may have to the payment or performance of the Obligations.

(d) Revival and Reinstatement. To the extent any borrower, Pledgor or any other person makes any payment to Secured Party in connection with the Obligations, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by Secured Party or paid over to a trustee, receiver or any other entity, whether under any bankruptcy act or otherwise (any

such payment is hereinafter referred to as a “Preferential Payment”), then this Agreement shall continue to be effective or shall be reinstated, as the case may be, and, to the extent of such payment or repayment by Secured Party, the Obligations or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made.

(e) Additional Obligations. Pledgor’s obligations under this Agreement are in addition to Pledgor’s obligations under any other existing or future agreements, each of which shall remain in full force and effect until it is expressly modified or released in a writing signed by Secured Party. Secured Party may exercise its remedies hereunder, without first proceeding against any Borrower, any other person or entity or any collateral that Secured Party may hold, and without pursuing any other remedy. Secured Party’s rights under this Agreement shall not be exhausted by any action by Secured Party until all Obligations have been paid and performed in full.

IN WITNESS WHEREOF, the parties hereto have caused this Pledge and Security Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the day and year first above written.

PLEDGOR:

CMR MORTGAGE FUND II, LLC,

a California limited liability company

By:

California Mortgage And Realty, Inc.,

a Delaware corporation, Manager

By:

/s/ Craig Raymond

Name:

Craig Raymond

Title:

Senior Vice President

SECURED PARTY:

CMR INCOME FUND, LLC, a

Nevada limited liability company

/s/ Henry Park

Name: Henry Park

Title: Manager

SECURED PARTY:

WELLS FARGO FOOTHILL, INC,

a California corporation, as Lender

By:

/s/ F.W. McCollum

Name:

F.W. McCollum

Title:

Vice President

EX-10.3 7 a2180921zex-10_3.htm EXHIBIT 10.3

Exhibit 10.3

SUB-SERVICING FEE AGREEMENT

This SUB-SERVICING FEE AGREEMENT (“Agreement”) is made as of September 22, 2006, by and between CMR Mortgage Fund II, LLC, a California limited liability company (“CMR Fund II”) and California Mortgage and Realty, Inc., a Delaware corporation (“CMR”).

R E C I T A L S

A. CMR Fund II has originated and funded a certain loan (the “Loan”) and pursuant to a Mortgage Loan Purchase and Sale Agreement (the “Purchase Agreement”), dated as of September 22, 2006, by and between CMR Fund II and ING USA Annuity and Life Insurance Company, an Iowa corporation (“ING”), CMR Fund II has sold the Loan and all of CMR Fund II’s interests under the promissory note evidencing the Loan (the “Note”) and all other documents, security agreements, instruments, certificates, and other agreements executed in contemplation of the Loan or that secure, further evidence, or describe the Loan (hereinafter, the “Security Documents”) to ING.

B. Pursuant to Section 7 of the Purchase Agreement, ING agreed to appoint Newmark Realty Capital, Inc. a California corporation (“Newmark”) to service the Loan and to cause Newmark to retain CMR as sub-servicer of the Loan, and CMR Fund II agreed to pay all required sub-servicing fees to CMR.

C. Article V of the Sub-Servicing Agreement, dated as of Septmber 19, 2006, between Newmark and CMR (the “Sub-Servicing Agreement”) provides that CMR agrees to seek and accept any sub-servicing compensation relating to the Loan from CMR Fund II, out of the proceeds of any contingent payment of loan proceeds payable to CMR on behalf of CMR Fund II pursuant to the Purchase Agreement.

A G R E E M E N T

Therefore, in consideration of the premises, mutual covenants, and other good and valuable consideration provided for in this Agreement, the sufficiency of which is hereby acknowledged, the parties agree as follows:

1. As compensation for CMR’s sub-servicing services under the Sub-Servicing Agreement, CMR Fund II shall pay CMR a monthly sub-servicing fee (“Fee”) equal to two percent (2%) per annum (i.e., one-sixth (1/6) of one percent (0.16666%) monthly) of the total unpaid principal balance of the Loan, payable only as Contingent Payments are received by CMR Fund II under the Purchase Agreement.

2. CMR shall be required to pay all expenses, if any, incurred by it in connection with its servicing activities under the Sub-Servicing Agreement and shall be entitled to reimbursement therefore, if any, as specifically provided for under the Sub-Servicing Agreement.

3. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument.

4. This Agreement shall be governed by, construed and enforceable in accordance with the laws of the State of California.

5. This Agreement shall inure to the benefit of parties and their successors and assigns.

In Witness Whereof, the undersigned parties have executed and delivered this Agreement as of the date first set forth above.

CMR Fund II:	CMR Mortgage Fund II, LLC,
	a California limited liability company

	By:	California Mortgage and Realty, Inc.,
		a Delaware corporation
		Its:Manager

			By:		/s/ Craig Raymond
			Craig Raymond, Senior Vice President


CMR:	California Mortgage and Realty, Inc.,
	a Delaware corporation

	By:			/s/ Craig Raymond
			Craig Raymond, Senior Vice President

EX-10.4 8 a2180921zex-10_4.htm EXHIBIT 10.4

Exhibit 10.4

PROMISSORY NOTE

(Commercial)

$5,400,000.00

December 29, 2006

Loan # 06-075

FOR VALUE RECEIVED, the undersigned,

California Mortgage and Realty, Inc. (collectively “Maker”),

whose address for purposes of this Promissory Note (this “Note”) is

62 1st Street, Fourth Floor, San Francisco California (the State of California is referred to as the “State”),

PROMISES TO PAY to the order of

CMR Mortgage Fund II, LLC, a CFL Licensed Lender, as to undivided 100% interest (collectively “Holder”),

at 62 1st Street, Fourth Floor, San Francisco California 94105, or such other place as the Holder may specify, the principal sum of Five Million Four hundred Thousand Dollars and Zero Cents ($5,400,000.00), together with interest thereon from the Date of Disbursement (as defined below) at the rate of Twelve and Fifty Hundredth Percent (12.50%) per annum (the “Contract Rate”), to be paid in lawful money of the United States of America as follows:

a. Interest from the Date of Disbursement through the end of the month shall be due and payable on the Date of Disbursement; and,

b. The payments on this Note shall be as follows:

Number of Payments	Amount of Payment		Date Series Commences “Date of Commencement”
35	$	56,250.00	February 01, 2007
1	$	5,456,250.00	January 01, 2010

The day of the month on which payments are due is called the “Installment Payment Date.” The last day in the last series above is called the “Date of Maturity.” Each installment payment shall be applied first to accrued interest and then to principal.

