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[X]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Delaware
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26-3541068
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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900 Veterans Blvd., Suite 500, Redwood City, CA
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94063-1743
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(Address of principal executive offices)
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(Zip Code)
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Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act:
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None
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
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Smaller reporting company [X]
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Part I – Item 1 – Business
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Part III – Item 11 – Executive Compensation
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Part III – Item 13 – Certain Relationships and Related Transactions, and Director Independence
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Part I
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Page No.
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Item 1
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– Business
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4
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Item 1A
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– Risk Factors
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10
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Item 1B
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– Unresolved Staff Comments (Not applicable)
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31
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Item 2
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– Properties (Not included as company owns no properties)
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31
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Item 3
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– Legal Proceedings
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31
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Item 4
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– Mine Safety Disclosures
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31
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Part II
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Item 5
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– Market for the Registrant’s Units, Related Unitholder Matters and
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Issuer Purchases of Equity Securities
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32
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Item 6
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– Selected Financial Data (Not included as smaller reporting company)
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33
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Item 7
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– Management’s Discussion and Analysis of Financial Condition and Results of Operations
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33
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Item 7A
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– Quantitative and Qualitative Disclosures About Market Risk (Not included as smaller reporting company)
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39
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Item 8
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– Consolidated Financial Statements and Supplementary Data
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39
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Item 9
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– Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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61
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Item 9A
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– Controls and Procedures
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61
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Item 9B
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– Other Information
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61
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Part III
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Item 10
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– Directors, Executive Officers and Corporate Governance
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61
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Item 11
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– Executive Compensation
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63
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Item 12
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– Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters
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64
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Item 13
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– Certain Relationships and Related Transactions, and Director Independence
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64
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Item 14
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– Principal Accountant Fees and Services
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64
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Part IV
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Item 15
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– Exhibits and Financial Statement Schedules
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65
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Signatures
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67
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Certifications
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69
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Proceeds from investors in applicant status at December 31, 2012 (later accepted by the managers): $14,916,267
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Proceeds under our distribution reinvestment plan from electing members: $636,405
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Proceeds from premiums paid by RMC: $128,464(1)
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Total proceeds from units sold from October 5, 2009, through December 31, 2012: $15,681,136
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(1)
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If a member acquired units through an unsolicited sale, the member’s capital account will be credited with the capital contribution plus the amount of the sales commissions, if any, paid by Redwood Mortgage Corp. that are specially allocated to the member.
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Yield a high rate of return from mortgage lending;
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Preserve and protect our capital; and
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Generate and distribute cash flow from operations/investments to members.
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Secured by deeds of trust on real property located in California;
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Having monthly payments of interest only or principal and interest at fixed rates, calculated on a 30-year amortization basis;
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Having maturities of 5 years or less, not to exceed 15 years.
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real estate settlement procedures;
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fair lending;
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truth in lending;
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compliance with federal and state disclosure requirements;
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the establishment of maximum interest rates, finance charges and other charges;
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loan servicing procedures;
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secured transactions and foreclosure proceedings; and
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privacy regulations providing for the use and safeguarding of non-public personal financial information of borrowers.
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Real Estate Settlement Procedures Act (RESPA). RESPA primarily regulates settlement procedures for real estate purchase and refinance transactions on residential (1-4 unit) properties. It governs lenders’ ability to require the use of specified third party providers for various settlement services, such as appraisal or escrow services. RESPA also governs the format of the good faith estimate of loan transaction charges and the HUD-1 escrow settlement statement.
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Truth in Lending Act. This federal act was enacted in 1968 for the purpose of regulating consumer financing and is implemented by the Consumer Financial Protection Bureau (CFPB). For real estate lenders, this act requires, among other things, advance disclosure of certain loan terms, calculation of the costs of the loan as demonstrated through an annual percentage rate (APR), and provides for the right of a consumer in a refinance transaction on their primary residence to rescind their loan within three days following signing.
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Home Ownership and Equity Protection Act (HOEPA) and California Covered Loan Law. HOEPA was passed in 1994 to provide additional disclosures for certain closed-end home mortgages with interest rates and fees in excess of certain percentage or amount thresholds. These regulations primarily focus on additional disclosure with respect to the terms of the loan to the borrower, the timing of such disclosures, and the prohibition of certain loan terms, including balloon payments and negative amortization. The Consumer Financial Protection Bureau (CFPB) has recently issued additional rules which will a) lower the interest rate and fees thresholds, causing more loans to be ‘covered’ under the regulation, b) expand the prohibitions against certain loan terms, including prepayment penalties, and c) require that all borrowers of HOEPA loans first obtain home ownership counseling by a HUD-approved counselor. These changes will become effective in January, 2014. The failure to comply with the regulations will render the loan rescindable for up to three years. Lenders can also be held liable for attorneys’ fees, finance charges and fees paid by the borrower and certain other money damages. Similarly in California, Assembly Bill 489, which was signed into law in 2001 and became effective as of July 1, 2002, as Financial Code Section 4970, et. seq., provides for state regulation of “high cost” residential mortgage and consumer loans secured by liens on real property, which are equal to or less than the Fannie Mae/Freddie Mac conforming loan limits, with interest rates and fees exceeding a certain percentage or amount threshold. The law prohibits certain lending practices with respect to high cost loans, including the making of a loan without regard to the borrower’s ability to repay the debt. When making such loans, lenders must provide borrowers with a consumer disclosure, and provide for an additional rescission period prior to closing the loan.
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Mortgage Disclosure Improvement Act. Enacted in 2008, this act amended the Truth in Lending Act regulating the timing and delivery of loan disclosures for all mortgage loan transactions governed under RESPA.
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Home Mortgage Disclosure Act. This act was enacted to provide for public access to statistical information on a lenders’ loan activity. It requires lenders to disclose certain information about the mortgage loans it originates and acquires, such as the race and gender of its customers, the disposition of mortgage applications, income levels and interest rate (i.e. annual percentage rate) information.
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Red Flags Rule. The Red Flags Rule, which became effective on August 1, 2009, requires lenders and creditors to implement an identity theft prevention program to identify and respond to loan applications in which the misuse of a consumer’s personal identification may be suspected.
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Graham-Leach-Bliley Act. This act requires all businesses that have access to consumers’ personal identification information to implement a plan providing for security measures to protect that information. As part of this program, we provide applicants and borrowers with a copy of our privacy policy.
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Dodd-Frank Act. The act enhanced regulatory requirements on banking entities and other organizations considered significant to U.S. financial markets. The act also provides for reform of the asset-backed securitization market. We do not expect these particular regulatory changes will have a material direct effect on our business or operations. The act imposes significant new regulatory restrictions on the origination and servicing of residential mortgage loans, under sections concerning “Mortgage Reform and Anti-Predatory Lending.” For example, these provisions require when a consumer loan is made, the lender must make a reasonable and good faith determination, based on verified and documented information concerning the consumer’s financial situation, whether the consumer has a reasonable ability to repay a residential mortgage loan before extending the loan. The act calls for regulations prohibiting a creditor from extending credit to a consumer secured by a high-cost mortgage without first receiving certification from an independent counselor approved by a government agency. The act also adds new provisions prohibiting balloon payments for defined high cost mortgages. The Act also established the CFPB, giving it regulatory authority over most federal consumer lending laws, including those relating to residential mortgage lending.
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Homeowner’s Bill of Rights. Effective January 1, 2013, the state of California mandated specific loan servicing rules on all servicers of consumer loans secured by single family 1-4 owner occupied residential first mortgages. There are two categories of servicers defined in the law, small servicers which conducted 175 or fewer foreclosures in the preceding calendar year, and large servicers whose foreclosure volume exceeds the threshold. Among the requirements of the law are, establishment of a single point of contact for borrowers to resolve loan servicing issues and to request loan modifications, pre-foreclosure notice and disclosure requirements, a prohibition against ‘dual tracking’ in which the servicer proceeds with a foreclosure while simultaneously considering a loan modification, and a requirement that foreclosure notices be reviewed, complete and accurate (no ‘robo-signing’). This law provides for a private right of action by borrowers against their lenders, which could result in lengthy and costly delays in processing home loan foreclosures in the state.
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Federal Loan Servicing Regulations. The CFPB has recently released final rules for servicing consumer loans on single family 1-4 residential properties. These rules will become effective in January, 2014. Among the key restrictions are a) timing form and content of periodic billing statements and adjustable rate mortgage notices, b) notice and timing requirements for forced-place insurance, c) single point of contact requirements, and d) loss mitigation requirements. Small servicers, defined as those servicing 5,000 or fewer mortgages, are exempt from much of the regulation.
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Proposed Amendments to the U.S. Bankruptcy Code. Since 2008, proposed legislation has been introduced before the U.S. Congress for the purpose of amending Chapter 13 in order to permit bankruptcy judges to modify certain terms in certain mortgages in bankruptcy proceedings, a practice commonly known as cramdown. Presently, Chapter 13 does not permit bankruptcy judges to modify mortgages of bankrupt borrowers. While the breadth and scope of the terms of the proposed amendments to Chapter 13 differ greatly, some commentators have suggested that such legislation could have the effect of increasing mortgage borrowing costs and thereby reducing the demand for mortgages throughout the industry. It is too early to tell when or if any of the proposed amendments to Chapter 13 may be enacted as proposed and what effect any such enacted amendments to Chapter 13 would have on the mortgage industry. Some local and state governmental authorities have taken, and others are contemplating taking, regulatory action to require increased loss mitigation outreach for borrowers, including the imposition of waiting periods prior to the filing of notices of default and the completion of foreclosure sales and, in some cases, moratoriums on foreclosures altogether.
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Consumer Financial Protection Bureau’s QM Rule and Proposed QRM Rule. Under the Dodd-Frank Act, the CFPB is charged with writing rules to implement two new underwriting standards, Qualified Mortgages (QM) and Qualified Residential Mortgages (QRM). Although these two regulations affect different areas of consumer finance, they have similar definitions under Dodd-Frank, and their implementation will most likely have a similar effect within the mortgage lending industry. Under Dodd-Frank, securitizers will be required to retain a 5% interest in any securities they issue, unless 100% of the securities in the offering meet the Qualified Residential Mortgage standard. The Qualified Mortgage will provide a safe harbor to lenders in meeting the “ability to pay” requirements in Dodd-Frank. If a residential loan is underwritten under the new QM guidelines, it will be presumed to be in compliance. To limit their liability, most institutional lenders will only be interested in writing loans that fall within the QM and QRM standards. If the rules are written with very narrow standards, it could have the possible effect of constricting the availability of credit to real property. It is anticipated that the QRM rule will be issued in the fall of 2013. The QM rule has been issued by the CFPB, and will become effective in January, 2014.
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If We Are Unable to Raise Substantial Funds, We Will Be Limited in the Number and Type of Properties We May Finance
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The ongoing offering of units to raise capital is being made on a “best efforts” basis, which means the broker-dealers participating in the offering are only required to use their best efforts to sell our units and have no firm commitment or obligation to purchase any of the units. As a result, we cannot assure you that any specific amount of gross proceeds will be raised beyond amounts previously raised. The maximum amount of this offering, at $1 per unit, is up to 150,000,000 units in the primary offering and up to 37,500,000 units in the distribution reinvestment plan. To the extent we sell less than such maximum amount and thus have less proceeds, we will originate and acquire fewer loans resulting in less diversification in terms of the number of properties financed, the geographic regions in which such properties are located and the types of properties securing the mortgages in which we invest. In such event, the likelihood of our profitability being affected by the performance of any one of our investments will increase. Your investment in our units will be subject to greater risk to the extent that we lack a diversified portfolio of mortgage assets. In addition, our fixed operating expenses, as a percentage of gross income, would be higher, and our financial condition and ability to pay distributions could be adversely affected if we are unable to raise substantial funds.
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Suitable Mortgage Loans May Not Be Available From Time to Time, Which Could Reduce Your Return on Investment
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Our managers receive referrals from a variety of sources, but will only arrange loans that satisfy our investment criteria. The ability to find suitable loans is more difficult when the economy is weaker and there is less activity in the real estate market. For example, currently the residential and commercial real estate markets in the San Francisco Bay Area are recovering from a significant downturn in investment and purchase activity in the market and less demand for mortgage loans. From time to time a similar decline in demand for loans may occur, and we may be unable to find a sufficient number of suitable loans which could leave us with excess cash. In such event, we will make short term, interim investments in government obligations, certificates of deposit, money market or other liquid asset accounts, with the offering proceeds pending investment in suitable loans. Interest returns on these investments are usually lower than on mortgage loans, which would reduce our profits and the yield to members.
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Loan Defaults and Foreclosures May Adversely Affect Us
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We are engaged in the business of lending and, as such, we are subject to the risk that borrowers may be unable to repay the loans we have made to them in accordance with the terms of the loan agreement. Most loans will be interest only or interest with small periodic repayments of principal. This means:
· The loans are structured to provide for relatively small monthly payments, typically interest only, with a large “balloon” payment of principal due at the end of the term. Many borrowers are unable to
repay such loans at maturity out of their own funds and are compelled to refinance or sell their property.
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· Defaults and foreclosures may increase if the economy weakens or if interest rates increase, which may make it more difficult for borrowers to refinance their loans at maturity or sell their property.
· If a borrower is unable to repay the loan and defaults, we may be forced to acquire the property at a foreclosure sale. If we cannot quickly sell or refinance such property, and the property does not
produce income in excess of expenses, our profitability will be adversely affected.
· Recently enacted borrower protection laws, both Federal and in California, impose additional notice and disclosure requirements on lenders which may slow or limit a lender’s ability to exercise
remedies against residential real property collateral (principally one to four family properties), including rights to sell the property in a foreclosure sale and certain rights of tenants residing in the
properties. We are aware of other proposed federal and state legislation under consideration which, if enacted, may significantly limit a lender’s ability to exercise remedies against residential real
property collateral following a borrower’s default in the performance of its loan obligations.
In addition, any litigation instituted by a defaulting borrower or the operation of the federal bankruptcy laws may have the effect of delaying enforcement of the lien of a defaulted loan and may in certain circumstances reduce the amount realizable from sale of a foreclosed property. A “lien” is a charge against the property of which the holder may cause the property to be sold and use the proceeds in satisfaction of the lien. In the event our right to foreclose is contested, the legal proceedings necessary to resolve the issue can be time-consuming. A judicial foreclosure may be subject to most of the delays and expenses of other litigation, sometimes requiring up to several years to complete.
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Our Entry Into Workout Agreements with Delinquent Borrowers Could Lead to a Loss of Revenue
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We may periodically enter into workout agreements with borrowers who are past maturity or delinquent in their regular payments. Typically, a workout agreement allows the borrower to extend the maturity date of the balloon payment and/or allows the borrower to make current monthly payments while deferring for periods of time, past due payments, and allows time to pay the loan in full. In the event we enter into workout agreements, we may experience a loss of revenue, which could adversely affect our profitability and the returns to our members.
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We Must Rely on Appraisals Which May Not
Be Accurate or May Be Affected by Subsequent Events
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We will rely on appraisals prepared by unrelated third parties to determine the fair market value of real property used to secure our loans. We rely on such appraisals for, among other matters, determining our loan-to-value ratios. In the case of a loan made in connection with a pending property purchase, an appraisal may, for various reasons, reflect a higher or lower value than the purchase amount; we will nevertheless base our loan-to-value ratios on the appraised value, rather than on such purchase amount. We cannot guarantee that such appraisals will, in any or all cases, be accurate or that the appraisals will reflect the actual amount buyers will pay for the property. If an appraisal is not accurate, our loan would not be as secure as we anticipated. In the event of foreclosure, we may not be able to recover our entire investment. Additionally, since an appraisal fixes the value of real property at a given point in time, subsequent events could adversely affect the value of the real property used to secure a loan. For example, if the value of the property declines to a value below the amount of the loan, the loan could become under-collateralized. This would result in a risk of loss for us if the borrower defaults on the loan.
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Our Emphasis on the Collateral Value of the Real Estate Securing our Loans May Increase the Risk of Loan Defaults and Foreclosures
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The cash flow and the income generated by the real property that is to secure the loan are factors affecting our decision to make a particular loan, as are the general creditworthiness, experience and reputation of the borrower. For loans secured by real property, other than owner occupied personal residences, those considerations are subordinate to a determination that the value of the real property is sufficient, in and of itself, as a source of repayment. The amount of the loan combined with the outstanding debt and claims secured by a senior deed of trust on the real property generally will not exceed a specified percentage of the appraised value of the property (the loan-to-value ratio) as determined by an independent written appraisal at the time the loan is made. The loan-to-value ratio generally will not exceed 80% for residential properties (including multi-family), 75% for commercial properties, and 50% for land. The excess of the value of the collateral securing the loan over our debt and any senior debt owing on the property is the “protective equity.” Our emphasis on asset based lending may increase the risk of loan defaults by borrowers and foreclosures.
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We Compete With Many Other Mortgage Lenders for Loans Which Could Lead to Lower Yields and Fewer Lending Opportunities
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Increased competition for mortgage loans could lead to reduced yields and fewer investment opportunities. The mortgage lending business is highly competitive, and we compete with numerous established entities, some of which have more financial resources and experience in the mortgage lending business than our managers. We will encounter significant competition from banks, insurance companies, savings and loan associations, mortgage bankers, pension funds, real estate investment trusts and other lenders with objectives similar in whole or in part to ours.
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Some of Our Loans are Junior in Priority and More Difficult and Costly to Protect
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We anticipate that our loans will eventually be diversified as to priority approximately as follows:
· first mortgages – 40-60%
· second mortgages (which will be junior to a first mortgage) – 40-60%
· third mortgages (which will be junior to the two other mortgages)
– 0-10%.
The lien securing each loan will not be junior to more than two other encumbrances (a first and, in some cases a second deed of trust) on the real property which is to be used as security for the loan. In the event of foreclosure under a second or third deed of trust the debt secured by a senior deed(s) of trust must be satisfied before any proceeds from the sale of the property can be applied toward the debt owed to us. To protect our junior security interest, we may be required to make substantial cash outlays for such items as loan payments to senior lien holders to prevent their foreclosure, property taxes, insurance, repairs, maintenance and any other expenses associated with the property. These expenditures could have an adverse effect on our profitability.
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We Make Construction Loans Which May Subject Us to Greater Risks
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We may make construction loans up to a maximum of 10% of our loan portfolio. Construction loans are those loans made to borrowers constructing entirely new structures or dwellings, whether residential, commercial or multi-family properties. Investing in construction loans subjects us to greater risk than loans related to properties with operating histories. If we foreclose on property under construction, construction will generally have to be completed before the property can begin to generate an income stream or could be sold. We may not have adequate cash reserves on hand with respect to junior encumbrances and/or construction loans at all times to protect our security. If we have inadequate cash reserves, we could suffer a loss of our investment. Additionally, we may be required to obtain permanent financing of the property in addition to the construction loan which could involve the payment of significant fees and additional cash obligations for us. As of December 31, 2012, we had not funded any construction loans.
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We Make Rehabilitation Loans Which May Subject Us to Greater Risks
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In addition to construction loans, we may make “rehabilitation loans” to finance remodeling, adding to and/or rehabilitating an existing structure or dwelling, whether residential, commercial or multi-family properties. We may make rehabilitation loans up to a maximum of 15% of our loan portfolio. Investing in rehabilitation loans subjects us to greater risk than standard acquisition loans for properties. If we foreclose on a property undergoing remodeling or rehabilitation, such remodeling or rehabilitation will generally have to be completed before the property can realize the anticipated increase in value from such remodeling or rehabilitation. We may not have adequate cash reserves on hand with respect to junior encumbrances and/or rehabilitation loans at all times to protect our security. If we have inadequate cash reserves, we could suffer a loss of our investment. Additionally, we may be required to obtain permanent financing of the property in addition to the rehabilitation loan which could involve the payment of significant fees and additional cash obligations for us.
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Owning Real Estate Following Foreclosure Will Subject Us to Additional Risks
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If a borrower is unable to pay our loan or refinance it when it is due, we may elect to institute foreclosure proceedings against the borrower to secure satisfaction of the debt. Although we may immediately be able to sell the property, sometimes we will be required to own the property for a period of time. We will be subject to certain economic and liability risks attendant to property ownership which may affect our profitability. The risks of ownership will include the following:
· The property could generate less income for us than we could have earned from interest on the loan.
· If the property is a rental property we will be required to find and keep tenants.
· We will be required to oversee and control operating expenses.
· We will be subject to general and local real estate and economic market conditions which could adversely affect the value of the property.
· We will be subject to any change in laws or regulations regarding taxes, use, zoning and environmental protection and hazards.
· We will be required to maintain insurance for property and liability exposures such as potential liability for any injury that occurs on or to the property.
· We will be subject to state and federal laws and local municipal codes and penalties relating to tenant retention and the maintenance and upkeep of lender owned properties.
· We may be subject to federal and state tax laws and regulations with respect to the tax treatment of items of our income, gain, loss or deductions for real estate held for investment, rental and/or sale, which in turn may result in federal and state
tax payment and filing exposure for our members.
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The Newly Effective Consumer Financial Protection Bureau Could Increase Our Administrative Burdens
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Established under the Dodd-Frank Act, the Consumer Financial Protection Bureau, or CFPB, is charged with authority over all federal consumer lending regulations and with implementing a large number of federal consumer legislation, including ECOA, RESPA, the Fair Lending Act, the Truth in Lending Act, the Home Ownership and Equity Protection Act and the Mortgage Disclosure Improvement Act. Residing within the Federal Reserve, the CFPB has been officially operating since July 21, 2011. In addition to its regulatory authority, the CFPB will have examination authority over all federal and state non-depository lending institutions, including mortgage brokers and lenders. In January 2012 the CFPB released examination procedures for loan servicing and for loan origination. The company is subject to possible examination by the CFPB. Such examinations, as well as regulations the CFPB might issue in the future, could ultimately increase our administrative burdens and adversely affect the return to our members.
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If We Decide to Develop Property
Acquired by Us, We Will Face Many Additional Risks
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If we have acquired property through foreclosure or otherwise, there may be circumstances in which it would be in our best interest not to immediately sell the property, but to develop it ourselves. Depending upon the location of the property and market conditions, the development done by us could be either residential (single or multi-family) or commercial. Development of any type of real estate involves risks including the following:
· We will be required to rely on the skill and financial stability of third party developers and contractors.
· Any development or construction will involve obtaining local government permits. We will be subject to the risk that our project does not meet the requirements necessary to obtain those permits.
· Any type of development and construction is subject to delays and cost overruns.
· There can be no guarantee that upon completion of the development that we will be able to sell the property or realize a profit from the sale.
· Economic factors and real estate market conditions could adversely affect the value of the property.
As of December 31, 2012, we had not foreclosed any properties.
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Bankruptcy and Legal Limitations on Personal Judgments May Adversely Affect Our Profitability
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Any borrower has the ability to delay a foreclosure sale by us for a period ranging from several months to several years or more by filing a petition in bankruptcy. The filing of a petition in bankruptcy automatically stops or “stays” any actions to enforce the terms of the loan. The length of this delay and the costs associated with it will generally have an adverse impact on our profitability. We also may not be able to obtain a personal judgment against a borrower.
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Unintended Violations of Usury Statutes May Adversely Affect Us
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Usury laws impose restrictions on the maximum interest that may be charged on our loans. Subject to applicable requirements of California law, loans originated by a licensed California real estate broker or a licensed California Finance Lender will be exempt from applicable California usury provisions. Since Redwood Mortgage Corp., a licensed California real estate broker and a holder of a California Finance Lenders license, or CFL license, originates our loans, our loans should be exempt from applicable state usury provisions. Nevertheless, unintended violations of the usury statutes may occur. In such an event, we may have insufficient cash to pay any damages, thereby adversely affecting our operations. We could also lose our entire investment. We also intend to apply for a CFL license in the name of Redwood Mortgage Investors IX, LLC, to provide additional flexibility in establishing the usury exemption.
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If We Make High Cost Mortgages, We Will
Be Required to Comply With Additional Regulations
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Although we anticipate making relatively few loans that would qualify as “high cost mortgages,” as defined by regulations of the CFPB, the failure to comply with these regulations could adversely affect us. A high cost mortgage is any loan made to a consumer secured by the consumer’s principal residence if either (i) the annual percentage rate exceeds by more than 8%, the yield on Treasury securities having comparable periods of maturity for first mortgages, or 10% for junior mortgages or (ii) the total fees payable by a consumer at or before closing exceed 8% of the total loan amount. These regulations primarily focus on:
· additional disclosure with respect to the terms of the loan to the borrower;
· the timing of such disclosures; and
· the prohibition of certain terms in the loan including balloon payments and negative amortization.
The failure to comply with the regulations, even if the failure was unintended, will render the loan rescindable for up to three years. The lender could also be held liable for attorneys’ fees, finance charges and fees paid by the borrower and certain other money damages.
In addition, under California law residential mortgage and consumer loans secured by liens on primary residences in amounts less than the Fannie Mae/Freddie Mac conforming loan limit are considered to be “high cost loans” if they have (i) an annual percentage rate at least 8% above the interest rate on U.S. Treasury securities of a comparable maturity, or (ii) points and fees in excess of 6% of the loan amount, exclusive of the points and fees. While it is unlikely that we would make many high cost loans, the failure to comply with California law regarding such loans could have significant adverse effects on us. The law prohibits certain lending practices with respect to high cost loans, including the making of a loan without regard to the borrower’s income or obligations. When making such loans, lenders must provide borrowers with a consumer disclosure, and provide for an additional rescission period prior to closing the loan. The reckless or willful failure to comply with any provision of this law, including the mandatory disclosure provisions, could result in, among other penalties, the imposition of administrative penalties of $25,000, loss or suspension of the offending broker’s license, as well as exposure to civil liability to the consumer/borrower (including the imposition of actual and punitive damages).
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We Operate in a Highly Regulated Industry
and the Failure to Comply with Such Regulations Will Materially Adversely
Affect Our Business
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The mortgage business has traditionally been highly regulated. The costs of complying with these regulations could adversely affect our profitability, and violations of these regulations could materially adversely affect our business and financial results. Recently, the turmoil in our industry has led to various proposed new legislation, rules and regulations by federal, state and local authorities relating to the origination and servicing of mortgage loans. If enacted, these initiatives could result in delayed or reduced collections from mortgagors, limitations on the foreclosure process and generally increased loan origination and servicing costs. These legislative and regulatory initiatives could ultimately increase our administrative burdens and adversely affect the returns to our members.
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Since We Are Not Regulated As a Bank, Our Members and Borrowers May Have Fewer Protections
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Although we are engaged in mortgage lending, we and our affiliates are not banks and accordingly, are not generally subject to the federal and state banking regulations, policies and oversight applicable to banks. For example, banks are subject to federal regulation and examination by the Federal Deposit Insurance Corporation, or FDIC, which insures bank deposits up to applicable limits. The operations of banks are also subject to the regulation and oversight of the Federal Reserve Board and state banking regulators. Banks are required to maintain a minimum level of regulatory capital in accordance with stringent guidelines established by federal law. Federal and state banking agencies also regulate the lending practices, capital structure, investment practices and dividend policy of banks, among other things.
Because we and our affiliates are generally not subject to the capital requirements and other regulations and oversight applicable to banks, our members and borrowers may not have the same level of protections and safeguards afforded to owners and customers of banks.
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Larger Loans May Result in Less Diversity
and May Increase Risk
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Investing in fewer, larger loans generally decreases diversification of the portfolio and increases the risk of loss and the possible reduction in profits and yield to our members in the case of a delinquency of such a loan. However, since larger loans generally will carry a somewhat higher interest rate, our managers may determine, from time to time, that a relatively larger loan is advisable for us. Our maximum investment in a loan will not exceed 10% of the then total gross proceeds of our offerings.
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Use of Borrowed Money May Reduce Our Profitability or Cause Losses Through Liquidation
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We are permitted to borrow funds for the purpose of making loans, for increased liquidity, reducing cash reserve needs or for any other proper purpose on any terms commercially available. We may assign all or a portion of our loan portfolio and/or all or a portion of real estate that we own as security for such loans. Our managers may not leverage more than, and our total indebtedness may not at any time exceed, 50% of members’ capital.
Changes in the interest rate will have a particularly adverse effect on us if we have borrowed money to fund loans. Borrowed money will likely bear interest at a variable rate, whereas we are likely to be making fixed rate loans. Thus, if prevailing interest rates rise, we may have to pay more in interest on the borrowed money than we make on loans to our borrowers. This will reduce our profitability or cause losses through liquidation of loans in order to repay the debt on the borrowed money. It is possible that we could default on our obligation if we cannot cover the debt on the borrowed money.
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Changes in Interest Rates May Affect Your Return on Your Investment
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We expect that our loans will typically have fixed rates and the majority of our loans will be for terms of one to five years. Consequently, due to the terms of our loans, if interest rates rapidly increase, such interest rates may exceed the average interest rate earned by our loan portfolio. If prevailing interest rates rise above the average interest rate being earned by our loan portfolio, you may be unable to quickly sell your units, as they are an illiquid investment, in order to take advantage of higher returns available from other investments. In addition, an increase in interest rates accompanied by a tight supply of mortgage funds may make refinancing by borrowers with balloon payments difficult or impossible. This is true regardless of the market value of the underlying property at the time such balloon payments are due. In such event, the property may be foreclosed upon.
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Moreover, we expect that the majority of our loans will not include prepayment penalties for a borrower paying off a loan prior to maturity. The absence of a prepayment penalty in our loans may lead borrowers to refinance higher interest rate loans in a market of falling interest rates. This would then require us to reinvest the prepayment proceeds in loans or alternative short term investments with lower interest rates and a corresponding lower yield to members.
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Marshaling of Assets Could Delay or Reduce Recovery of Loans
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As security for a single loan, we may require a borrower to execute deeds of trust on other properties owned by the borrower in addition to the property the borrower is purchasing or refinancing. In the event of a default by the borrower, we may be required to “marshal” the assets of the borrower. Marshaling is an equitable doctrine used to protect a junior lienholder with a security interest in a single property from being “squeezed out” by a senior lienholder, such as us, with a security interest not only in the property, but in one or more additional properties. Accordingly, if another creditor of the borrower forced us to marshal the borrower’s assets, foreclosure and eventual recovery of the loan could be delayed or reduced, and our costs associated therewith could be increased.
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We May Provide Loans to Borrowers Who Are in Default Under Other of Their Obligations
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The cash flow and the income generated by the real property that is to secure the loan are factors affecting our decision to make a particular loan, as are the general creditworthiness, experience and reputation of the borrower. For loans secured by real property, other than owner occupied personal residences, those considerations are subordinate to a determination that the value of the real property is sufficient, in and of itself, as a source of repayment. Accordingly, loans may be made to borrowers who are in default under other of their obligations (e.g., to consolidate their debts) or who do not have sources of income that would be sufficient to qualify for loans from other lenders such as banks or savings and loan associations. There is a greater risk that such borrowers will default under loans we make to them.
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We May Face Potential Liability for Toxic or Hazardous Substances
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If we take an equity interest in, management control of, or foreclose on any of the loans, we may be considered the owner of the real property securing such loans. In the event of any environmental contamination, there can be no assurance that we would not incur full recourse liability for the entire cost of any such removal and cleanup, even if we did not know about or participate in the contamination. Full recourse liability means that any of our property, including the contaminated property, could be sold in order to pay the costs of cleanup in excess of the value of the property at which such contamination occurred. In addition, we could incur liability to tenants and other users of the affected property, or users of neighboring property, including liability for consequential damages. Consequential damages are damages that are a consequence of the contamination but are not costs required to clean up the contamination, such as lost profits of a business.
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If Properties We Own Contain Hazardous Substances, We Could Be Required to Pay for Their Removal or Clean Up
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If we became the “owner” of any real property containing hazardous substances, we would also be exposed to risk of lost revenues during any cleanup, the risk of lower lease rates or decreased occupancy if the existence of such substances or sources on the property were a health risk. If we fail to remove the substances or sources and clean up the property, federal, state, or local environmental agencies could perform such removal and cleanup. Such agencies would impose and subsequently foreclose liens on the property for the cost thereof. We may find it difficult or impossible to sell the property prior to or following any such cleanup. If such substances are discovered after we sell the property, we could be liable to the purchaser thereof if our managers knew or had reason to know that such substances or sources existed. In such case, we could also be subject to the costs described above.