1. The “Date of Disbursement” for purposes of this Note shall mean the day upon which a closing agent disburses the majority of the principal amount of this Note.

2. A “Loan Month” for purposes of this Note shall mean each successive calendar month of the term of this Note, beginning with the month in which the Date of Commencement falls.

3. If any installment of principal and/or interest not be paid within Ten (10) Days after the due date (“Grace Period Expiration Date”, Maker shall also pay to Holder a late charge of 10%) of such installment. THE

LATE CHARGE SHALL BE PAID WITHOUT PREJUDICE TO THE RIGHT OF THE HOLDER TO COLLECT ANY OTHER AMOUNTS PROVIDED TO BE PAID OR TO DECLARE A DEFAULT UNDER THIS NOTE OR THE DEED OF TRUST (AS DEFINED BELOW). THE LATE CHARGE SHALL BE PAYABLE NOT LATER THAN THE DUE DATE OF THE NEXT PAYMENT AND SHALL BE SECURED BY THE DEED OF TRUST AND OTHER SECURITY DOCUMENTS (AS DEFINED BELOW). MAKER RECOGNIZES THAT ITS DEFAULT IN MAKING ANY PAYMENT AS AGREED TO BE PAID WHEN DUE, OR THE OCCURRENCE OF ANY OTHER EVENT OF DEFAULT UNDER THE DEED OF TRUST OR ANY OTHER SECURITY DOCUMENT, WILL REQUIRE HOLDER TO INCUR ADDITIONAL EXPENSE IN SERVICING AND ADMINISTERING THE LOAN, IN LOSS TO HOLDER OF THE USE OF THE MONEY DUE AND IN FRUSTRATION TO HOLDER IN MEETING ITS OTHER FINANCIAL AND LOAN COMMITMENTS AND THAT THE DAMAGES CAUSED THEREBY WOULD BE EXTREMELY DIFFICULT AND IMPRACTICAL TO ASCERTAIN. MAKER AGREES (A) THAT AN AMOUNT EQUAL TO THE LATE CHARGE PLUS THE ACCRUAL OF INTEREST AT THE DEFAULT RATE IS A REASONABLE ESTIMATE OF THE DAMAGE TO HOLDER CAUSED BY A LATE PAYMENT, AND (B) THAT THE ACCRUAL OF INTEREST AT THE DEFAULT RATE FOLLOWING ANY OTHER EVENT OF DEFAULT IS A REASONABLE ESTIMATE OF THE DAMAGE TO HOLDER CAUSED BY ANOTHER EVENT OF DEFAULT, REGARDLESS OF WHETHER THERE HAS BEEN AN ACCELERATION OF THE DEBT. NOTHING IN THIS NOTE SHALL BE CONSTRUED AS AN OBLIGATION ON THE PART OF HOLDER TO ACCEPT, AT ANY TIME, LESS THAN THE FULL AMOUNT THEN DUE, OR AS A WAIVER OR LIMITATION OF HOLDER’S RIGHT TO COMPEL PROMPT PERFORMANCE.

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4. [NO] If the box preceding this sentence contains the word “yes,” Holder has no obligation to accept tendered full or partial prepayments of any portion of the principal balance outstanding hereunder until 0 after the Date of Disbursement (the “Lock Period”).

[NO] If the box preceding this sentence contains the word “yes,” in the event of a Prepayment after the Lock Period, Maker shall, as a condition to the Holder’s acceptance of the Prepayment, pay to Holder a prepayment premium (the “Prepayment Premium”) equal to (0) months’ interest on that portion of the unpaid balance of this Note prepaid.

Maker shall have no right to prepay, and the Holder shall have no obligation to accept tendered full or partial prepayments of any portion of the principal balance outstanding hereunder (a “Prepayment”) unless and until prepayment is made on an Installment Payment Date, with not less than thirty (30) days’ prior written notice to Holder, and pays any Prepayment Premium called for in the previous paragraph. Any amounts to he prepaid as specified in said notice shall become due and payable at the time provided in said notice, and said notice shall not relieve the Maker from making any payment due prior to or, in the event of a partial Prepayment, after, the time specified in said notice. Prepayments shall be credited to installments of principal in the inverse order of their maturity.

5. If an Event of Default occurs and the Holder accelerates payment of the indebtedness, the Holder shall suffer damages and opportunity costs which are now difficult or impossible to ascertain. Therefore, if that occurs, Maker shall pay to the Holder, as liquidated damages and not as a penalty, and in addition to the entire balance of principal and accrued interest and all other sums then due under this Note, the Deed of Trust and the Other Security Documents, an amount equal to the Prepayment Premium computed as if the entire unpaid balance of this Note were prepaid on the date of default.

The Maker waives all rights under California Civil Code Section 2954.10 which provides, in part, as follows:

AN OBLIGEE WHICH ACCELERATES THE MATURITY DATE OF THE PRINCIPAL AND ACCRUED INTEREST, PURSUANT TO CONTRACT, ON ANY LOAN SECURED BY A MORTGAGE OR DEED OF TRUST ON REAL PROPERTY UPON THE CONVEYANCE OF ANY RIGHT, TITLE, OR INTEREST IN THAT PROPERTY, MAY NOT CLAIM, EXACT, OR COLLECT ANY CHARGE, FEE, OR PENALTY FOR ANY PREPAYMENT RESULTING FROM THAT ACCELERATION.

The Maker understands and acknowledges that the Holder bargained for this waiver as part of the consideration that induced the Holder to enter into this transaction. The Maker initials this paragraph for the purpose of evidencing its understanding of Civil Code Section 2954.10 recited in part above and the Maker’s agreement to the waiver of its terms.

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6. This Note is secured, without limitation), by that certain Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement (the “Deed of Trust”) of the same date given by Maker to California Mortgage and Realty, Inc., as Trustee, for the benefit of Holder, on certain real estate and personal property (the “Trust Property”) and the Other Security Documents (as defined in the Deed of Trust, referred to as the “Other Security Documents”). This Promissory Note is the Note referred to in, and is entitled to the benefits of, the Deed of Trust and the Other Security Documents. Among the provisions of the Deed of Trust is the following paragraph 12:

12. Transfer or Encumbrances of the Trust Property. Trustor acknowledges that Beneficiary has examined both the creditworthiness of Trustor and Trustor’s experience in owning and operating properties such as the Trust Property in determining whether or not to make the Loan, that Beneficiary has relied on Trustor’s creditworthiness and experience in deciding to make the Loan, and that Beneficiary will continue to rely on Trustor’s ownership of the Trust Property as a means of maintaining the value of the Trust Property as security for repayment of the Debt. Trustor acknowledges that Beneficiary has a valid interest in maintaining the value of the Trust Property so as to ensure that, if Trustor defaults in the repayment of the Debt, Beneficiary can recover the Debt by a sale of the Trust Property. If Trustor shall, without the prior written consent of Beneficiary, further encumber the Trust Property with any lien imposed in connection with any other financing, or sell, transfer or convey any part of the Trust Property or the right to manage or control the operation of any part of the Trust Property, the entire Debt shall become due, at the option of Beneficiary. A sale, transfer or conveyance within the meaning of this Paragraph shall be deemed to include (i) an installment sales agreement in which Trustor agrees to sell any part of the Trust Property for a price to be paid in installments; (ii) an agreement by Trustor leasing all or a substantial part of the Trust Property, or a sale, pledge, assignment or other transfer of, or the grant of a security interest in, Trustor’s tight, title and interest in any Leases or any Rents; (iii) if Trustor is a corporation or a limited partnership with a corporate general partner, the transfer of stock of the Trustor or its corporate general partner to parties who do not now hold a controlling interest; (iv) if Trustor is a general or limited partnership, joint venture, or other form of partnership (a “Partnership”), a transfer of any general partnership interest or the admission of any new general partner; and (v) if Trustor is a limited liability company or a limited partnership with a limited liability company as general partner, the transfer of membership interests in the Trustor or its limited liability company general partner (or the stock or membership interests in any corporation or limited liability company controlling Trustor or its limited liability company general partner) or the creation or issuance of new memberships in Trustor or its limited liability company general partner to parties who do not now own a controlling interest. Beneficiary reserves the right to condition its consent upon a modification of the terms of this Deed of Trust and the Note and on assumption of this Deed of Trust as so modified, by the proposed transferee, payment of a transfer or assumption fee, or such other conditions as Beneficiary shall determine in its sole discretion to be in the interest of Beneficiary. Beneficiary shall not be required to demonstrate any actual impairment of its security or any increased risk of

default in order to declare the Debt immediately due and payable upon Trustor’s sale, transfer, conveyance or further encumbrance of the Trust Property without Beneficiary’s consent. This provision shall apply to every sale, transfer, conveyance, or further encumbrance of the Trust Property regardless of whether voluntary or not or whether or not Beneficiary has consented to any previous sale, transfer, conveyance, or further encumbrance of the Trust Property.

7. Maker shall be in default under this Note (referred to as an “Event of Default”) and the whole sum of principal and interest shall become due and payable at the option of the Holder without notice or demand, upon: (i) the nonpayment, by the Grace Period Expiration Date of any installment of principal and/or interest, or any other monetary obligation under this Note, the Deed of Trust or the Other Security Documents; or (ii) any other Event of Default under the Deed of Trust or the Other Security Documents.

8. If an Event of Default occurs, this Note shall thereafter bear interest at the rate of the lesser of (i) the Maximum Rate (as hereinafter defined) or (ii) 18 percent % per annum (which lesser rate is referred to as the “Default Rate”) from the date of the Event of Default until cured. In the event Maker fails to pay, in full, all outstanding principal, interest and other sums due under the terms of this Note, on or before the maturity date as set forth herein, Borrower shall pay to Holder as liquidated damages the additional sum of 10% of the total outstanding balance due as of such maturity date.

9. Additional Advances: The Holder shall be entitled to advance such further sums as necessary, in the Holder’s sole discretion, to cure any default(s) on any senior lien(s) including property tax liens. Any sum or sums so advanced shall be considered additional advances under this Note and the Deed of Trust by which this Note is secured and shall bear interest at the Default Rate set forth above from the date of the advance(s) until paid by the Borrower. Further, Maker shall pay to Holder as liquidated damages an additional fee equal to ten percent (10.00%) of any sum(s) advanced hereon for services rendered in connection with such advance(s).

10. Liquidated Damages: Maker agrees that the actual damages to Holder, in the event of a default by Maker and/or failure by Maker to pay upon maturity, would be extremely difficult or impracticable to determine because they involve such factors, among others, as the need of Holder to make decisions, undertake risks, and take action; and the impact on business relations between Holder and its members and/or investors. Therefore, by signing below, Maker acknowledges that the above charges have been agreed upon as a reasonable estimate of such damages.

INITIAL:

11. Acceptance by Holder of any payment for less than what is due shall be deemed an acceptance on account only, and the failure to pay the entire amount then due before the Grace Period Expiration Date, shall be and continue to be an Event of Default under this Note. The rights or remedies of the Holder, as provided in this Note, the Deed of Trust or any of the Other Security Documents, or as provided at law or in equity shall be cumulative and concurrent, and may be pursued singly, jointly or successively against the Trust Property, Leases, Rents (as defined in the Deed of Trust) or any other funds, property or security held by Holder for the payment or performance thereof, or against the Maker or otherwise, at the sole discretion of the Holder. The failure to exercise any such right or remedy shall not be construed as a waiver or release of any rights or remedies or of the right to exercise them at any later time.

12. Maker and all endorsers, guarantors, sureties, accommodation parties hereof, and all other persons liable or to become liable for all or any part of the indebtedness under this Note, the Deed of Trust, and the Other Security Documents, waive all applicable exemption rights, whether under the laws of the State, homestead laws, or otherwise, and also waive valuation and appraisement, diligence, presentment, protest and demand, and also notice of protest, of demand, of nonpayment, of dishonor, of acceleration, of intention to accelerate and of maturity. All endorsers,

guarantors, sureties, and accommodation parties hereby consent to any and all renewals, extensions or modifications of the terms hereof, including time for payment. Any such renewals, extensions or modifications may be made without notice to any of said parties.