If we are required to incur such costs or satisfy such liabilities, this could have a material adverse effect on our profitability. Additionally, if a borrower is required to incur such costs or satisfy such liabilities, this could result in the borrower’s inability to repay its loan from us.
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Conflicts May Arise if We Participate in Loans With Other Programs Organized by Our Managers
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In certain limited circumstances and subject to compliance with applicable regulations or guidelines, we may participate in loans with other programs organized by our managers, where we purchase a fractional undivided interest in a loan. Our portion of the total loan may be smaller or greater than the portion of the loan made by the other programs. You should be aware that participating in loans with other programs organized by our managers could result in a conflict of interest between us and our managers as well between us and such other programs, in the event that the borrower defaults on the loan and our managers protect the interests of other programs, which they have organized, in the loan and in the underlying security.
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The Reduced Availability of Mortgage Loans
and the Volatility and Reduced Liquidity in the Financial Markets May Adversely Affect Our Results
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Following the 2008 financial crisis and the resulting, so-called “Great Recession,” the constrained credit markets offer fewer mortgage loan options, stricter loan qualifications and other constraints on the availability of mortgage financing, which make it more difficult for some borrowers to finance the purchase or refinance of real estate. These factors have caused reduced levels of investment and purchase activity and may increase the likelihood of defaults on our loans and, consequently, reduce our profits and our ability to pay distributions to our members.
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Certain Economic Events Could Cause
Declines in Cash Flows
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Certain events such as general economic downturns, recessions, depressions, dramatic changes in interest rates and periods of illiquidity can disrupt expected cash returns from mortgage lending. These types of events are difficult to predict and can occur unexpectedly.
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Beginning in 2008 and still continuing to some degree today, the economic events and ramifications of the so-called “Great Recession” caused great disruption to a number of industries, including financial services, real estate and mortgage lending. During this period, mortgage lenders throughout the country experienced increased loan delinquencies, loan defaults and foreclosures well above normal. In 2008, our sponsors were operating three public and two private mortgage programs with investment objectives similar to ours. Each of these programs had a significant portion of their loans become delinquent, which often resulted in these programs acquiring the real estate securing the loans. The migration from current loans to delinquent loans and then to real estate owned significantly reduced the programs’ cash flows as well as caused them to incur losses due primarily to increases in loan loss reserves and losses upon the sale of real estate owned. Even when the real estate owned by these programs generated rental revenue, that revenue generally did not fully replace the cash flows that were previously generated by loans.
The reduced cash flows in Redwood Mortgage Investors VIII, one of the programs operated by our sponsors, required the suspension of limited partner capital liquidations in March 2009 in order to maintain adequate cash availability to meet partnership expenses and provide sufficient cash to protect partnership assets.
Redwood Mortgage Investors VIII had leveraged its portfolio with a line of credit. In 2010, as a result of a technical default to its financial loan covenants, a forbearance agreement and an amended loan agreement were entered into with the lender causing the line of credit principal amount to be fixed and repaid in installments on an accelerated basis, including certain other covenants and conditions. Redwood Mortgage Investors VIII made the final payment owing in September 2012.
Should as significant an economic deterioration occur again, we could suffer the same declines in cash flows and increases in loan delinquencies as was experienced by mortgage lenders in general during this period of financial crisis and Great Recession.
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Our Operating Results May be Affected by Economic and Regulatory Changes That Have
an Adverse Impact on the Real Estate Market
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Our operating results will be subject to risks generally associated with the ownership of assets related to the real estate industry, including:
· changes in interest rates and availability of mortgage loans;
· changes in general economic or local conditions; and
· changes in tax, environmental, zoning and other real estate laws.
Due to these reasons, among others, we cannot assure you that we will be profitable or that we will maintain profitability.
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The Concentration of Loans with a Single Borrower May Increase Our Risks
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We may invest in multiple secured loans that share a common borrower. The aggregate of our loans, however, to any one borrower may not exceed 10% of the gross proceeds of our offerings of units. The bankruptcy, insolvency or other inability of any borrower that is the subject of multiple loans to pay interest or repay principal on its loans would have adverse effects on our income and reduce the amount of funds available for distribution to members. The more concentrated our portfolio is with one or a few borrowers, the greater credit risk we face. The loss of any one of these borrowers would have a material adverse effect on our financial condition and results of operations.
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We Have a Limited Operating History and We Cannot Assure You That We Will Be Successful in the Marketplace
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We were organized in 2008 and commenced active operations in October 2009. Consequently, we have a limited operating history, which makes it difficult to evaluate our future prospects. You should consider our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies that are in a similar stage of development. The past performance of other mortgage programs sponsored by our managers is not necessarily indicative of our future performance and there can be no assurance that we will achieve comparable results.
To be successful in this market, we must, among other things:
· identify and make loans that further our investment objectives;
· expand and maintain our network of participating broker-dealers;
· attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations;
· respond to lending competition as well as to competition for potential investors; and
· continue to build and expand our operational structure to support our business.
We cannot guarantee we will succeed in achieving these goals, and our failure to do so could cause our investors to lose some of their investment.
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Lack of Liquidity of Units Increases Their Risks
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There are substantial restrictions on the transferability of the units. You will not be free to sell or transfer your units at will, and they may not be acceptable by a lender as security for borrowing. No public trading market for the units is expected to exist after the offering. It is highly unlikely that a public trading market will ever develop. The California Commissioner of Corporations also imposes a restriction on sale or transfer, except to specified persons, because of the investor suitability standards that apply to a purchaser of units who is a resident of California. Units may not be sold or transferred without consent of the Commissioner, except to family members, other holders of units, and us.
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Our operating agreement also imposes substantial restrictions upon your ability to transfer units. The operating agreement provides you with a limited right to redeem units, subject to certain limitations and requirements. The amount that a redeeming member will receive from the company is based on the lesser of the purchase price paid by the redeeming member or the redeeming member’s capital account balance as of the date of each redemption payment. 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 member’s interest in the company. The fair market value of your units will be irrelevant in determining amounts to be paid upon redemption. As described above, the amount received by a redeeming member may, under certain circumstances, be based on the member’s capital account balance as of the date of each redemption payment, rather than the date of the redemption request. Accordingly, the amount paid to a member upon redemption may not reflect the redeeming member’s capital balance as of the date on which the redemption request was made. In addition, your units may not be readily accepted as collateral for a loan. Consequently, you should consider the purchase of units only as a long-term investment.
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You are Limited in Your Ability to Have Your Units Redeemed Under Our Unit Redemption Program
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Our unit redemption program contains significant restrictions and limitations that limit your ability to redeem your units. The number of units you may redeem per quarter will be subject to a maximum of the greater of 100,000 units or 25% of your units outstanding. In addition, we will not, in any calendar year, redeem from all of our members a total of more than 5% (or in any calendar quarter, redeem more than 1.25%) of the weighted average number of all units outstanding during the twelve month period immediately prior to the date of the redemption.
Moreover, our managers reserve the right, in their sole discretion, at any time, to reject any request for redemption, or to suspend or terminate the acceptance of new redemption requests without prior notice, or to terminate, suspend or amend the unit redemption program upon 30 days’ written notice. Therefore, in making a decision to purchase units, you should not assume that you will be able to sell any of your units back to us pursuant to our redemption program.
We will fund redemptions solely from available company cash flow and will not establish a reserve from which to fund redemptions. Accordingly, we cannot guarantee that we will have sufficient funds to accommodate all redemption requests made in any given year.
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There is No Assurance You Will Receive Cash Distributions
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Our managers and their affiliates will be paid and reimbursed by us for certain services performed for us and expenses paid on our behalf. We will bear all other expenses incurred in our operations. All of these fees and expenses are deducted from cash funds generated by our operations prior to computing the amount that is available for distribution to you. Our managers, in their discretion, may also retain a portion of cash funds generated from operations for working capital purposes. Accordingly, there is no assurance as to when or whether cash will be available for distributions to you.
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We May Pay Distributions From Sources
Other Than Cash Flow From Operating Activities Which Will Result in Fewer Funds Available to Invest in Mortgages and Could Reduce Our Members’ Overall Return
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In the event we do not have enough cash flow from operating activities to fund our distributions, we may need to defer or reduce distributions or fund distributions from cash on hand, which may include proceeds from offerings and loan repayments from borrowers.
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You Must Rely on Our Managers for Management Decisions; You Will Have No Control Over Our Operation
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All decisions with respect to our management will be made exclusively by our managers. In addition, our managers arrange and generally service all of our mortgage loans. Our success will, to a large extent, depend on the quality of our management, particularly as it relates to lending decisions. You have no right or power to take part in our management. Accordingly, you should not purchase any of the units offered unless you are willing to entrust all aspects of management to our managers. You should carefully evaluate our managers’ capabilities to perform such functions.
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Because We Do Not Have Independent Directors, Members May Have Less Protection Against Affiliated Transactions and Conflicts
of Interests
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We are managed by our managers who have various conflicts of interest in connection with their management of us. We do not have a board of directors or any independent directors. The absence of independent directors may leave our members with less protection against affiliated transactions and conflicts of interest arising out of our relationship with our managers and their affiliates and similar matters. These include arrangements pursuant to which our managers and their affiliates are compensated by us. If actions are taken by our managers, or expenses are incurred that are not in our best interests, it could have a material adverse effect on our business and operations.
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Because We Do Not Have an Audit or Compensation Committee, Members Will Have to Rely on Our Managers, Who are Not Independent, to Perform These Functions
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Since the units are not listed for trading on a national securities exchange, we are not subject to certain of the corporate governance rules established by the national securities exchanges pursuant to the Sarbanes-Oxley Act of 2002. Among other things, these rules relate to independent director standards, audit and compensation committees standards and the use of an audit committee financial expert. Accordingly, our members will not receive the protections these rules and standards were enacted to provide, such as protections against interested director transactions, conflicts of interest and similar matters.
We do not have an audit or compensation committee. As a result, members will have to rely on our managers, none of whom are independent, to perform these functions. Thus, there is a potential conflict in that our managers, who are engaged in management, will participate in decisions concerning management compensation and audit issues that may affect management performance.
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Your Ability to Recover Your Investment on Dissolution and Termination Will Be Limited
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In the event of our dissolution or termination, the proceeds realized from the liquidation of assets, if any, will be distributed to the members only after the satisfaction of claims of creditors. Accordingly, your ability to recover all or any portion of your investment under such circumstances will depend on the amount of funds so realized and claims to be satisfied from those proceeds. Additionally, if you have elected to reinvest your distributions into additional units through your participation in our distribution reinvestment plan, you could lose such reinvested distributions in addition to the amount of your initial investment.
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We Established the $1 Per Unit Offering Price on an Arbitrary Basis
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We arbitrarily determined the $1 per unit selling price for our offerings of units as well as the $1 per unit price for reinvestment of distributions. Such price bears no relationship to our book or asset values. Such price also is not necessarily the amount you may receive pursuant to your limited right to redeem units, subject to certain requirements. The amount that a redeeming member will receive is the lesser of the purchase price for the redeemed units or the redeeming member’s capital account balance as of the date of each redemption payment. The fair market value of your interest in the company will be irrelevant in determining amounts to be paid upon redemption.
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Our Managers and Their Affiliates May Purchase Units
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Our managers and their affiliates may, in their discretion, purchase units for their own account. The maximum amount of units that may be purchased by our managers or their affiliates is 1,000,000 units ($1,000,000). Upon any such purchases of units, our managers or their affiliates will have the same rights as other members in respect of the units owned by them, including the right to vote on matters subject to the vote of members, subject to certain exceptions.
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We May Be Unable to Insure Against Certain Kinds of Losses
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We will require comprehensive insurance, including fire and extended coverage, which is customarily obtained for or by a lender, on properties in which we acquire a security interest. Generally, such insurance will be obtained by and at the cost of the borrower. However, there are certain types of losses (generally of a catastrophic nature, such as civil disturbances and acts of God such as earthquakes, floods and slides) which are either uninsurable or not economically insurable. Should such a disaster occur to, or cause the destruction of, any property serving as collateral for a loan, we could lose both our invested capital and anticipated profits from such investment. In addition, on certain real estate owned by us as a result of foreclosure, we may require homeowner’s liability insurance. However, insurance may not be available for theft, vandalism, land or mud slides, hazardous substances or earthquakes on all real estate owned and losses may result from destruction or vandalism of the property which would adversely affect our profitability.
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Our Anticipated Concentration of Mortgages
in the San Francisco Bay Area Exposes Us to Greater Risks of Loss if the Local Economy Weakens
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We expect that a significant majority of our loans will be secured by properties located in nine counties that comprise the San Francisco Bay Area (San Francisco, San Mateo, Santa Clara, Alameda, Contra Costa, Marin, Napa, Solano and Sonoma). As is the case nationally, the residential and commercial real estate markets in California, including the San Francisco Bay Area, have experienced a downturn. Our anticipated concentration of loans in the San Francisco Bay Area exposes us to greater risk of loss if the economy in the San Francisco Bay Area weakens than would be the case if our loans were spread throughout California or the nation. The San Francisco Bay Area economy and/or real estate market conditions could be weakened by:
· an extended economic slowdown or recession in the area;
· overbuilding of commercial and residential properties;
· relocation of businesses outside of the area due to economic factors such as high cost of living and of doing business within the region;
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· increased interest rates, thereby weakening the general real estate market; and
· reductions in the availability of credit.
If the economy were to weaken, it is likely that there would be more property available for sale, values would fall and lending opportunities would decrease. In addition, a weak economy and increased unemployment could adversely affect borrowers resulting in an increase in the number of loans in default.
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You Will Be Bound by Decision of Majority
Vote
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Subject to certain limitations, members holding a majority of units may vote to, among other things:
· dissolve and terminate the company;
· amend the operating agreement, subject to certain limitations;
· approve or disapprove the sale of all or substantially all of our assets; and
· remove or replace one or all of our managers or elect additional or new managers.
If you do not vote with the majority in interest of the other members, you nonetheless will be bound by the majority vote. Our managers will have the right to increase our current offering of units or conduct additional offerings of units without obtaining your consent or the consent of any other member.
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The Formation Loan May Be Forgiven Under Certain Circumstances
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We will loan to Redwood Mortgage Corp., a manager, funds in an amount equal to the sales commissions and amounts payable in connection with unsolicited sales. The formation loan will be an unsecured loan that will not bear interest and will be repaid in annual installments. During the offering period, Redwood Mortgage Corp. will make annual installments of one-tenth of the principal balance of the formation loan as of December 31 of the prior year. Such payment will be due and payable by December 31 of the following year. Prior to the termination of our offering of units, the principal balance of the formation loan will increase as additional sales of units are made each year. Upon completion of the offering, the balance of the formation loan will be repaid in 10 equal annual installments of principal, without interest, commencing on December 31 of the year following the year the offering terminates.
A portion of the amount we receive from redeeming members as early redemption penalties may first be applied to reduce the principal balance of the formation loan. This will have the effect of reducing the amount owed by Redwood Mortgage Corp. to us. If all or any one of the initial managers are removed as a manager by the vote of a majority in interest of the members and a successor or additional manager begins using any other loan brokerage firm for the placement of loans or loan servicing, Redwood Mortgage Corp. will be immediately released from any further payment obligation under the formation loan. If all of the managers are removed, no other managers are elected, the company is liquidated and Redwood Mortgage Corp. is no longer receiving payments for services rendered, we will forgive the debt on the formation loan and Redwood Mortgage Corp. will be immediately released from any further obligations under the formation loan. The non-interest bearing feature of the formation loan will have the effect of slightly diluting your rate of return, but to a much lesser extent than if we were required to bear all of our own syndication expenses out of the offering proceeds.
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You Will Have Limited Ability to Liquidate
Your Investment Prior to the End of Our Term and May Experience Delays in Receiving Distributions Upon Liquidation
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Under our operating agreement, we will continue to operate until October 8, 2028, unless our term is extended by the vote of a majority in interest of the members. While we do not currently intend to cease operations prior to the end of our term and do not anticipate providing liquidity to our members prior to such time (other than on a limited basis through our unit redemption program), we may dissolve and terminate earlier upon the occurrence of various events described in our operating agreement or by operation of law. Upon our dissolution, our managers will seek to promptly liquidate our assets for the best price reasonably obtainable and to use any proceeds to satisfy our debts, and then to distribute any remaining proceeds to our members and managers in accordance with the terms of our operating agreement. However, there is no assurance that our managers will be successful in liquidating us on our anticipated termination date or any earlier dissolution date. Delays in liquidation may arise due to market conditions and other factors beyond the control of our managers. In the event we are unable to liquidate on or prior to the end of our anticipated term, you and other members may not receive distributions of remaining proceeds, if any, in a timely manner or at all.
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Our Managers Have Limited Assets Which
May Affect Their Ability to Fulfill Their Obligations to Us
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Our managers have limited assets and financial resources. As a result, they may not be unable to fulfill their obligations and responsibilities to us. Our managers also serve as the sponsors and managers of other mortgage programs and have legal and financial obligations with respect to these other programs. Additionally, they may have contingent liability for the obligations of such other programs. To the extent that our managers are required to expend a significant portion of their assets and financial resources to satisfy their obligations or liabilities to such other programs or otherwise, their ability to fulfill their financial and other obligations to us may be adversely affected.
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Delays in Investment Could Adversely Affect Your Return
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A delay will occur between the time investors purchase our units in our ongoing offering of units and the time the net proceeds of the offering are invested. This delay could adversely affect the return paid. In order to mitigate this risk, pending the investment of the proceeds, funds will be placed in highly liquid, short-term investments designated by our managers. The interest earned on such interim investments is expected to be less than the interest we would earn on loans.
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We Cannot Precisely Determine Compensation to be Paid to Our Managers and Their
Affiliates
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Our managers and their affiliates are unable to predict the amounts of compensation to be paid to them. Any such prediction would necessarily involve assumptions of future events and operating results which cannot be made at this time. As a result, there is a risk that members will not have the opportunity to judge ahead of time whether the compensation realized by our managers is commensurate with the return generated by the loans.
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Payment of Fees to Our Managers and Their Affiliates Will Reduce Cash Available for Investment and Distribution
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Our managers and their affiliates will perform services for us in connection with the offer and sale of the units, the selection and acquisition of our investments and the administration of our investments. They will be paid substantial fees for these services, which will reduce the amount of cash available for investment in properties or distribution to members.
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Working Capital Reserves May Not be
Adequate
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We intend to maintain working capital reserves to meet our obligations, including our carrying costs and operating expenses. Our managers believe such reserves are reasonably sufficient for our contingencies. If for any reason those reserves are insufficient, we will have to borrow the required funds or liquidate some or all of our loans. In the event our managers deem it necessary to borrow funds, there can be no assurance that such borrowing will be on acceptable terms or even available to us. Such a result might require us to liquidate our investments and abandon our activities.
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We May be Required to Forego More Favorable Investments to Avoid Regulation Under Investment Company Act of 1940
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Our managers intend to conduct our operations so that we will not be subject to regulation under the Investment Company Act of 1940. Among other things, they will monitor the proportions of our funds which are placed in various investments and the form of such investments so that we do not come within the definition of an investment company under such Act. As a result, we may have to forego certain investments which would produce a more favorable return.
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Conflicts May Arise as a Result of Our Managers’ Legal and Financial Obligations to Other Mortgage Programs
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Our managers and their affiliates are currently involved with five mortgage programs with investment objectives similar to ours. They may also organize other mortgage programs in the future with investment objectives similar to ours. Our managers and such affiliates have legal and financial obligations with respect to these other mortgage programs that are similar to their obligations with respect to us. These obligations may at times conflict or require our managers to limit the resources allocated to us and these other programs.
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Conflicts May Arise From Our Managers’ Allocation of Time Between Us and Other Activities
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Our managers and their affiliates have conflicts of interest in allocating the time of their personnel between us and other activities in which they are involved. Redwood Mortgage Corp. also provides loan brokerage services to investors other than us. As a result, there will exist conflicts of interest on the part of our managers between us and the other mortgage programs or investors with which they are affiliated at such time.
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The Amount of Loan Brokerage Commissions and Other Compensation of Our Managers
May Affect the Rate of Return to You
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None of the compensation payable to our managers was determined by arm’s-length negotiations. We anticipate that the loan brokerage commissions charged to borrowers by Redwood Mortgage Corp., one of our managers, will average approximately 2%-5% of the principal amount of each loan, but may be higher or lower depending upon market conditions. Any increase in the loan brokerage commission charged on loans may have a direct, adverse effect on the interest rates we charge on loans and thus the overall rate of return to you. This conflict of interest will exist in connection with every loan transaction, and you must rely upon the fiduciary duties of our managers to protect your interests.
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If Our Managers Lose or are Unable to Obtain Key Personnel or One or More of Their Key Personnel Decides to Compete With Us, Our Ability to Implement Our Strategic Plans
Could be Impaired
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We depend on the diligence, experience and skills of certain executive officers and other key personnel of our managers and their affiliates, including Michael R. Burwell, Diana B. Mandarino and Lorene A. Randich, for the selection, acquisition, structuring and monitoring of our lending and investment activities. These individuals are not bound by employment agreements with the managers or with us. If any of our managers’ key personnel were to cease their employment with them or their affiliates, our operating results could suffer. One of our managers has obtained life insurance policies on Michael Burwell, one of their key personnel. There is no assurance that such insurance will be sufficient to protect against events that may adversely affect our ability to implement our strategies. We also believe that our future success depends, in large part, upon the ability of our managers or their affiliates to hire and retain highly skilled managerial, operational and marketing personnel. We cannot assure you that they will be successful in attracting and retaining such personnel. The loss of key personnel and the inability of our managers to hire any key person could harm our business, financial condition, cash flow and results of operations.
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We Will Rely on Independent Broker-Dealers to Sell Units in the Offering
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We are offering the units in our ongoing offering through selected broker-dealers who are members of FINRA. None of the broker-dealers participating in the offering will be affiliated with our sponsors or our managers. Because we do not have a captive or affiliated broker-dealer that will be exclusively or primarily focused on selling our units, our ability to successfully complete the offering will depend, in large part, on our ability to develop and maintain relationships with a sufficient number of unaffiliated participating broker-dealers. These broker-dealers are engaged in the sale of various securities and investment products beyond those offered by us, including those of competing mortgage programs. In the event we are unable to enter into selling agreements with a sufficient number of qualified participating broker-dealers, or if those participating broker-dealers engaged by us fail to devote sufficient time and attention to the marketing of our units, we may be unable to raise a sufficient amount of funds in the offering as may be necessary to enable us to be successful.
|
|
Risks Associated With Treatment of the Limited Liability Company as a Partnership
for Federal Income Tax Purposes
|
We intend to be treated as a partnership (other than a publicly traded partnership) for federal income tax purposes and not as a corporation. Although we have received an opinion from Baker & McKenzie LLP to the effect that we will be treated as a partnership (other than a publicly traded partnership) for federal income tax purposes, we will not seek a ruling from the Internal Revenue Service (“IRS”) on the tax treatment of us or our members. Counsel’s opinion represents only its best legal judgment based upon existing law and, among other things, factual representations provided by our managers. The opinion of counsel has no binding effect on the IRS or any court, and no assurance can be given that the conclusions reached in said opinion would be sustained by a court if challenged by the IRS.
If we were taxable as a corporation, the “pass through” treatment of our income and losses would be lost. Instead, we would, among other things, pay income tax on our earnings in the same manner and at the same rate as a corporation, and our losses, if any, would not be deductible by the members. Members would be taxed upon distributions substantially in the manner that corporate shareholders are taxed on dividends. In addition, if we were classified as a publicly traded partnership but nonetheless remained taxable as a partnership, the passive activity loss rules would apply in a manner that could adversely affect members.
|
|
Your Ability to Offset Income With Our Losses May be Limited
|
We are engaged in mortgage lending. We take the position that we are engaged in the active conduct of equity-financed lending. Under the applicable regulations, each member is required to report separately on its income tax return its distributive share of our income as nonpassive income. Each member’s distributive share of our losses, if any, will be reported as passive losses. Passive losses may be used to offset passive income. To the extent that passive losses do not offset passive income, they may be carried forward to offset passive income in future years. It is possible, however, that the IRS could assert that our income is properly treated as portfolio income for purposes of those limitations. Such treatment is subject to the interpretation of complex Treasury regulations, and is dependent upon a number of factors, such as whether we are engaged in a trade or business, the extent to which we incur liabilities in connection with our activities, and the proper matching of the allocable expenses incurred in the production of income. There can be no assurance that an IRS challenge to our characterization of our income will not succeed. It also is possible that we might be unable to allocate expenses to the income produced, in which case members might find their ability to offset income with allocable expenses limited by the 2% floor on miscellaneous investment expenses.
|
|
Your Tax Liability May Exceed the Cash You Receive
|
Your tax liabilities associated with an investment in the units for a given year may exceed the amount of cash we distribute to you during such year. As a member, you will be taxed on your allocable share of our taxable income whether or not you actually receive cash distributions from us. Your taxable income could exceed cash distributions you receive, for example, if you elect to reinvest into additional units the cash distributions you would otherwise have received. Taxable income in excess of cash distributions also could result if we were to generate so-called “phantom income” (taxable income without an associated receipt of cash). Phantom income could be recognized from a number of sources, including, without limitation, any established loan loss reserves or fluctuation thereof, repayment of principal on loans incurred by the company as well as imputed income due to original issue discount, market discount, imputed interest and significant modifications to existing loans.
|
|
We Expect to Generate Unrelated Business Taxable Income
|
Tax-exempt investors (such as an employee pension benefit plan or an IRA) may be subject to tax to the extent that income from the units is treated as unrelated business taxable income, or UBTI. We borrow funds on a limited basis, which can cause a portion of our income to be treated as UBTI. We may also receive income from services rendered in connection with making or securing loans, which is likely to constitute UBTI. In addition, although we do not currently intend to own and lease personal property, it is possible we may do so as a result of a foreclosure upon a default. Although we use reasonable efforts to prevent any borrowings and leases of personal property from causing any significant amount of income from the units to be treated as UBTI, we expect that some portion of our income will be UBTI. Prospective investors that are tax-exempt entities are urged to consult their own tax advisors regarding the suitability of an investment in units. In particular, an investment in units may not be suitable for charitable remainder trusts.
|
|
Tax Audits Could Result in Adjustments to
Your Tax Returns
|
The IRS and state tax authorities could challenge certain federal and state income tax positions, respectively, taken by us if we are audited. Any adjustment to our return resulting from an audit by a tax authority would result in adjustments to your tax returns and might result in an examination of items in such returns unrelated to your investment in the units or an examination of tax returns for prior or later years. Moreover, we and our members could incur substantial legal and accounting costs in contesting any challenge by a tax authority, regardless of the outcome. Our managers generally will have the authority and power to act for, and bind the company in connection with, any such audit or adjustment for administrative or judicial proceedings in connection therewith.
|
|
You May be Subject to State and Local Tax
Laws
|
The state in which you reside may impose an income tax upon your share of our taxable income. Furthermore, states such as California, in which we will own property generally impose income tax upon a member’s share of the company’s taxable income considered allocable to such states, whether or not a member resides in that state. As a result, a nonresident member may be required to file a tax return in California and any other such state. Differences may exist between federal income tax laws and state and local income tax laws. We may be required to withhold state taxes from distributions to members in certain instances. You are urged to consult with your own tax advisers with respect to state and local tax consequences of an investment in our units.
|
|
The IRS may Argue that Our Allocations to
You May Not Have Substantial Economic Effect
|
For U.S. federal income tax purposes, allocations to you of our items of income, gain, loss, deduction and credit will be governed by our operating agreement if such allocations have “substantial economic effect.” The rules for determining whether an allocation has substantial economic effect provide a safe harbor under which allocations generally will be respected. Our operating agreement does not satisfy the requirements for the substantial economic effect safe harbor. However, because our operating agreement generally allocates profits and losses in the same manner as cash distributions are made, we believe these allocations are in accordance with the members’ interests in our units and thus should be respected. However, there can be no assurance that the IRS will not challenge the allocations and will not attempt to reallocate profits and losses among the members and/or the managers. Any successful challenge by the IRS to such allocations could have a material adverse effect on your investment in our units.
|
|
Changes in Tax Laws Could Have an Adverse Effect on Your Investment
|
In recent years, legislative, judicial and administrative changes have been made in the provisions of the federal income tax laws applicable to investments similar to an investment in our units. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect the taxation of a member. Any such changes could have an adverse effect on an investment in our units or on the market value of our assets. You are urged to consult with your own tax advisor with respect to the impact of recent legislation on your investment in units and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our units. You should also note that our counsel’s tax opinion assumes that no legislation will be enacted after the date of this prospectus that will be applicable to an investment in our units.
|
|
Risks of Investment by Benefit Plan Investors and Other Tax-Exempt Investors
|
In considering an investment in the units, if you are an employee benefit plan subject to ERISA, you should consider, among other things, (i) whether the investment satisfies the diversification requirements of Section 404(a)(1)(C) of ERISA; and (ii) whether the investment is prudent, since there may not be a market created in which you can sell or otherwise dispose of the units. In addition if you are a tax-qualified pension or 401(k) plan or an IRA, you should consider (i) whether a distribution of units from a tax-qualified plan or IRA would be accepted by an IRA custodian as a rollover, and if not, the automatic 20% income tax withholding which the beneficiary may need to satisfy out of other assets that they own; and (ii) whether a required distribution from a tax-qualified plan or IRA commencing on the April 1 following the calendar year in which the beneficiary attains age 70½ or, with respect to a tax-qualified plan distribution, retires, if later, could cause the beneficiary to become subject to income tax that the beneficiary would need to satisfy out of other assets if such beneficiary were not able to transfer the units for cash. Finally, all Benefit Plan Investors, including tax-qualified pension and 401(k) plans and IRAs should consider (i) whether the investment will impair the liquidity of your plan or other entity; and (ii) whether interests in us or the underlying assets owned by us constitute “plan assets” for purposes of Section 406 of ERISA or Section 4975 of the Code which could cause certain transactions with us to constitute non-exempt prohibited transactions. ERISA requires that the assets of a plan be valued at their fair market value as of the close of the plan year, and it may not be possible to adequately value the units from year to year, since there will not be a market for those units and the appreciation of any property may not be shown in the value of the units until we sell or otherwise dispose of our investments.
|
|
·
|
For redemptions beginning after one year (but before two years) 92% of purchase price or 92% of the capital account balance, whichever is less;
|
|
·
|
For redemptions beginning after two years (but before three years) 94% of purchase price or 94% of the capital account balance, whichever is less;
|
|
·
|
For redemptions beginning after three years (but before four years) 96% of purchase price or 96% of the capital account balance, whichever is less;
|
|
·
|
For redemptions beginning after four years (but before five years) 98% of purchase price or 98% of the capital account balance, whichever is less;
|
|
·
|
For redemptions beginning after five years, 100% of purchase price or 100% of the capital account balance, whichever is less.