13. Maker and all endorsers, guarantors, sureties, accommodation parties hereof and all other persons liable or to become liable for all or any part of this indebtedness agree to pay all costs of collection, including reasonable attorneys’ fees and all costs of suit, if this Note is not paid when due, or if it is necessary to protect the security for this Note or to commence foreclosure proceedings under the Deed of Trust or any of the Other Security Documents, or if Holder is made a party to any litigation because of this Note, the Deed of Trust or any of the Other Security Documents, whether or not suit is filed, and whether through courts of original jurisdiction, as well as in courts of appellate jurisdiction, or through a bankruptcy court or other legal proceedings. Such costs of collection shall include attorneys fees and costs in all aspects of bankruptcy proceedings affecting the security for this Note or performance hereunder, including plan objection proceedings, objections to discharge, claim objection proceedings, preference actions, relief from stay litigation, motions to dismiss, convert or appoint a trustee, case monitoring and serving on a creditor’s committee.

14. This Note shall not be amended, modified or changed, nor shall any waiver of any of its provision be effective unless accomplished by an instrument in writing signed by the party against whom enforcement of any amendment, modification, change or waiver is sought.

15. Maker acknowledges that this Note and the loan it evidences was made by a licensed California Finance Lender or licensed California Real Estate Broker or it was arranged by a licensed California Real Estate Broker and that the broker’s participation was a material factor in the consummation of this transaction. However, none of the terms and provisions contained in this Note, the Deed of Trust, or any of the Other Security Documents, shall ever be construed to create a contract for the use, forbearance or detention of money requiring payment of interest at a rate in excess of the Maximum Rate. The Maker or other party now or later liable for the payment of this Note shall never be required to pay interest on this Note at a rate in excess of the Maximum Rate, and the provisions of this paragraph shall control over all other provisions and of any other instrument executed in connection herewith this loan transaction. If Holder collects monies which are deemed to be interest in excess of the Maximum Rate, all excess sums shall be applied against the unpaid principal balance and not to the payment of interest; and if a surplus remains after full payment of principal and lawful interest, the surplus shall be refunded to the Maker in cash and the Maker hereby agrees to accept such refund. As used in this Note, the term “Maximum Rate” means the maximum rate (or, if the context so permits or requires, an amount calculated at such rate) of interest which, at the time in question would not cause the interest charged on the indebtedness evidenced by this Note, the Deed of Trust, or any of the Other Security Documents at such time to exceed the maximum amount which Holder would be allowed to contract for, charge, take, reserve or receive under the laws of the State or any other applicable law after taking into account, to the extent required by the laws of the State or any other applicable law, all relevant payments or charges under this Note, the Deed of Trust, and the Other Security Documents.

16. Whenever used herein, the words “Maker” and “Holder” shall be deemed to include their respective successors and assigns. In the event Maker is comprised of more than one individual or entity, each such individual or entity shall be jointly and severally liable under this Note.

17. Time is of the essence of this Note.

18. Any notice, demand, statement, request, or consent made under this Note shall be in writing and shall be deemed given when hand-delivered or within Three (3) Days after the date sent by certified mail, return receipt requested, or the next business day after the date sent by nationally recognized overnight mail or courier service to the address, as

set forth above, of the party to whom such notice is to be given, or to such other address as Maker or Holder, as the case may be, shall in like manner designated in writing.

19. The singular number shall include the plural, and the plural the singular, and any gender shall be substituted for any other gender, where appropriate.

20. This Note is to be governed by and construed in accordance with the laws of the State, without giving effect to the conflicts of law provisions thereof. Whenever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Note. Maker consents to the jurisdiction of the state and federal courts in the State for any actions involving the enforcement or interpretation of this Note, Deed of Trust and the transaction they evidence.

MAKER HEREBY WAIVES TRIAL BY JURY IN ANY SUIT INVOLVING THE HOLDER OR ANY ARRANGER OF THIS LOAN AS WELL AS ANY CLAIM FOR PUNITIVE DAMAGES.

21. THIS NOTE, THE DEED OF TRUST, THE ENVIRONMENTAL iNDEMnity, ANY GUARANTY AND THE OTHER SECURITY DOCUMENTS COLLECTIVELY REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN OR AMONG THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OR AMONG THE PARTIES.

22. This Note is made by Maker pursuant to that certain Assignment of Membership Interest and Claims between Maker and Holder dated December 29, 2006.

IN WITNESS WHEREOF, the undersigned has executed and delivered this Note effective as of the date first above written.

California Mortgage and Realty, Inc.

BY:	/s/ Henry Park
California Mortgage and Realty, Inc.
Henry Park, Vice President

EX-10.5 9 a2180921zex-10_5.htm EXHIBIT 10.5

Exhibit 10.5

Loan # 06-075

GENERAL GUARANTY AND INDEMNITY AGREEMENT

THIS GENERAL GUARANTY AND INDEMNITY AGREEMENT (“Guaranty”), is made effective as of December 29, 2006, by the following persons in his or her individual capacities, whose addresses for purposes of this Guaranty are:

Guarantor Name		Guarantor Address
David Choo		62 1st Street, Fourth Floor, San Francisco California

(which persons are hereinafter individually and collectively referred to as the “Guarantor”) TO AND IN FAVOR OF CMR Mortgage Fund II, LLC, a California limited liability company and licensed California Finance Lender, as to an undivided 100% interest (the “Lender”), whose address for purposes of this Agreement is 62 1st Street, Fourth Floor, San Francisco California 94105.