|
|
Changes for the years ended December 31,
|
|||||||||||
|
2012
|
2011
|
||||||||||
|
Dollars
|
Percent
|
Dollars
|
Percent
|
||||||||
|
Revenue, net
|
|||||||||||
|
Interest income
|
|||||||||||
|
Interest on loans
|
$
|
162,187
|
28
|
%
|
$
|
397,345
|
213
|
%
|
|||
|
Imputed interest on formation loan
|
12,286
|
153
|
5,471
|
214
|
|||||||
|
Other interest, net
|
—
|
—
|
(1,236
|
)
|
(100
|
)
|
|||||
|
Total interest income
|
174,473
|
29
|
401,580
|
211
|
|||||||
|
Interest expense, amortization of discount
|
|||||||||||
|
on imputed interest
|
12,286
|
153
|
5,471
|
214
|
|||||||
|
Net interest income
|
162,187
|
28
|
396,109
|
211
|
|||||||
|
Late fees
|
3,682
|
213
|
1,371
|
385
|
|||||||
|
Other
|
100
|
33
|
200
|
200
|
|||||||
|
Total revenues, net
|
165,969
|
28
|
397,680
|
212
|
|||||||
|
Provision for loan losses
|
—
|
—
|
—
|
—
|
|||||||
|
Operating expenses
|
|||||||||||
|
Mortgage servicing fees
|
4,601
|
27
|
11,979
|
251
|
|||||||
|
Asset management fees
|
—
|
—
|
—
|
—
|
|||||||
|
Costs through RMC
|
33,223
|
81
|
37,270
|
939
|
|||||||
|
Professional services
|
10,118
|
201
|
(2,304
|
)
|
(31
|
)
|
|||||
|
Other
|
9,361
|
203
|
(1,533
|
)
|
(25
|
)
|
|||||
|
Total operating expenses, net
|
57,303
|
85
|
45,412
|
204
|
|||||||
|
Net income
|
$
|
108,666
|
21
|
%
|
$
|
352,268
|
213
|
%
|
|||
|
2012
|
2011
|
|||||||
|
Daily average secured loan balance(1)
|
$
|
8,708,000
|
$
|
6,689,000
|
||||
|
Interest on loans, net
|
745,739
|
583,552
|
||||||
|
Amortization loan administration fees
|
67,722
|
44,629
|
||||||
|
Interest on loans, gross
|
813,461
|
628,181
|
||||||
|
Portfolio Average Yield Rate
|
9.34
|
%
|
9.21
|
%
|
||||
|
Effective Yield Rate
|
9.34
|
%
|
9.21
|
%
|
||||
|
|
(1)
|
Portfolio Review – See Note 4 (Loans) to the financial statements included in Part II, Item 8 of this report for a detailed presentation on the secured loan portfolio.
|
|
Date
|
Net Cash
Provided By (Used In)
Operating Activities
|
Net Income
|
Distributions to
Members
|
Distributions to
Managers
|
||||||||||||
|
Jul – Sep 09
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Oct – Dec 09
|
(68,128 | ) | 14,055 | 13,914 | 141 | |||||||||||
|
Jan – Mar 10
|
(27,333 | ) | 27,335 | 28,048 | 179 | |||||||||||
|
Apr – Jun 10
|
137,616 | 23,534 | 38,713 | — | ||||||||||||
|
Jul – Sep 10
|
45,968 | 56,474 | 58,414 | — | ||||||||||||
|
Oct – Dec 10
|
54,852 | 58,341 | 78,800 | 1,477 | ||||||||||||
|
Jan – Mar 11
|
64,741 | 96,883 | 112,962 | — | ||||||||||||
|
Apr – Jun 11
|
125,021 | 116,177 | 147,873 | 2,131 | ||||||||||||
|
Jul – Sep 11
|
117,179 | 151,211 | 162,965 | (2,131 | ) | |||||||||||
|
Oct – Dec 11
|
153,654 | 153,681 | 176,990 | — | ||||||||||||
|
Jan – Mar 12
|
170,559 | 159,935 | 191,236 | — | ||||||||||||
|
Apr – Jun 12
|
114,514 | 103,257 | 205,097 | 5,180 | ||||||||||||
|
Jul – Sep 12
|
92,938 | 139,090 | 219,263 | — | ||||||||||||
|
Oct – Dec 12
|
190,706 | 224,335 | 239,204 | — | ||||||||||||
|
TOTAL
|
$ | 1,172,287 | $ | 1,324,308 | $ | 1,673,479 | $ | 6,977 | ||||||||
|
2012
|
2011
|
|||||||
|
Reinvesting
|
$
|
381,811
|
$
|
199,275
|
||||
|
Distributing
|
472,989
|
401,515
|
||||||
|
Total
|
$
|
854,800
|
$
|
600,790
|
||||
|
Percent of members’ capital, electing distribution
|
55
|
%
|
67
|
%
|
||||
|
Year ended December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
Capital liquidations-without penalty
|
$ | — | $ | — | ||||
|
Capital liquidations-subject to penalty
|
— | 15,000 | ||||||
|
Total
|
$ | — | $ | 15,000 | ||||
|
·
|
Report of Independent Registered Public Accounting Firm
|
|
·
|
Balance Sheets – December 31, 2012 and 2011
|
|
·
|
Statements of Income for the years ended December 31, 2012 and 2011
|
|
·
|
Statements of Changes in Members’ Capital for the years ended December 31, 2012 and 2011
|
|
·
|
Statements of Cash Flows for the years ended December 31, 2012 and 2011
|
|
·
|
Notes to Financial Statements
|
|
2012
|
2011
|
|||||||
|
Cash and cash equivalents
|
$
|
1,964,536
|
$
|
2,099,328
|
||||
|
Loans, secured by deeds of trust
|
||||||||
|
Principal
|
11,891,017
|
8,253,328
|
||||||
|
Advances
|
1,979
|
70
|
||||||
|
Accrued interest
|
82,536
|
54,219
|
||||||
|
Total loans
|
11,975,532
|
8,307,617
|
||||||
|
Loan administration fees, net
|
76,952
|
40,044
|
||||||
|
Total assets
|
$
|
14,017,020
|
$
|
10,446,989
|
||||
|
Liabilities – accounts payable
|
$
|
9,446
|
$
|
212
|
||||
|
Investors in applicant status
|
355,750
|
320,545
|
||||||
|
Members’ capital
|
||||||||
|
Members’ capital, subject to redemption, net of unallocated
|
||||||||
|
syndication costs of $664,520 and $498,661 for 2012 and 2011,
|
||||||||
|
respectively; and net of formation loan of $931,406 and $741,215
|
||||||||
|
for 2012 and 2011, respectively
|
13,637,215
|
10,114,766
|
||||||
|
Managers’ capital, net of unallocated syndication costs
|
||||||||
|
of $6,712 and $5,037 for 2012 and 2011, respectively
|
14,609
|
11,466
|
||||||
|
Total members’ capital
|
13,651,824
|
10,126,232
|
||||||
|
Total liabilities, investors in applicant status and members’ capital
|
$
|
14,017,020
|
$
|
10,446,989
|
|
2012
|
2011
|
|||||||
|
Revenues
|
||||||||
|
Interest income
|
||||||||
|
Loans
|
$
|
745,739
|
$
|
583,552
|
||||
|
Imputed interest on formation loan
|
20,319
|
8,033
|
||||||
|
Total interest income
|
766,058
|
591,585
|
||||||
|
Interest expense – amortization of discount on formation loan
|
20,319
|
8,033
|
||||||
|
Net interest income
|
745,739
|
583,552
|
||||||
|
Late fees
|
5,409
|
1,727
|
||||||
|
Other
|
400
|
300
|
||||||
|
Total revenues, net
|
751,548
|
585,579
|
||||||
|
Provision for loan losses
|
—
|
—
|
||||||
|
Operating expenses
|
||||||||
|
Mortgage servicing fees
|
21,357
|
16,756
|
||||||
|
Asset management fees
|
—
|
—
|
||||||
|
Costs through RMC
|
74,464
|
41,241
|
||||||
|
Professional services
|
15,144
|
5,025
|
||||||
|
Other
|
13,966
|
4,605
|
||||||
|
Total operating expenses
|
124,931
|
67,627
|
||||||
|
Net income
|
$
|
626,617
|
$
|
517,952
|
||||
|
Net income
|
||||||||
|
Managers (1%)
|
$
|
6,266
|
$
|
5,180
|
||||
|
Members (99%)
|
620,351
|
512,772
|
||||||
|
$
|
626,617
|
$
|
517,952
|
|||||
|
Net income per $1,000 invested by members
|
||||||||
|
for entire period
|
$
|
47
|
$
|
56
|
||||
|
Members
|
||||||||||||||||||||
|
Investors
|
||||||||||||||||||||
|
In
|
Unallocated
|
|||||||||||||||||||
|
Applicant
|
Syndication
|
Formation
|
||||||||||||||||||
|
Status
|
Capital
|
Costs
|
Loan
|
Capital, net
|
||||||||||||||||
|
Balances at December 31, 2010
|
$ | 1,285,031 | $ | 5,911,916 | $ | (263,865 | ) | $ | (487,674 | ) | $ | 5,160,377 | ||||||||
|
Contributions on application
|
4,329,028 | — | — | — | — | |||||||||||||||
|
Contributions admitted to members' capital
|
(5,270,414 | ) | 5,270,414 | — | — | 5,270,414 | ||||||||||||||
|
Premiums paid on application by RMC
|
52,955 | — | — | — | — | |||||||||||||||
|
Premiums admitted to members' capital
|
(76,055 | ) | 76,055 | — | — | 76,055 | ||||||||||||||
|
Net income
|
— | 512,772 | — | — | 512,772 | |||||||||||||||
|
Earnings distributed to members
|
— | (600,790 | ) | — | — | (600,790 | ) | |||||||||||||
|
Earnings distributed used in DRIP
|
— | 199,275 | — | — | 199,275 | |||||||||||||||
|
Member's redemptions
|
— | (15,000 | ) | — | — | (15,000 | ) | |||||||||||||
|
Formation loan funding
|
— | — | — | (303,032 | ) | (303,032 | ) | |||||||||||||
|
Formation loan payments received
|
— | — | — | 48,767 | 48,767 | |||||||||||||||
|
Syndication costs incurred
|
— | — | (235,268 | ) | — | (235,268 | ) | |||||||||||||
|
Early withdrawal penalties
|
— | — | 472 | 724 | 1,196 | |||||||||||||||
|
Balances at December 31, 2011
|
$ | 320,545 | $ | 11,354,642 | $ | (498,661 | ) | $ | (741,215 | ) | $ | 10,114,766 | ||||||||
|
Contributions on application
|
3,766,342 | — | — | — | — | |||||||||||||||
|
Contributions admitted to members' capital
|
(3,722,968 | ) | 3,722,968 | — | — | 3,722,968 | ||||||||||||||
|
Premiums paid on application by RMC
|
— | — | — | — | — | |||||||||||||||
|
Premiums admitted to members' capital
|
(8,169 | ) | 8,169 | — | — | 8,169 | ||||||||||||||
|
Net income
|
— | 620,351 | — | — | 620,351 | |||||||||||||||
|
Earnings distributed to members
|
— | (854,800 | ) | — | — | (854,800 | ) | |||||||||||||
|
Earnings distributed used in DRIP
|
— | 381,811 | — | — | 381,811 | |||||||||||||||
|
Member's redemptions
|
— | — | — | — | — | |||||||||||||||
|
Formation loan funding
|
— | — | — | (264,312 | ) | (264,312 | ) | |||||||||||||
|
Formation loan payments received
|
— | — | — | 74,121 | 74,121 | |||||||||||||||
|
Syndication costs incurred
|
— | — | (165,859 | ) | — | (165,859 | ) | |||||||||||||
|
Early withdrawal penalties
|
— | — | — | — | — | |||||||||||||||
|
Balances at December 31, 2012
|
$ | 355,750 | $ | 15,233,141 | $ | (664,520 | ) | $ | (931,406 | ) | $ | 13,637,215 | ||||||||
|
Managers
|
||||||||||||||||
|
Unallocated
|
Total
|
|||||||||||||||
|
Syndication
|
Members’
|
|||||||||||||||
|
Capital
|
Costs
|
Capital, net
|
Capital
|
|||||||||||||
|
Balances at December 31, 2010
|
$ | 5,933 | $ | (2,665 | ) | $ | 3,268 | $ | 5,163,645 | |||||||
|
Contributions on application
|
— | — | — | — | ||||||||||||
|
Contributions admitted to members' capital
|
5,390 | — | 5,390 | 5,275,804 | ||||||||||||
|
Premiums paid on application by RMC
|
— | — | — | — | ||||||||||||
|
Premiums admitted to members' capital
|
— | — | — | 76,055 | ||||||||||||
|
Net income
|
5,180 | — | 5,180 | 517,952 | ||||||||||||
|
Earnings distributed to members
|
— | — | — | (600,790 | ) | |||||||||||
|
Earnings distributed used in DRIP
|
— | — | — | 199,275 | ||||||||||||
|
Members’ redemptions
|
— | — | — | (15,000 | ) | |||||||||||
|
Formation loan funding
|
— | — | — | (303,032 | ) | |||||||||||
|
Formation loan payments received
|
— | — | — | 48,767 | ||||||||||||
|
Syndication costs incurred
|
— | (2,377 | ) | (2,377 | ) | (237,645 | ) | |||||||||
|
Early withdrawal penalties
|
— | 5 | 5 | 1,201 | ||||||||||||
|
Balances at December 31, 2011
|
$ | 16,503 | $ | (5,037 | ) | $ | 11,466 | $ | 10,126,232 | |||||||
|
Contributions on application
|
— | — | — | — | ||||||||||||
|
Contributions admitted to members' capital
|
3,732 | — | 3,732 | 3,726,700 | ||||||||||||
|
Premiums paid on application by RMC
|
— | — | — | — | ||||||||||||
|
Premiums admitted to members' capital
|
— | — | — | 8,169 | ||||||||||||
|
Net income
|
6,266 | — | 6,266 | 626,617 | ||||||||||||
|
Earnings distributed to members
|
(5,180 | ) | — | (5,180 | ) | (859,980 | ) | |||||||||
|
Earnings distributed used in DRIP
|
— | — | — | 381,811 | ||||||||||||
|
Members’ redemptions
|
— | — | — | — | ||||||||||||
|
Formation loan funding
|
— | — | — | (264,312 | ) | |||||||||||
|
Formation loan payments received
|
— | — | — | 74,121 | ||||||||||||
|
Syndication costs incurred
|
— | (1,675 | ) | (1,675 | ) | (167,534 | ) | |||||||||
|
Early withdrawal penalties
|
— | — | — | — | ||||||||||||
|
Balances at December 31, 2012
|
$ | 21,321 | $ | (6,712 | ) | $ | 14,609 | $ | 13,651,824 | |||||||
|
2012
|
2011
|
|||||||
|
Cash flows from operating activities
|
||||||||
|
Net income
|
$
|
626,617
|
$
|
517,952
|
||||
|
Adjustments to reconcile net income to net cash provided
|
||||||||
|
by (used in) operating activities
|
||||||||
|
Amortization of loan origination fees
|
67,722
|
44,629
|
||||||
|
Interest income, imputed on formation loan
|
(20,319
|
)
|
(8,033
|
)
|
||||
|
Amortization of discount on formation loan
|
20,319
|
8,033
|
||||||
|
Change in operating assets and liabilities
|
||||||||
|
Accrued interest
|
(28,317
|
)
|
(36,215
|
)
|
||||
|
Advances
|
(1,909
|
)
|
(70
|
)
|
||||
|
Receivable from affiliate
|
—
|
442
|
||||||
|
Loan administration fees
|
(104,630
|
)
|
(62,391
|
)
|
||||
|
Accounts payable
|
9,234
|
(1,870
|
)
|
|||||
|
Payable to affiliate
|
—
|
(1,882
|
)
|
|||||
|
Net cash provided by (used in) operating activities
|
568,717
|
460,595
|
||||||
|
Cash flows from investing activities
|
||||||||
|
Loans funded
|
(10,711,463
|
)
|
(8,360,839
|
)
|
||||
|
Principal collected on loans
|
7,073,774
|
3,263,139
|
||||||
|
Net cash provided by (used in) investing activities
|
(3,637,689
|
)
|
(5,097,700
|
)
|
||||
|
Cash flows from financing activities
|
||||||||
|
Contributions by member applicants
|
3,770,074
|
4,387,373
|
||||||
|
Members’ withdrawals
|
(478,169
|
)
|
(416,515
|
)
|
||||
|
Syndication costs paid, net
|
(167,534
|
)
|
(237,168
|
)
|
||||
|
Formation loan, funding
|
(264,312
|
)
|
(303,032
|
)
|
||||
|
Formation loan, collections
|
74,121
|
49,491
|
||||||
|
Net cash provided by (used in) financing activities
|
2,934,180
|
3,480,149
|
||||||
|
Net increase (decrease) in cash and cash equivalents
|
(134,792
|
)
|
(1,156,956
|
)
|
||||
|
Cash and cash equivalents at beginning of year
|
2,099,328
|
3,256,284
|
||||||
|
Cash and cash equivalents at end of year
|
$
|
1,964,536
|
$
|
2,099,328
|
||||
|
|
NOTE 1 – ORGANIZATION AND GENERAL
|
|
|
NOTE 1 – ORGANIZATION AND GENERAL (continued)
|
|
·
|
For redemptions beginning after one year (but before two years) 92% of purchase price or 92% of the capital account balance, whichever is less;
|
|
·
|
For redemptions beginning after two years (but before three years) 94% of purchase price or 94% of the capital account balance, whichever is less;
|
|
·
|
For redemptions beginning after three years (but before four years) 96% of purchase price or 96% of the capital account balance, whichever is less;
|
|
·
|
For redemptions beginning after four years (but before five years) 98% of purchase price or 98% of the capital account balance, whichever is less;
|
|
·
|
For redemptions beginning after five years, 100% of purchase price or 100% of the capital account balance, whichever is less.
|
|
|
NOTE 1 – ORGANIZATION AND GENERAL (continued)
|
|
2012
|
2011
|
|||||||
|
Members’ capital per financial statements
|
$
|
13,651,824
|
$
|
10,126,232
|
||||
|
Unallocated syndication costs
|
671,232
|
503,698
|
||||||
|
Allowance for loan losses
|
—
|
—
|
||||||
|
Formation loans receivable
|
931,406
|
741,215
|
||||||
|
Members’ capital tax basis
|
$
|
15,254,462
|
$
|
11,371,145
|
||||
|
2012
|
2011
|
||||||
|
Member contributions to date
|
$
|
15,272,017
|
$
|
11,506,844
|
|||
|
Balance, January 1
|
$
|
741,215
|
$
|
487,674
|
|||
|
Formation Loan made
|
264,312
|
303,032
|
|||||
|
Unamortized discount on imputed interest
|
(21,261
|
)
|
(51,489
|
)
|
|||
|
Formation Loan made, net
|
984,266
|
739,217
|
|||||
|
Repayments received from RMC
|
(74,121
|
)
|
(48,767
|
)
|
|||
|
Early withdrawal penalties applied
|
—
|
(724
|
)
|
||||
|
Formation loan, net
|
910,145
|
689,726
|
|||||
|
Unamortized discount on imputed interest
|
21,261
|
51,489
|
|||||
|
Balance, December 31
|
$
|
931,406
|
$
|
741,215
|
|||
|
Percent loaned
|
7.00
|
%
|
7.00
|
%
|
|||
|
2013
|
$
|
93,141
|
||
|
2014
|
93,141
|
|||
|
2015
|
93,141
|
|||
|
2016
|
93,141
|
|||
|
2017
|
93,141
|
|||
|
Thereafter
|
465,701
|
|||
|
Total
|
$
|
931,406
|
|
2012
|
2011
|
|||||||
|
Maximum chargeable by the managers
|
$
|
98,398
|
$
|
60,677
|
||||
|
Waived by the managers
|
(98,398
|
)
|
(60,677
|
)
|
||||
|
Charged
|
$
|
—
|
$
|
—
|
||||
|
2012
|
2011
|
|||||||
|
Balance, January 1
|
$
|
503,698
|
$
|
266,530
|
||||
|
Costs incurred
|
167,534
|
237,645
|
||||||
|
Early withdrawal penalties applied
|
—
|
(477
|
)
|
|||||
|
Allocated to date
|
—
|
—
|
||||||
|
Balance, December 31
|
$
|
671,232
|
$
|
503,698
|
||||
|
2012
|
2011
|
|||||||
|
Principal, January 1
|
$
|
8,253,328
|
$
|
3,155,628
|
||||
|
Loans funded
|
10,711,463
|
8,360,839
|
||||||
|
Payments received
|
(7,073,774
|
)
|
(3,263,139
|
)
|
||||
|
Principal, December 31
|
$
|
11,891,017
|
$
|
8,253,328
|
||||
|
2012
|
2011
|
|||||||
|
Number of secured loans
|
41
|
25
|
||||||
|
Secured loans – principal
|
$
|
11,891,017
|
$
|
8,253,328
|
||||
|
Secured loans – lowest interest rate (fixed)
|
7.75
|
%
|
7.75
|
%
|
||||
|
Secured loans – highest interest rate (fixed)
|
11.00
|
%
|
11.00
|
%
|
||||
|
Average secured loan – principal
|
$
|
290,025
|
$
|
330,133
|
||||
|
Average principal as percent of total principal
|
2.44
|
%
|
4.00
|
%
|
||||
|
Average principal as percent of members’ capital
|
2.12
|
%
|
3.26
|
%
|
||||
|
Average principal as percent of total assets
|
2.07
|
%
|
3.16
|
%
|
||||
|
Largest secured loan – principal
|
$
|
1,200,000
|
$
|
1,000,000
|
||||
|
Largest principal as percent of total principal
|
10.09
|
%
|
12.12
|
%
|
||||
|
Largest principal as percent of members’ capital
|
8.79
|
%
|
9.87
|
%
|
||||
|
Largest principal as percent of total assets
|
8.56
|
%
|
9.57
|
%
|
||||
|
Smallest secured loan – principal
|
$
|
74,857
|
$
|
97,255
|
||||
|
Smallest principal as percent of total principal
|
0.63
|
%
|
1.18
|
%
|
||||
|
Smallest principal as percent of members’ capital
|
0.55
|
%
|
0.96
|
%
|
||||
|
Smallest principal as percent of total assets
|
0.53
|
%
|
0.93
|
%
|
||||
|
Number of counties where security is located (all California)
|
13
|
10
|
||||||
|
Largest percentage of principal in one county
|
34.66
|
%
|
30.18
|
%
|
||||
|
Number of secured loans in foreclosure
|
—
|
—
|
||||||
|
Secured loans in foreclosure – principal
|
—
|
—
|
||||||
|
Number of secured loans with an interest reserve
|
—
|
—
|
||||||
|
Interest reserves
|
$
|
—
|
$
|
—
|
||||
|
2012
|
2011
|
|||||||||
|
Unpaid Principal Balance
|
Percent
|
Unpaid Principal Balance
|
Percent
|
|||||||
|
Northern California Counties
|
||||||||||
|
San Francisco
|
$
|
2,104,019
|
17.69
|
%
|
$
|
2,490,816
|
30.18
|
%
|
||
|
Santa Cruz
|
1,200,000
|
10.09
|
—
|
—
|
||||||
|
Alameda
|
1,199,567
|
10.09
|
536,595
|
6.50
|
||||||
|
Santa Clara
|
1,070,463
|
9.00
|
1,050,000
|
12.72
|
||||||
|
Contra Costa
|
428,693
|
3.61
|
308,355
|
3.74
|
||||||
|
San Mateo
|
418,371
|
3.52
|
556,592
|
6.75
|
||||||
|
Nevada
|
340,000
|
2.86
|
—
|
—
|
||||||
|
Marin
|
244,302
|
2.06
|
746,368
|
9.04
|
||||||
|
Monterey
|
183,784
|
1.55
|
184,851
|
2.24
|
||||||
|
Sonoma
|
174,689
|
1.47
|
—
|
—
|
||||||
|
7,363,888
|
61.94
|
5,873,577
|
71.17
|
%
|
||||||
|
Southern California Counties
|
||||||||||
|
Los Angeles
|
4,121,933
|
34.66
|
1,482,910
|
17.96
|
%
|
|||||
|
San Diego
|
207,338
|
1.74
|
697,529
|
8.45
|
||||||
|
Orange
|
197,858
|
1.66
|
199,312
|
2.42
|
||||||
|
4,527,129
|
38.06
|
2,379,751
|
28.83
|
%
|
||||||
|
Total secured loans
|
$
|
11,891,017
|
100.00
|
%
|
$
|
8,253,328
|
100.00
|
%
|
||
|
·
|
Secured by first deeds of trust on single-family, real property located in California;
|
|
·
|
Have monthly payments of interest only at fixed rates, calculated on a 30-year amortization basis;
|
|
·
|
Have maturities of 5 to 11 months.
|
|
2012
|
2011
|
|||||||||||||
|
Loans
|
Principal
|
Percent
|
Loans
|
Principal
|
Percent
|
|||||||||
|
First trust deeds
|
30
|
$
|
8,241,074
|
69
|
%
|
17
|
$
|
6,383,100
|
77
|
%
|
||||
|
Second trust deeds
|
11
|
3,649,943
|
31
|
8
|
1,870,228
|
23
|
||||||||
|
Total secured loans
|
41
|
11,891,017
|
100
|
%
|
25
|
8,253,328
|
100
|
%
|
||||||
|
Liens due other lenders at loan closing
|
7,182,065
|
4,569,311
|
||||||||||||
|
Total debt
|
$
|
19,073,082
|
$
|
12,822,639
|
||||||||||
|
Appraised property value at loan closing
|
$
|
37,369,615
|
$
|
26,836,465
|
||||||||||
|
Percent of total debt to appraised
|
||||||||||||||
|
values (LTV) at loan closing (1)
|
51.04
|
%
|
47.78
|
%
|
||||||||||
|
|
(1)
|
Based on appraised values and liens due other lenders at loan closing. The loan to value computation does not take into account subsequent increases or decreases in security property values following the loan closing nor does it include decreases or increases of the amount owing on senior liens to other lenders by payments or interest accruals, if any.
|
|
2012
|
2011
|
|||||||||||||
|
Loans
|
Principal
|
Percent
|
Loans
|
Principal
|
Percent
|
|||||||||
|
Single family
|
39
|
$
|
10,820,554
|
91
|
%
|
23
|
$
|
7,585,395
|
92
|
%
|
||||
|
Multi-family
|
1
|
670,463
|
6
|
1
|
267,933
|
3
|
||||||||
|
Commercial
|
1
|
400,000
|
3
|
1
|
400,000
|
5
|
||||||||
|
Land
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||
|
Total secured loans
|
41
|
$
|
11,891,017
|
100
|
%
|
25
|
$
|
8,253,328
|
100
|
%
|
||||
|
Loans
|
Principal
|
Percent
|
|||||
|
2013
|
15
|
$
|
3,914,238
|
33
|
% | ||
|
2014
|
3
|
936,895
|
8
|
||||
|
2015
|
5
|
2,420,940
|
20
|
||||
|
2016
|
5
|
994,002
|
8
|
||||
|
2017
|
11
|
2,900,229
|
25
|
||||
|
Thereafter
|
1
|
324,713
|
3
|
||||
|
Total future maturities
|
40
|
11,491,017
|
97
|
||||
|
Matured at December 31, 2012
|
1
|
400,000
|
3
|
||||
|
Total secured loans
|
41
|
$
|
11,891,017
|
100
|
%
|
||
|
2012
|
2011
|
|||||||
|
Past Due
|
||||||||
|
30-89 days
|
$
|
327,702
|
$
|
670,600
|
||||
|
90-179 days
|
199,910
|
—
|
||||||
|
180 or more days
|
—
|
—
|
||||||
|
Total past due
|
527,612
|
670,600
|
||||||
|
Current
|
11,363,405
|
7,582,728
|
||||||
|
Total secured loans
|
$
|
11,891,017
|
$
|
8,253,328
|
||||
|
|
-
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the company has the ability to access at the measurement date. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
|
-
|
Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
|
|
|
-
|
Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs reflect the company’s own assumptions about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk). Unobservable inputs are developed based on the best information available in the circumstances and may include the company’s own data.
|
|
|
The following methods and assumptions were used to estimate the fair value of assets and liabilities:
|
|
(a)
|
Cash and cash equivalents. The carrying amount equals fair value. All amounts, including interest bearing accounts, are subject to immediate withdrawal.
|
|
(b)
|
Secured loans. The fair value of the loans was $12,197,000 and $8,454,000 at December 31, 2012 and 2011, respectively. The fair value was estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans (with regards to specifics of property type, occupancy and lien position) would be made or are being made by RMC. The discount rates used at December 31, 2012 and 2011, averaged 8.5% for property types of single-family and multi-family residences and 9.5% for commercial and land property types. A market, such as would be required to designate the performing loans as being Level 1 or Level 2 does not exist. Sales of loans underwritten primarily as asset-based, are infrequent and are not usually publicly reported, even within the lending trade associations.
|
|
Entity Receiving Compensation
|
Description of Compensation and Services Rendered
|
Amount
|
|
Redwood Mortgage Corp.
|
Mortgage Servicing Fee for servicing loans
|
$21,357
|
|
(Manager)
|
||
|
Managers &/or Affiliates
|
Asset Management Fee for managing assets
|
$0
|
|
Managers
|
1% interest in profits (loss)
|
$6,266
|
|
Less allocation of syndication costs
|
$0
|
|
|
$6,266
|
||
|
Managers &/or Affiliates
|
Portion of early withdrawal penalties applied to
|
|
|
reduce Formation Loan
|
$0
|
|
Redwood Mortgage Corp.
|
Mortgage Brokerage Commissions for services in
|
|
|
connection with the review, selection, evaluation,
|
||
|
negotiation, and extension of the loans paid by the
|
||
|
borrowers and not by the company
|
$168,435
|
|
|
Redwood Mortgage Corp.
|
Processing and Escrow Fees for services in
|
|
|
connection with notary, document preparation, credit
|
||
|
investigation, and escrow fees payable by the borrowers
|
||
|
and not by the company
|
$11,634
|
|
|
Gymno LLC
|
Reconveyance Fee
|
$543
|
|
|
1.
|
In Part II, Item 8 under A –Financial Statements.
|
|
|
2. No financial statement schedules are required to be filed because Redwood Mortgage Investors IX, LLC is a smaller reporting company.
|
|
|
3.
|
Exhibits.
|
|
Exhibit No.
|
Description of Exhibits
|
|
3.1
|
*
|
Fifth Amended and Restated Limited Liability Company Operating Agreement
|
|
3.2
|
**
|
Certificate of Formation
|
|
4.1
|
*
|
Subscription Agreement and Power of Attorney, including Special Notice for California Residents
|
|
10.1
|
*
|
Distribution Reinvestment Plan
|
|
10.2
|
***
|
Loan Servicing Agreement
|
|
10.3
|
***
|
Form of Note secured by Deed of Trust for Construction Loans which provides for interest only payments
|
|
10.4
|
***
|
Form of Note secured by Deed of Trust for Commercial Loans which provides for interest only payments
|
|
10.5
|
***
|
Form of Note secured by Deed of Trust for Commercial Loans which provides for principal and interest payments
|
|
10.6
|
***
|
Form of Note secured by Deed of Trust for Residential Loans which provides for interest only payments
|
|
10.7
|
***
|
Form of Note secured by Deed of Trust for Residential Loans which provides for interest and principal prepayments
|
|
10.8
|
***
|
Construction Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing to accompany Exhibit 10.3
|
|
10.9
|
***
|
Deed of Trust, Assignment of Leases and Rents, and Security Agreement and Fixture Filing to accompany Exhibits 10.4 and 10.5
|
|
10.10
|
***
|
Deed of Trust, Assignment of Leases and Rents, and Security Agreement and Fixture Filing to accompany Exhibits 10.6 and 10.7
|
|
10.11
|
***
|
Agreement to Seek a Lender
|
|
10.12
|
***
|
Formation Loan Promissory Note
|
|
31.1
|
†
|
Certification of Manager pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
†
|
Certification of Manager pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32.1
|
†
|
Certification of Manager pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32.2
|
†
|
Certification of Manager pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
99.1
|
†
|
Selected Portions of the Company’s Prospectus, dated December 4, 2012
|
|
101.INS
|
‡
|
XBRL Instance Document
|
|
101.SCH
|
‡
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL
|
‡
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
‡
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
‡
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
‡
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
*
|
Previously filed and incorporated by reference to the same numbered Exhibit to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11 (Commission File No. 333-181953), filed on January 24, 2013.
|
|
|
**
|
Previously filed and incorporated by reference to Exhibit 3.2 to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-11 (Commission File No. 333-155428), filed on March 17, 2009.
|
|
|
***
|
Previously filed and incorporated by reference to the same numbered Exhibit to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11 (Commission File No. 333-181953), filed on November 27, 2012.
|
|
|
†
|
Filed herewith.
|
|
|
‡
|
XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
|
|
REDWOOD MORTGAGE INVESTORS IX, LLC
|
|
By:
|
Redwood Mortgage Corp., Manager
|
|||
|
By:
|
/S/ Michael R. Burwell
|
|||
|
Michael R. Burwell, President,
|
||||
|
Secretary/Treasurer
|
||||
|
By:
|
Gymno LLC, Manager
|
|||
|
By:
|
/S/ Michael R. Burwell
|
|||
|
Michael R. Burwell, Manager
|
||||
|
Signature
|
Title
|
Date
|
|
/S/ Michael R. Burwell
|
||||
|
Michael R. Burwell
|
President, Secretary/Treasurer of Redwood Mortgage Corp. (Principal Financial and Accounting Officer);
Director of Redwood Mortgage Corp.