PRELIMINARY STATEMENT. As of the date of this Guaranty, the Lender has loaned to California Mortgage and Realty, Inc. (“Borrower”) the principal sum of $5,400,000.00 (the “Loan”), which loan is evidenced by that certain Promissory Note of Borrower of even date herewith in the amount of the Loan, bearing interest at the rate per annum as specified therein (the note and all renewals, modifications and extensions of it are collectively referred to as the “Note”). The Note is secured, without limitation, by that certain Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement to and in favor of California Mortgage and Realty, Inc., as Trustee, for the benefit of Lender (the “Deed of Trust”), on certain real estate and personal property described therein (collectively, the “Mortgaged Property”) and the Other Security Documents (as defined in the Deed of Trust). The Note, the Deed of Trust, the Other Security Documents and that certain Environmental Certificate and Indemnity Agreement dated as of the date hereof, made by Borrower and Henry Park in favor of the Lender (the “Environmental Indemnity) shall herein be collectively referred to as the “Loan Documents”. The Guarantor will financially and otherwise benefit from the making of the Loan by the Lender to the Borrower. It is a condition precedent to the making of the Loan by the Lender that the Guarantor shall have executed and delivered this Guaranty.

NOW, THEREFORE, in consideration of the premises and in order to induce the Lender to make the Loan, the Guarantor hereby agrees as follows:

1. Indemnification. The Guarantor hereby agrees, at its sole cost and expense, up to a maximum amount of Two Million Dollars ($2,000,000) to unconditionally indemnify, defend, and hold the Lender and its directors, officers, employees and agents harmless from and against any loss, liability, damage (whether direct or consequential), expenses, claims, penalties, fines, injunctions, suits, proceedings, disbursements or expenses (including, without limitation, attorneys’ and experts’ fees and disbursements and court costs), in connection with, or in any manner related or pertaining to, or as a result of the existence of any or all of the following:

(a) Rents, tenant security or other deposits, insurance proceeds or condemnation awards which are not held, applied or paid over to the Lender in accordance with the terms of the Deed of Trust or the Other Security Documents;

(b) Damages suffered by the Lender as a result of fraud or material misrepresentation by or on behalf of the Borrower in connection with the making or the servicing of the Loan;

(c) Any diminution in value of the Mortgaged Property as a result of waste or willful damage to the Mortgaged Property caused or suffered by Borrower;

(d) Real estate taxes, assessments, ground rents or other impositions required to be paid by Borrower by the terms of the Loan Documents;

(e) Premiums for policies of insurance required to be maintained under the terms of the Deed of Trust, and any loss, liability or damage suffered by the Lender as a result of the non-payment of such premiums;

(f) Indebtedness, obligations or liabilities of Borrower under the Environmental Indemnity Provisions (as defined in the Deed of Trust) or Borrower under the Environmental Indemnity;

(g) Court costs, attorneys’ fees and expenses and other direct expenses of the Lender incurred in connection with a default by Borrower in the payment or performance required under this Note, the Deed of Trust, the Environmental Indemnity or the Other Security Documents prior to foreclosure or deed in lieu of foreclosure by the Lender.

2. Guaranty. The Guarantor hereby agrees to guarantee the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Borrower’s indebtedness, obligations and liabilities to the Lender under the Loan Documents or arising by operation of law, individually and collectively sometimes referred to as the “Obligations.” The Guarantor absolutely, unconditionally and unequivocally guarantees the payment and performance of the Obligations strictly in accordance with the terms of the Note, the Deed of Trust, this Guaranty and the other Loan Documents, regardless of any law, regulation or order now or later in effect in any jurisdiction affecting any of such terms or the rights of the Lender. Notwithstanding the foregoing, the Guarantor’s guarantee of the Obligations shall be limited to a maximum amount of Two Million Dollars ($2,000,000).

3. Rights of the Lender. Guarantor authorizes the Lender to perform any of the following acts at any time in its sole discretion, all without notice to Guarantor and without affecting Guarantor’s obligations under this Guaranty:

(a) The Lender may alter any terms of the Loan or any part of it, including renewing, compromising, extending or accelerating, or otherwise changing the time for payment of, or increasing or decreasing the rate of interest on, the Loan or any part of it.

(b) The Lender may take and hold security for the Loan or this Guaranty, accept additional or substituted security for either, and subordinate, exchange, enforce, waive, release, compromise, fail to perfect and sell or otherwise dispose of any such security.

(c) The Lender may direct the order and manner of any sale of all or any part of any security now or later to be held for the Loan or this Guaranty, and the Lender may also bid at any such sale.

(d) The Lender may apply any payments or recoveries from Borrower, Guarantor or any other source, and any proceeds of any security, to Borrower’s obligations under the Loan Documents in such manner, order and priority as the Lender may elect, whether or not those obligations are guarantied by this Guaranty or secured at the time of the application.

(e) The Lender may release Borrower of its liability for the Loan or any part of it.

(f) The Lender may substitute, add or release any one or more guarantors or endorsers.

(g) In addition to the Loan, the Lender may extend other credit to Borrower, and may take and hold security for the credit so extended, all without affecting Guarantor’s liability under this Guaranty.

4. Guaranty to be Absolute. Guarantor expressly agrees that until the Obligations are paid and performed in full (or until the obligations of Guarantor under this Guaranty are fully performed) and each and every term, covenant and condition of this Guaranty is fully performed, Guarantor shall not be released by or because of:

(a) Any act or event that might otherwise discharge, reduce, limit or modify Guarantor’s obligations under this Guaranty;

(b) Any waiver, extension, modification, forbearance, delay or other act or omission of the Lender, or its failure to proceed promptly or otherwise as against Borrower, Guarantor or any security;

(c) Any action, omission or circumstance which might increase the likelihood that Guarantor may be called upon to perform under this Guaranty or which might affect the rights or remedies of Guarantor as against Borrower;

(d) Any dealings occurring at any time between Borrower and the Lender, whether relating to the Loan or otherwise;

(e) Any lack of validity or enforceability of the Note, the Deed of Trust or any other Loan Document or any other agreement or instrument relating thereto;

(f) Any action of the Lender described in Paragraph 3 above; or

(g) Any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Borrower, or Guarantor.

Guarantor hereby acknowledges that absent this Paragraph 4, Guarantor might have a defense to the enforcement of this Guaranty as a result of one or more of the foregoing acts, omissions, agreements, waivers or matters. Guarantor hereby expressly waives and surrenders any defense to any liability under this Guaranty based upon any of such acts, omissions, agreements, waivers or matters. It is the express intent of Guarantor that Guarantor’s obligations under this Guaranty are and shall be absolute, unconditional and irrevocable.