|
March 29, 2013
|
|
/S/ Michael R. Burwell
|
||||
|
Michael R. Burwell
|
Manager of Gymno LLC
|
March 29, 2013
|
|
|
I, Michael R. Burwell, certify that:
|
|
1.
|
I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors IX, LLC, a Delaware Limited Liability Company (the “Registrant”);
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
|
|
4.
|
The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15-d-15(f)) for the Registrant and have:
|
|
|
(a)
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
|
(b)
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
|
(c)
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
|
(d)
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
|
|
5.
|
The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
|
|
|
(a)
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
|
|
|
(b)
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
|
|
|
I, Michael R. Burwell, certify that:
|
|
1.
|
I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors IX, LLC, a Delaware Limited Liability Company (the “Registrant”);
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
|
|
4.
|
The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15-d-15(f)) for the Registrant and have:
|
|
|
(a)
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
|
(b)
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
|
(c)
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
|
(d)
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
|
|
5.
|
The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
|
|
|
(a)
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
|
|
|
(b)
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
|
|
|
(1)
|
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
|
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company at the dates and for the periods indicated.
|
|
|
/s/ Michael R. Burwell
|
|
|
___________________________
|
|
|
Michael R. Burwell, President,
|
|
|
(principal executive officer and principal financial officer)
|
|
|
Redwood Mortgage Corp,
|
|
|
Manager
|
|
|
March 29, 2013
|
|
|
(1)
|
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
|
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company at the dates and for the periods indicated.
|
|
|
/s/ Michael R. Burwell
|
|
|
_____________________________
|
|
|
Michael R. Burwell,
|
|
|
Manager of Gymno LLC,
|
|
|
Manager
|
|
|
March 29, 2013
|
|
·
|
analyzed the compensation arrangements in other offerings;
|
|
·
|
spoken to other professionals in the industry including issuers, promoters and broker-dealers;
|
|
·
|
examined “rate sheets” from banks, savings & loans, mortgage brokers, mortgage bankers and consumer finance lenders, which set forth the rates being charged by those institutions for the same or similar services; and
|
|
·
|
collected data regarding compensation from trade association meetings, relevant periodicals and/or other sources.
|
|
Entity Receiving Compensation
|
Form and Method of Compensation
|
Estimated Amount Payable
for Primary Offering Midpoint
|
Estimated Amount Payable for Primary Offering Plus DRIP
|
||
|
(Unleveraged)
|
(Leveraged)(6)
|
(Unleveraged)
|
(Leveraged)(6)
|
||
|
Redwood Mortgage Corp.
|
Reimbursement of organization and offering expenses up to 4.5% of the gross primary offering proceeds. Redwood Mortgage Corp. will be responsible for any portion of organization and offering expenses exceeding 4.5% of gross primary offering proceeds.
|
$3,375,000
for the
offering
|
$3,375,000
for the
offering
|
$6,750,000
for the
offering
|
$6,750,000
for the
offering
|
|
Entity Receiving Compensation
|
Form and Method of Compensation
|
Estimated Amount Payable for Primary Offering Midpoint
|
Estimated Amount Payable for Primary Offering Plus DRIP
|
||
|
(Unleveraged)
|
(Leveraged) (6)
|
(Unleveraged)
|
(Leveraged)(6)
|
||
|
Redwood Mortgage Corp.
|
Loan brokerage commissions in an amount negotiated with prospective borrowers on a case by case basis. It is estimated that such commissions will be approximately 2% to 5% of the principal amount of each loan made. The loan brokerage commissions will be capped at 4% of our total assets per year assets (except during the first year of operations). Loan brokerage commissions are payable solely by the borrower and not by us (See “TERMS OF THE OFFERING” at page 40).
|
$380,000
per year(7)(8)
|
$624,000
per year(7)(8)
|
$940,000
per year(7)(8)
|
$1,546,000
per year(7)(8)
|
|
Redwood Mortgage Corp.
|
Loan administrative fees in an amount up to 1% of the principal amount of each new loan originated or acquired on our behalf by Redwood Mortgage Corp. for services rendered in connection with the selection and underwriting of potential loans. Such fees are payable by us upon the closing of each loan.
|
$138,000
per year(7)(8)
|
$227,000
per year(7)(8)
|
$342,000
per year(7)(8)
|
$562,000
per year(7)(8)
|
|
Redwood Mortgage Corp.
|
Processing and escrow fees for services in connection with notary, document preparation, credit investigation, and escrow fees in an amount equal to the fees customarily charged by Redwood Mortgage Corp. for comparable services in the geographical area where the property securing the loan is located, payable solely by the borrower and not by us.
|
$18,200
per year(7)
|
$30,000
per year(7)
|
$45,000
per year(7)
|
$74,000
per year(7)
|
|
Redwood Mortgage Corp.
|
Loan servicing fee, payable monthly, which when added to all other fees paid in connection with the servicing of a particular loan, does not exceed 0.25% per year of the outstanding principal amount of the loan.(1)
|
$150,000
per year(7)
|
$234,000
per year(7)
|
$357,000
per year(7)
|
$566,000
per year(7)
|
|
Entity Receiving Compensation
|
Form and Method of Compensation
|
Estimated Amount Payable for Primary Offering Midpoint
|
Estimated Amount Payable for Primary Offering Plus DRIP
|
||
|
(Unleveraged)
|
(Leveraged)(6)
|
(Unleveraged)
|
(Leveraged)(6)
|
||
|
Redwood Mortgage Corp. (75%)
Gymno LLC (25%)
|
Asset management fee payable monthly in an amount up to 0.75% annually of the portion of the capital originally committed to investment in mortgages, not including leverage, and including up to 2% of working capital reserves. This amount will be recomputed annually after the second full year of our operations by subtracting from the then fair market value of our loans plus the working capital reserves, an amount equal to our outstanding debt.(2)
|
$460,000
per year(7)
|
$460,000
per year(7)
|
$1,095,000
per year(7)
|
$1,095,000
per year(7)
|
|
Redwood Mortgage Corp.
|
Reimbursement of salaries, compensation, travel expenses and fringe benefits of personnel employed by us and involved in our business.(3)
|
$73,000
per year
|
$73,000
per year
|
$172,000
per year
|
$172,000
per year
|
|
Redwood Mortgage Corp.
|
Reimbursement of expenses relating to our administration, subject to certain limitations; see Article 11 of the operating agreement.(4)
|
$31,000
per year
|
$31,000
per year
|
$74,000
per year
|
$74,000
per year
|
|
Gymno LLC
|
Reconveyance fee for reconveyance of property upon full payment of loan, payable by borrower.
|
Approximately $45 per deed
of trust or statutory rate.
|
Approximately $45 per deed
of trust or statutory rate.
|
Approximately $45 per deed
of trust or statutory rate.
|
Approximately $45 per deed
of trust or
statutory rate.
|
|
Redwood Mortgage Corp.
|
Assumption fee for assumption of loans payable by borrower of between 0.5% and 1.5% of the loan principal balance.(5)
|
$2,800
per year(7)
|
$5,000
per year(7)
|
$7,000
per year(7)
|
$11,000
per year(7)
|
|
Redwood Mortgage Corp.
|
Extension fee for extending the loan period payable by borrower as a percentage of the loan principal balance.(5)
|
$5,600
per year(7)
|
$9,000
per year(7)
|
$14,000
per year(7)
|
$22,000
per year(7)
|
|
Redwood Mortgage Corp. (50%)
Gymno LLC (50%)
|
1% interest in profits and 1% interest in losses.
|
$50,000
per year(7)
|
$50,000
per year(7)
|
$119,000
per year(7)
|
$119,000
per year(7)
|
|
Entity Receiving Compensation
|
Form and Method of Compensation
|
Estimated Amount Payable for Primary Offering Midpoint
|
Estimated Amount Payable for Primary Offering Plus DRIP
|
||
|
(Unleveraged)
|
(Leveraged)(6)
|
(Unleveraged)
|
(Leveraged)(6)
|
||
|
Managers or Third Parties
|
The total compensation paid to all persons for the sale of property held by us as a result of foreclosure may not exceed 6% of the contract price for the sale of such property. Neither our managers nor any of their affiliates will receive a real estate commission in connection with such a sale. Foreclosed properties may not be sold to our managers or any of their affiliates at this time (See “CONFLICTS OF INTEREST” at page 52).
|
Not
determinable at this time
|
Not
determinable at this time
|
Not
determinable at this time
|
Not
determinable at this time
|
|
Entity Receiving Compensation
|
Form and Method of Compensation
|
Estimated Amount Payable for Primary Offering Midpoint
|
Estimated Amount Payable for Primary Offering Plus DRIP
|
||
|
(Unleveraged)
|
(Leveraged)(6)
|
(Unleveraged)
|
(Leveraged)(6)
|
||
|
Redwood Mortgage Corp.
|
Redwood Mortgage Corp.’s obligation to repay the principal amount of the formation loan owed to us will be reduced by a portion of the early redemption penalties received by us. Initially, a portion of the early redemption penalties will be used to reduce the formation loan obligation and a portion will be used to pay our offering expenses. This portion will be determined by the ratio between the initial amount of the formation loan and the total amount of the offering expenses incurred by us. Assuming that the maximum formation loan is $10,500,000 and the maximum organizational costs are $6,750,000, the ratio would be 61:39. This amount could be higher or lower, depending upon actual total offering expenses. That ratio will be determined by the actual formation loan and offering expenses incurred. The ratio will change as offering expenses are amortized (See “TRANSFER OF UNITS – Unit Redemption Program” at page 97).
|
$13,000
per year(7)
|
$13,000
per year(7)
|
$27,000
per year(7)
|
$27,000
per year(7)
|
|
(1)
|
For purposes of the “Estimated Amount Payable for Primary Offering Midpoint” columns, assuming that $75,000,000 of units offered in the primary offering are sold in the first year, that none of the members elect to purchase units in the distribution reinvestment plan, and that we do not obtain leverage (Unleveraged column), or we obtain leverage of 50% of the members’ capital balance (Leveraged column), we estimate that the average annual loan portfolio resulting from unit sales will average $60,000,000 (Unleveraged) and $94,000,000 (Leveraged), which amounts are the basis for the above loan servicing fee calculations. For purposes of the “Estimated Amount Payable for Primary Offering Plus DRIP” columns, assuming that $150,000,000 of units offered in the primary offering are sold in the first year and $37,500,000 of units under the distribution reinvestment plan are sold over a period of years, that 60% of the members elect to purchase units in the distribution reinvestment plan, and that we do not obtain leverage (Unleveraged column), or we obtain leverage of 50% of the members’ capital balance (Leveraged column), we estimate that the average annual loan portfolio resulting from unit sales will average $142,800,000 (Unleveraged) and $226,000,000 (Leveraged), which amounts are the basis for the above loan servicing fee calculations. Our managers, who will service all of our loans, are entitled to receive a maximum loan servicing fee, payable monthly, of up to 0.25% per year of the outstanding principal amount of each loan. Our managers, in their sole discretion, may elect to lower the loan servicing fee for any period of time and thereafter raise the fees up to the stated limits. An increase or decrease in this fee within the limits set by the operating agreement directly impacts the yield to the members.
|
|
(2)
|
The managers, in their sole discretion, may elect to lower the amount of the asset management fee they receive. The managers may not increase the asset management fee above the maximum amount. An increase or decrease in this fee within the limits set by the operating agreement directly impacts the yield to the members. The asset management fee is anticipated to be paid 75% to Redwood Mortgage Corp. and 25% to Gymno LLC. The managers may, in their discretion, change the relative amount received by each of them. No asset management fees will be payable on subscription funds held in the subscription account.
|
|
(3)
|
Includes reimbursement of salaries, compensation, travel expenses and fringe benefits of persons who may also be employees of our managers or their affiliates, but excludes such items incurred or allocated to any person holding a 5% or greater equity interest in a manager or affiliate, or a person having the power to direct a manager or affiliate.
|
|
(4)
|
The managers or their affiliates are reimbursed for the actual cost of goods and materials used for or by the company and obtained from unaffiliated parties. In addition, the managers or their affiliates are reimbursed for the cost of administrative services necessary for the prudent operation of the company provided that such reimbursement will be the lesser of (i) the actual cost of such services or (ii) the amount that the company would be required to pay independent parties for comparable services.
|
|
(5)
|
Redwood Mortgage Corp. may receive assumption fees and extension fees estimated to range between 0.5% and 1.5% of the outstanding principal balance of a loan when a new borrower assumes the loan obligations of the original borrower in the case of a loan assumption or when a lender allows the extension of the maturity date in the case of a loan extension. The actual amount of the assumption fees and extension fees is determined by the managers at the time of the assumption or extension based on such factors as current interest rates, the amount of the outstanding loan and the credit worthiness of the new borrower. Assumption fees and extension fees are paid by the borrower.
|
|
(6)
|
Our maximum leverage is limited to, and our total indebtedness may not at any time exceed, 50% of members’ capital. The “Leveraged” columns assume that our managers have obtained leverage in an amount equal to 50% of members’ capital. We may borrow funds for the purpose of making loans, for increased liquidity, reducing cash reserve needs or for any other company purposes.
|
|
(7)
|
The amount of fees to be paid to the managers and their affiliates related to this offering are based on certain assumptions made in light of the managers’ experience with similar programs. For purposes of the “Estimated Amount Payable for Primary Offering Midpoint” column, in determining the average annual fees to be paid to the managers and their affiliates related to this offering the managers have assumed, based upon their experience the following: (i) the company operates for 12 years assuming $75,000,000 is raised in the first year; (ii) none of the members elect to participate in our distribution reinvestment plan; (iii) an 8.00% yield is achieved in all 12 years; (iv) withdrawal rates of 1% in year two, 2% in year three, 2.5% in year four, 2.5% in year five and 3.5% in subsequent years through year 12; (v) a turnover rate on loans of 5% in year two, of 10% in year three, 15% in year four and 20% in years thereafter; (vi) no leveraging of the portfolio occurs (Unleveraged column), or we obtain leverage of 50% of the members’ capital balance (Leveraged column); (vii) syndication costs of $3,375,000 are incurred in year one; (viii) cash liquidity reserves are 2% of our capital originally committed to investment in mortgages; and (ix) a formation loan of $5,250,000 is incurred upon the sale of units and is repaid according to its terms in equal amortizing payments of principal beginning on December 31 of year two. For purposes of the “Estimated Amount Payable for Primary Offering Plus DRIP” columns, in determining the average annual fees to be paid to the managers and their affiliates related to this offering the managers have assumed, based upon their experience the following: (i) the company operates for 12 years assuming $150,000,000 is raised in the first year; (ii) 60% of the members elect to participate in our distribution reinvestment plan until all 37,500,000 units have been sold; (iii) an 8.00% yield is achieved in all 12 years; (iv) withdrawal rates of 1% in year two, 2% in year three, 2.5% in year four, 2.5% in year five and 3.5% in subsequent years through year 12; (v) a turnover rate on loans of 5% in year two, of 10% in year three, 15% in year four and 20% in years thereafter; (vi) no leveraging of the portfolio occurs (Unleveraged column), or we obtain leverage of 50% of the members’ capital balance (Leveraged column); (vii) syndication costs of $6,750,000 are incurred in year one; (viii) cash liquidity reserves are 2% of our capital originally committed to investment in mortgages; and (ix) a formation loan of $10,500,000 is incurred upon the sale of units and is repaid according to its terms in equal amortizing payments of principal beginning on December 31 of year two. However, because the estimated amount of fees to be paid to the managers and their affiliates is based on certain assumptions and conditions, including, historical experience, which may not provide an exact measurement of the fees to be paid, the general state of the economy, interest rates, the turnover rate of loans, company earnings, the duration and type of loans the company will make, and the election of members to purchase units by participating in our distribution reinvestment plan or receive periodic cash distributions, the actual amount of fees paid will vary from those set forth above. The managers and their affiliates may receive additional fees to the extent we reinvest the principal on repaid loans.