5. Guarantor’s Waivers. Guarantor waives:

(a) All statutes of limitations as a defense to any action or proceeding brought against Guarantor by the Lender, to the fullest extent permitted by law;

(b) Any right it may have to require the Lender to proceed against Borrower, proceed against or exhaust any security held from Borrower, or pursue any other remedy in the Lender’s power to pursue;

(d) Any defense based on: (i) any legal disability of Borrower, (ii) any release, discharge, modification, impairment or limitation of the liability of Borrower to the Lender from any cause, whether consented to by the Lender or arising by operation of law or from any bankruptcy or other voluntary or involuntary proceeding, in or out of court, for the adjustment of debtor-creditor relationships (hereinafter, an “Insolvency Proceeding”) and (iii) any rejection or disaffirmance of the Loan, or any part of it, or any security held for it, in any such Insolvency Proceeding;

(e) Any defense based on any action taken or omitted by the Lender in any Insolvency Proceeding involving Borrower, including any election to have the Lender’s claim allowed as being secured, partially secured or unsecured, any extension of credit by the Lender to Borrower in any Insolvency Proceeding, and the taking and holding by the Lender of any security for any such extension of credit;

(f) All promptness, diligence, presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, notices of acceptance of this Guaranty and of the existence, creation, or incurring of new or additional indebtedness, and demands and notices of every kind;

(g) Any defense based on or arising out of any defense that Borrower may have to the payment or performance of the Loan or any part of it; and

(h) Any defense based on or arising out of any action of the Lender described in Paragraphs 3 or 4 above.

6. Waivers of Subrogation and Other Rights and Defenses.

(a) Upon a default by Borrower, the Lender in its sole discretion, without prior notice to or consent of Guarantor, may elect to: (i) foreclose either judicially or nonjudicially against any real or personal property security it may hold for the Loan, (ii) accept a transfer of any such security in lieu of foreclosure, (iii) compromise or adjust the Loan or any part of it or make any other accommodation with Borrower or Guarantor, or (iv) exercise any other remedy against Borrower or any security. No such action by the Lender shall release or limit the liability of Guarantor, who shall remain liable under this Guaranty after the action, even if the effect of the action is to deprive Guarantor of any subrogation rights, rights of indemnity, or other rights to collect reimbursement from Borrower for any sums paid to the Lender, whether contractual or arising by operation of law or otherwise. Guarantor expressly agrees that under no circumstances shall it be deemed to have any right, title, interest or claim in or to any real or personal property to be held by the Lender or any third party after any foreclosure or transfer in lieu of foreclosure of any security for the Loan.

(b) Regardless of whether Guarantor may have made any payments to the Lender, Guarantor hereby waives: (i) all rights of subrogation, indemnification, contribution, and any other rights to collect reimbursement from Borrower or any other party for any sums paid to the Lender, whether contractual or arising by operation of law (including the United States Bankruptcy Code or any successor or similar statute) or otherwise, (ii) all rights to enforce any remedy that the Lender may have against Borrower, and (iii) all rights to participate in any security now or later to be held by the Lender for the Loan. The waivers given in this subsection 6(b) shall be effective until the Loan has been paid and performed in full.

(c) Guarantor understands and acknowledges that if the Lender forecloses judicially or nonjudicially against any real property security for the Loan, that foreclosure could impair or destroy any ability that Guarantor may have to seek reimbursement, contribution or indemnification from Borrower or others based on any right Guarantor may have of subrogation, reimbursement, contribution or indemnification for any amounts paid by Guarantor under this Guaranty. Guarantor further understands and acknowledges that in the absence of this Paragraph 6, such potential impairment or destruction of Guarantor’s rights, if any, may entitle Guarantor to assert a defense to this Guaranty based on Section 580d of the California Code of Civil Procedure as interpreted in Union Bank v. Gradsky, 265 Cal.App.2d 40 (1968). By executing this Guaranty, Guarantor freely, irrevocably and unconditionally: i) waives and relinquishes that defense and agrees that Guarantor will be fully liable under this Guaranty even though the Lender may foreclose judicially or nonjudicially against any real property security for the Loan; ii) agrees that Guarantor will not assert that defense in any action or proceeding which the Lender may commence to enforce this Guaranty; iii) acknowledges and agrees that the rights and defenses waived by Guarantor under this Guaranty include any right or defense that Guarantor may have or be entitled to assert based upon or arising out of any one or more of Sections 580a, 580b, 580d or 726 of the California Code of Civil Procedure or Section 2848 of the California Civil Code; and iv) acknowledges and agrees that the Lender is relying on this waiver in making the Loan, and that this waiver is a material part of the consideration which the Lender is receiving for making the Loan.

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(d) Guarantor waives any rights and defenses that are or may become available to Guarantor by reason of Sections 2787 to 2855, inclusive, and Sections 2899 and 3433, of the California Civil Code.

INITIALS:___________

(e) Guarantor waives all rights and defenses that Guarantor may have because Borrower’s Loan is secured by real property. This means, among other things:

(i) The Lender may collect from Guarantor without first foreclosing on any real or personal property collateral pledged by Borrower.

(ii) If the Lender forecloses on any real property collateral pledged by Borrower:

(A) The amount of the Loan may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price.

(B) The Lender may collect from Guarantor even if the Lender, by foreclosing on the real property collateral, has destroyed any right Guarantor may have to collect from Borrower.

This subsection 6(e) is an unconditional and irrevocable waiver of any rights and defenses Guarantor may have because Borrower’s Loan is secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure.

INITIALS:___________

(f) Guarantor waives any right or defense it may have at law or equity, including California Code of Civil Procedure Section 580a, to a fair market value hearing or action to determine a deficiency judgment after a foreclosure.

INITIALS:___________

(g) No provision or waiver in this Guaranty shall be construed as limiting the generality of any other provision or waiver contained in this Guaranty.

7. Revival and Reinstatement. If the Lender is required to pay, return or restore to Borrower or any other person any amounts previously paid on the Loan because of any Insolvency Proceeding of Borrower, any stop notice or any other reason, the obligations of Guarantor shall be reinstated and revived and the rights of the Lender shall continue with regard to such amounts, all as though they had never been paid.

8. Information Regarding Borrower and the Property. Before signing this Guaranty, Guarantor investigated the financial condition and business operations of Borrower, the present and former condition, uses and ownership of the Property, and such other matters as Guarantor deemed appropriate to assure itself of Borrower’s ability to discharge its obligations under the Loan Documents. Guarantor assumes full responsibility for that due diligence, as well as for keeping informed of all matters that may affect Borrower’s ability to pay and perform its obligations to the Lender. The Lender has no duty to disclose to Guarantor any information which the Lender may have or receive about Borrower’s financial condition or business operations, the condition or uses of the Property, or any other circumstances bearing on Borrower’s ability to perform.

9. Subordination. Any rights of Guarantor, whether now existing or later arising, to receive payment on account of any indebtedness (including interest) owed to it by Borrower or any subsequent owner of the Property, or to withdraw capital invested by it in Borrower, or to receive distributions from Borrower, shall at all times be subordinate as to lien and time of payment and in all other respects to the earlier of either the full and prior repayment to the Lender of the Loan or full performance of Guarantor of its obligations under this Guaranty. Guarantor shall not be entitled to enforce or receive payment of any sums hereby subordinated and any such sums received in violation of this Guaranty shall be received by Guarantor in trust for the Lender.

10. Guarantor’s Representations and Warranties. Guarantor represents and warrants that:

(a) All financial statements and other financial information furnished or to be furnished to the Lender are or will be true and correct and do or will fairly represent the financial condition of Guarantor (including all contingent liabilities);

(b) All financial statements were or will be prepared in accordance with generally accepted accounting principles, or such other accounting principles as may be acceptable to the Lender at the time of their preparation, consistently applied; and

(c) There has been no material adverse change in the business condition (financial or otherwise), operations, properties or prospects of Guarantor since the dates of the statements most recently furnished to the Lender.

11. Events of Default. the Lender may declare Guarantor to be in default under this Guaranty upon the occurrence of any of the following events (“Events of Default”):

(a) Guarantor fails to perform any of its obligations under this Guaranty; or

(b) Guarantor revokes this Guaranty or this Guaranty becomes ineffective for any reason; or

(c) Any representation or warranty made or given by Guarantor to the Lender proves to be false or misleading in any material respect; or

(d) Guarantor becomes insolvent or the subject of any Insolvency Proceeding; or

(e) Guarantor (or any one of them) dies, and Borrower fails to, within sixty (60) days after such death, to provide the Lender with a replacement guarantor or guarantors acceptable to the Lender in the Lender’s reasonable discretion; or

(f) Guarantor dissolves or liquidates, or any of these events happens to any of Guarantor’s general partners, or Guarantor’s trustor if Guarantor is a trust; or

(g) Guarantor’s managing general partner or manager, if any as the case may be, ceases for any reason to act in that capacity, or if Guarantor is a trust, the trust is revoked or materially modified; or

(h) Any material adverse change occurs, or is reasonably likely to occur, in Guarantor’s business condition (financial or otherwise), operations, properties or prospects, or ability to perform under this Guaranty.

12. Authorization; No Violation. Guarantor is authorized to execute, deliver and perform under this Guaranty, which is a valid and binding obligation of Guarantor. No provision or obligation of Guarantor contained in this Guaranty violates any applicable law, regulation or ordinance, or any order or ruling of any court or governmental agency. No such provision or obligation conflicts with, or constitutes a breach or default under, any agreement to which Guarantor is a party. No consent, approval or authorization of or notice to any person or entity is required in connection with Guarantor’s execution of and obligations under this Guaranty.

13. Additional and Independent Obligations. Guarantor’s obligations under this Guaranty are in addition to its obligations under any other existing or future guaranties, each of which shall remain in full force and effect until it is expressly modified or released in a writing signed by the Lender. Guarantor’s obligations under this Guaranty are independent of those of Borrower on the Loan. The Lender may bring a separate action, or commence a separate reference or arbitration proceeding against Guarantor without first proceeding against Borrower, any other person or any security that the Lender may hold, and without pursuing any other remedy. The Lender’s rights under this Guaranty shall not be exhausted by any action by the Lender until the Loan has been paid and performed in full.

14. No Waiver; Consents; Cumulative Remedies. Each waiver by the Lender must be in writing, and no waiver shall be construed as a continuing waiver. No waiver shall be implied from the Lender’s delay in exercising or failure to exercise any right or remedy against Borrower, Guarantor or any security. Consent by the Lender to any act or

omission by Borrower or Guarantor shall not be construed as a consent to any other or subsequent act or omission, or as a waiver of the requirement for the Lender’s consent to be obtained in any future or other instance. All remedies of the Lender against Borrower and Guarantor are cumulative.

15. No Release. Guarantor shall not be released from its obligations under this Guaranty except by a writing signed by the Lender.

16. Heirs, Successors and Assigns; Participations. The terms of this Guaranty shall bind and benefit the heirs, legal representatives, successors and assigns of the Lender and Guarantor; provided, however, that Guarantor may not assign this Guaranty, or assign or delegate any of its rights or obligations under this Guaranty, without the prior written consent of the Lender in each instance. The Lender in its sole discretion may sell or assign participations or other interests in the Loan and this Guaranty, in whole or in part, all without notice to or the consent of Guarantor and without affecting Guarantor’s obligations under this Guaranty. Also without notice to or the consent of Guarantor, the Lender may disclose any and all information in its possession concerning Guarantor, this Guaranty and any security for this Guaranty to any actual or prospective purchaser of any securities issued or to be issued by the Lender, and to any actual or prospective purchaser or assignee of any participation or other interest in the Loan and this Guaranty.

17. Notices. Any notice, demand, statement, request, or consent made hereunder shall be in writing and shall be deemed given when hand delivered or within three (3) days of the date sent by certified mail, return receipt requested, or the next business day after the date sent by nationally recognized overnight mail or courier service to the address, as set forth above, of the party to whom such notice is to be given, or to such other address as Guarantor or the Lender, as the case may be, shall in like manner designate in writing.

18. Rules of Construction. In this Guaranty, the word “Borrower” includes both the named Borrower and any other person who at any time assumes or otherwise becomes primarily liable for all or any part of the obligations of the named Borrower on the Loan. The word “person” includes any individual, company, trust or other legal entity of any kind. If this Guaranty is executed by more than one person, the word “Guarantor” includes all such persons. The word “include(s)” means “include(s), without limitation,” and the word “including” means “including, but not limited to.” When the context and construction so require, all words used in the singular shall be deemed to have been used in the plural and vice versa. No listing of specific instances, items or matters in any way limits the scope or generality of any language of this Guaranty. All headings appearing in this Guaranty are for convenience only and shall be disregarded in construing this Guaranty.

19. Governing Law. This Guaranty shall be governed by, and construed in accordance with, the laws of the State of California, without giving effect to the conflict of laws provisions thereof.

20. Costs and Expenses. If any lawsuit, reference or arbitration is commenced which arises out of, or which relates to this Guaranty, the Loan Documents or the Loan, the prevailing party shall be entitled to recover from each other party such sums as the court, referee or arbitrator may adjudge to be reasonable attorneys’ fees (including allocated costs for services of in-house counsel) in the action or proceeding, in addition to costs and expenses otherwise allowed by law. In all other situations, including any Insolvency Proceeding, Guarantor agrees to pay all of the Lender’s costs and expenses, including attorneys’ fees (including allocated costs for services of the Lender’s in-house counsel) which may be incurred in any effort to collect or enforce the Loan or any part of it or any term of this Guaranty. From the time(s) incurred until paid in full to the Lender, all sums shall bear interest at the Default Rate, as defined in the Note.

21. Consideration. Guarantor acknowledges that it expects to benefit from the Lender’s extension of the Loan to Borrower because of its relationship to Borrower, and that it is executing this Guaranty in consideration of that anticipated benefit.

22. Continuing Guaranty. This Guaranty is a continuing Guaranty and shall:

(a) Remain in full force and effect until payment in full of the Debt and the Obligations and all other amounts payable under this Guaranty;

(b) Be binding upon the Guarantor, his heirs, legal representatives, successors and assigns; and

All of the indebtedness, liabilities and obligations of the Borrower to the Lender shall be conclusively presumed to have been created in reliance on this Guaranty.

23. Integration; Modifications. This Guaranty (a) integrates all the terms and conditions mentioned in or incidental to this Guaranty, (b) supersedes all oral negotiations and prior writings with respect to its subject matter, and (c) is intended by Guarantor and the Lender as the final expression of the agreement with respect to the terms and conditions set forth in this Guaranty and as the complete and exclusive statement of the terms agreed to by Guarantor and the Lender. No representation, understanding, promise or condition shall be enforceable against any party hereto unless it is contained in this Guaranty. This Guaranty may not be modified except in a writing signed by both the Lender and Guarantor. No course of prior dealing, usage of trade, parol or extrinsic evidence of any nature shall be used to supplement, modify or vary any of the terms hereof.

24. Credit Verification. Each legal entity and individual obligated on this Guaranty, whether as a Guarantor, a general partner of a Guarantor or in any other capacity, hereby authorizes the Lender to check any credit references, verify his/her employment and obtain credit reports from credit reporting agencies of the Lender’s choice in connection with any monitoring, collection or future transaction concerning the Loan, including any modification, extension or renewal of the Loan. Also in connection with any such monitoring, collection or future transaction, the Lender is hereby authorized to check credit references, verify employment and obtain a third party credit report for the spouse of any married person obligated on this Guaranty, if such person lives in a community property state.

25. Obligations Joint and Several. If Guarantor consists of more than one individual or entity, the indebtedness, liabilities, and obligations under this Guaranty shall be joint and several. The Obligations of the Guarantor under this Guaranty and those of any other guarantor who may have guaranteed or who later guarantees all or any portion of the Obligations, are and will be joint and several. The Lender may release or settle with one or more Guarantor or any other guarantor at any time without affecting the continuing liability of the remaining individual or entity comprising the Guarantor.

26. Right of Setoff. Upon the occurrence and during the continuance of any Event of Default, the Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lender to or for the credit or the account of the Guarantor against any and all of the obligations of the Guarantor now or hereafter existing under this Guaranty, irrespective of whether or not the Lender shall have made any demand under this Guaranty and although such deposits, indebtedness or obligations may be unmatured or contingent. The rights of the Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Lender may have.

27. Consent to Jurisdiction.

(a) THE GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE FEDERAL DISTRICT AND THE SUPERIOR COURT IN AND FOR THE STATE OF CALIFORNIA, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY, AND THE GUARANTOR HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COURTS. THE GUARANTOR HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT GUARANTOR MAY EFFECTIVELY DO SO, THE DEFENSE OF ANY INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING. THE GUARANTOR IRREVOCABLY CONSENTS TO THE SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE GUARANTOR TO GUARANTOR’S ADDRESSES SET FORTH ABOVE BY REGISTERED MAIL, RETURN RECEIPT REQUESTED, AND DEPOSITED IN THE U.S. MAILS. THE GUARANTOR AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.

(b) Nothing in this Section shall affect the right of the Lender to serve legal process in any other manner permitted by law or affect the right of the Lender to bring any action or proceeding against the Guarantor or his property in the courts of any other jurisdictions.

28. Miscellaneous. The death or legal incapacity of any Guarantor shall not terminate the obligations of such Guarantor or any other Guarantor under this Guaranty, including its obligations with regard to future advances under the Loan Documents. The illegality or unenforceability of one or more provisions of this Guaranty shall not affect any other provision. Any Guarantor who is married agrees that the Lender may look to all of his or her community property and separate property to satisfy his or her obligations under this Guaranty. This Guaranty and any attached consents or exhibits requiring signatures may be executed in counterparts, and all counterparts shall constitute but one and the same document. Time is of the essence in the performance of this Guaranty by Guarantor.

29. Counsel: Guarantor acknowledges that Guarantor has had adequate opportunity to carefully read this Guaranty and to consult with an attorney of Guarantor’s choice prior to signing it.

30. Waiver of Jury Trial. THE GUARANTOR HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS GUARANTY.

IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed and delivered as of the date first above written.

	/s/ H. David Choo
	David Choo, in an individual capacity

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