|
|
(8)
|
For purposes of the “Estimated Amount Payable for Primary Offering Midpoint” columns, to estimate the maximum loan brokerage commissions and loan administrative fees, we have assumed that cash available for investment in loans will average $13,818,000 (Unleveraged) and $22,691,000 (Leveraged) per year and that we will receive an average of 2.75 points from the borrower on each loan. For purposes of the “Estimated Amount Payable for Primary Offering Plus DRIP” columns, to estimate the maximum loan brokerage commissions and loan administrative fees, we have assumed that cash available for investment in loans will average $34,182,000 (Unleveraged) and $56,218,000 (Leveraged) per year and that we will receive an average of 2.75 points from the borrower on each loan. The loan administrative fees were also calculated based on the same cash availability for investments in loans.
|
|
Year Ended
December 31, 2011
|
Year Ended
December 31, 2010
|
|||||||||||||||||||||||||||||||
|
Actual Amount Received
|
Actual Fee
%
|
Maximum Amount Allowable
|
Maximum Fee
%
|
Actual Amount Received
|
Actual Fee
%
|
Maximum Amount Allowable
|
Maximum Fee
%
|
|||||||||||||||||||||||||
|
Paid by the Company:
|
||||||||||||||||||||||||||||||||
|
Loan Administrative Fee
|
$ | 62,400 | 1 | % | $ | 62,400 | 1 | % | $ | 20,800 | 1 | % | $ | 20,800 | 1 | % | ||||||||||||||||
|
Loan Servicing Fee
|
$ | 16,800 | 0.25 | % | $ | 16,800 | 0.25 | % | $ | 4,800 | 0.25 | % | $ | 4,800 | 0.25 | % | ||||||||||||||||
|
Asset Management Fee(1)
|
$ | 0 | 0 | % | $ | 60,700 | 0.75 | % | $ | 0 | 0 | % | $ | 26,300 | 0.75 | % | ||||||||||||||||
|
Reimbursement of Operating
|
$ | 41,200 | N/A | $ | 41,200 | N/A | $ | 4,000 | N/A | $ | 4,000 | N/A | ||||||||||||||||||||
|
Expenses
|
||||||||||||||||||||||||||||||||
|
1% of Profits, Losses and
|
$ | 5,200 | 1 | % | $ | 5,200 | 1 | % | $ | 1,700 | 1 | % | $ | 1,700 | 1 | % | ||||||||||||||||
|
Disbursements
|
||||||||||||||||||||||||||||||||
|
Paid by the Borrowers:
|
||||||||||||||||||||||||||||||||
|
Loan Brokerage Fees(2)
|
$ | 134,700 | 2.16 | % | $ | 417,900 | 4 | % | $ | 54,800 | 2.64 | % | $ | 258,100 | 4 | % | ||||||||||||||||
|
Processing and Servicing Fees
|
$ | 10,000 | N/A | $ | 10,000 | N/A | $ | 4,300 | N/A | $ | 4,300 | N/A | ||||||||||||||||||||
|
(ranges from approximately
$500 to $1,000 per loan based
|
||||||||||||||||||||||||||||||||
|
upon loan size)
|
||||||||||||||||||||||||||||||||
|
Reconveyance Fees
|
$ | 500 | N/A | $ | 500 | N/A | $ | 200 | N/A | $ | 200 | N/A | ||||||||||||||||||||
|
(maximum of $45 per deed of
|
||||||||||||||||||||||||||||||||
|
trust or equal to fractionalized
|
||||||||||||||||||||||||||||||||
|
interest of the company in the
|
||||||||||||||||||||||||||||||||
|
deed of trust)
|
||||||||||||||||||||||||||||||||
|
Assumption Fee
|
$ | 0 | N/A | $ | 0 | N/A | $ | 0 | N/A | $ | 0 | N/A | ||||||||||||||||||||
|
Extension Fee
|
$ | 0 | N/A | $ | 0 | N/A | $ | 0 | N/A | $ | 0 | N/A | ||||||||||||||||||||
|
(ranges from approximately $250 to $1,000 per loan based
|
||||||||||||||||||||||||||||||||
|
upon loan size)
|
||||||||||||||||||||||||||||||||
|
Paid by Others:
|
||||||||||||||||||||||||||||||||
|
Interest earned on deposit
|
$ | 0 | N/A | $ | 0 | N/A | $ | 1,200 | N/A | $ | 1,200 | N/A | ||||||||||||||||||||
|
Early withdrawal penalty(3)
|
$ | 1,200 | N/A | $ | 1,200 | N/A | $ | 2,100 | N/A | $ | 2,100 | N/A | ||||||||||||||||||||
|
(1)
|
The actual asset management fee for the years ended 2011 and 2010 was waived by the managers. The maximum amount allowable for both years 2011 and 2010 was calculated based on the maximum 0.75% asset management fee allowable. An increase or decrease in the asset management fee within the limits set by the operating agreement directly affects the yield to the members.
|
|
(2)
|
Although Redwood Mortgage Corp. can receive loan brokerage fees of up to five percent (5%) or higher if such fees could have been negotiated with borrowers, the figures reflect actual loan brokerage fees charged on the loans. For the years 2011 and 2010, the loan brokerage fees were 2.16% and 2.64%, respectively, of the principal amount of the loans extended and 1.29% and 0.85% of total company assets as of December 31, 2011 and 2010, respectively.
|
|
(3)
|
Amount of early withdrawal penalties collected from early withdrawing members and applied against the formation loan and syndication costs.
|
|
·
|
the size of the loan;
|
|
·
|
portfolio diversification;
|
|
·
|
amount of uninvested funds; and
|
|
·
|
the length of time that excess funds have remained uninvested.
|
|
·
|
Yield a high rate of return from mortgage lending;
|
|
·
|
Preserve and protect our capital; and
|
|
·
|
Generate and distribute cash flow from operations to investors.
|
|
·
|
less liquid;
|
|
·
|
not readily transferable; and
|
|
·
|
not provide a guaranteed return over its investment life.
|
|
·
|
single-family residences (including homes, condominiums and townhouses, including 1-4 unit residential buildings);
|
|
·
|
multi-family properties (such as apartment buildings);
|
|
·
|
commercial property (such as stores, shops, offices, warehouses and retail strip centers); and
|
|
·
|
land.
|
|
·
|
Priority of Mortgages. The lien securing each loan will not be junior to more than two other encumbrances (a first and, in some cases a second deed of trust) on the real property that is to be used as security for the loan. Although we may also make wrap-around or “all-inclusive” loans, those wrap-around loans will include no more than two underlying obligations (See “CERTAIN LEGAL ASPECTS OF LOANS – Special Considerations in Connection with Junior Encumbrances” at page 72). We anticipate that our loans will eventually be diversified as to priority approximately as follows:
|
|
·
|
Geographic Area of Lending Activity. We will limit lending to properties located in California, and primarily in the nine San Francisco Bay Area counties. These counties, which have an aggregate population of over 7.3 million, are San Francisco, San Mateo, Santa Clara, Alameda, Contra Costa, Marin, Napa, Solano and Sonoma. The economy of the area where the security is located is important in protecting market values. Therefore, our managers will limit the largest percentage of our lending activity principally to the San Francisco Bay Area since it has a broad diversified economic base, an expanding working population and a minimum of buildable sites. Our managers believe these factors generally contribute to a stable market for residential property. Although we anticipate that our primary area of lending will be Northern California, we may elect to make loans secured by real property located throughout California. As of September 30, 2012, 54% ($5,039,603) of our loans were secured by properties located in the nine counties that comprise the San Francisco Bay Area.
|
|
·
|
Construction Loans. We may make construction loans up to a maximum of 10% of our loan portfolio. With respect to residential property, a construction loan is a loan in which the proceeds are used to construct a new dwelling (up to four units) on a parcel of property on which no dwelling previously existed or on which the existing dwelling was entirely demolished. With respect to commercial property, a construction loan is a loan in which the proceeds are used to construct an entirely new building on a parcel of property on which no building existed or on which an existing building was entirely demolished. It is possible that with the disbursement of undisbursed commitments, there may be times when the aggregate amount of our construction loans would exceed 10% of its total loan portfolio. Our managers anticipate, however, that as such undisbursed commitments are disbursed, the total amount of construction loans will not exceed such 10% level because such disbursed loans will be offset by repayments of other outstanding construction loans and by the overall growth in our loan portfolio. As of September 30, 2012, we had not funded any construction loans.
|
|
·
|
Rehabilitation Loans. We will also make “rehabilitation loans” to finance remodeling, additions to and/or rehabilitation of an existing structure or dwelling, whether residential, commercial or multi-family properties. While we will not classify rehabilitation loans as construction loans, rehabilitation loans do carry some of the same risks as construction loans. We may make rehabilitation loans up to a maximum of 15% of our total loan portfolio. As of September 30, 2012, we had not funded any rehabilitation loans.
|
|
·
|
Loan-to-Value Ratios. The amount of our loan combined with the outstanding debt secured by a senior deed of trust on the security property generally will not exceed a specified percentage of the appraised value of the security property as determined by an independent written appraisal at the time the loan is made. These loan-to-value ratios are as follows:
|
|
Type of Security Property
|
Loan-to-Value Ratio
|
|
|
Residential (including apartments)
|
80%
|
|
|
Commercial (including retail stores, office buildings, warehouses facilities, mixed use properties)
|
75%
|
|
|
Land
|
50%
|
|
·
|
Terms of Loans. Most of our loans are for a period of one to five years, but in no event more than 15 years. Most loans provide for monthly payments of interest and/or principal and interest only. Many loans provide for payments of interest only or are partially amortizing with a “balloon” payment of principal payable in full at the end of the term. Some loans provide for the deferral and compounding of all or a portion of accrued interest for various periods of time. We generally do not grant borrowers an option to refinance or extend the loan at the time the loan is made. However, we may agree to extend or refinance a loan at its maturity if deemed appropriate and advisable for business reasons or in light of the then current economic climate or other factors.
|
|
·
|
Escrow Conditions. Loans are funded through an escrow account handled by a title insurance company, an escrow company or by Redwood Mortgage Corp., subject to the following conditions:
|
|
§
|
Satisfactory title insurance coverage is obtained for all loans. The title insurance policy will name us as the insured and provides title insurance in an amount at least equal to the principal amount of the loan. Title insurance insures only the validity and priority of our deed of trust, and does not insure us against loss by reason of other causes, such as diminution in the value of the security property, over appraisals, etc.
|
|
§
|
Satisfactory fire and casualty insurance is obtained for all loans, naming us as loss payee in an amount equal to cover the replacement cost of improvements.
|
|
§
|
Our managers do not intend to arrange, and to date have not arranged, for mortgage insurance, which would afford some protection against loss if we foreclose on a loan and there is insufficient equity in the security property to repay all sums owed. If our managers determine in their sole discretion to obtain such insurance, the minimum loan-to-value ratio for residential property loans will be increased.
|
|
§
|
All loan documents (notes, deeds of trust, escrow agreements, and any other documents needed to document a particular transaction or to secure the loan) and insurance policies will name us as payee and beneficiary. Loans will not be written in the name of our managers or any other nominee.
|
|
·
|
Loans to our Managers and Their Affiliates. We will make a formation loan to Redwood Mortgage Corp. pursuant to the terms of our operating agreement. However, we may not acquire a loan from, or sell a loan to, a program in which a manager or its affiliate has an interest, except as allowed under our operating agreement. In addition, we may not provide a mortgage loan to mortgage programs formed by or affiliated with us.
|
|
·
|
Purchase of Loans from Managers, Affiliates and Third Parties. We may not purchase a loan in which a manager or its affiliate has an interest unless: (i) the manager or its affiliate acquired the loan temporarily in its name for the purpose of facilitating the acquisition of the loan and provided that the loan is purchased from the manager for a price no greater than the cost of the loan to the manager, except for the compensation allowed by the NASAA Mortgage Guidelines; or (ii) the purchase is made from a program pursuant to the rights of first refusal required by the provisions of the NASAA Mortgage Guidelines. In addition, existing loans may be purchased from the managers, their affiliates or other third parties, but only so long as any such loan is not in default and otherwise satisfies all of the foregoing requirements; provided, the managers and their affiliates will sell no more than a 90% interest and retain a 10% interest in any loan sold to us that they have held for more than 180 days. In such case, the managers and their affiliates will hold their 10% interest and we will hold our 90% interest in the loan as tenants in common. Our purchase price for any such loan will not exceed the par value of the note or its fair market value, whichever is lower.
|
|
·
|
Sale of Loans. We may not sell a loan to a manager unless: (i) we do not have sufficient offering proceeds available to retain the loan; (ii) the manager pays us an amount of cash equal to the cost of the loan (including all related cash payments and carrying costs); (iii) the manager assumes all of our obligations and liabilities incurred in connection with holding the loan; and (iv) the sale occurs not later than 90 days following the termination date of the offering. A manager or its affiliate will purchase all loans that we do not have sufficient proceeds to retain. In the event that the offering proceeds are insufficient to retain all loans, we will sell loans to the managers on a “last-in, first-out” basis. Our managers or their affiliates may sell loans to third parties (or fractional interests therein) if and when our managers determine that it appears to be advantageous to do so. We may not give a manager or its affiliate an exclusive right or employment to sell or otherwise dispose of loans or other assets of the company.
|
|
·
|
Note Hypothecation. We may make loans that will be secured by assignments of secured promissory notes. The amount of a loan secured by an assigned note will satisfy the loan-to-value ratios set forth above (which are determined as a specified percentage of the appraised value of the underlying property) and also will not exceed 80% of the principal amount of the assigned note. For example, if the property securing a note is commercial property, the total amount of outstanding debt secured by such property, including the debt represented by the assigned note and any senior mortgages, must not exceed 75% of the appraised value of such property, and the loan will not exceed 80% of the principal amount of the assigned note. For purposes of making loans secured by promissory notes, we will rely on the appraised value of the underlying property, as determined by an independent written appraisal that was conducted within the last 12 months. If such appraisal was not conducted within the last 12 months, then we will arrange for a new appraisal to be prepared for the property. All such appraisals will satisfy our loan-to-value ratios set forth above. Any loan evidenced by a note assigned to us will also satisfy all other lending standards and policies described herein. Concurrently with our making of the loan, the borrower, (i.e., the holder of the promissory note) will execute a written assignment that will assign to us their interest in the promissory note. No more than 10% of our portfolio at any time will be secured by promissory notes.
|
|
·
|
Investments in or with Other Programs. We may invest in general partnerships or joint ventures with our other publicly registered affiliates if: (1) the programs have substantially identical investment objectives; (2) there are no duplicate fees; (3) the compensation to the managers or general partners of the programs is substantially identical in each program; (4) each program has a right of first refusal to buy if the other programs wish to sell assets held in the joint venture; and (5) the investment of each program is on substantially the same terms and conditions. Participants in such investments may from time to time reach an impasse on joint venture decisions since no participant controls decisions. In addition, while a joint venture participant may have the right to buy the assets from the general partnership or joint venture, it may not have the resources to do so. We may also invest in general partnership interests of limited partnerships, but only if we, alone or together with our publicly registered affiliate meeting the above requirements, acquire a controlling interest, no duplicate fees are payable and no additional compensation beyond that permitted by the NASAA Mortgage Guidelines, is paid to the managers. We may not invest in interests of other programs.
|
|
·
|
Loan Participation. We may participate in loans with other programs organized by our managers, where we will purchase a fractional undivided interest in a loan, meeting the requirements set forth above. Because we will not participate in a loan that would not otherwise meet our requirements, the risk of such participation is minimized. We may also participate in loans with nonaffiliated lenders, individuals or pension funds. Any such participation would only be on the terms and conditions set above. We may also acquire from or sell to affiliated publicly registered mortgage programs, participation interests in loans.
|
|
·
|
Diversification. We may not invest in or make loans on any one property that would exceed, in the aggregate, an amount equal to 10% of the then total gross proceeds of this offering. We may not invest in or make loans to or from any one borrower that would exceed, in the aggregate, an amount greater than 10% of the then total gross proceeds of this offering.
|
|
·
|
Other Limitations. We may not make a loan secured by unimproved real property, except in amounts and upon terms that can be financed by the offering proceeds or from cash flow and provided investment in such unimproved real property does not exceed 10% of the then total gross proceeds of this offering. Properties will not be considered unimproved if they are expected to produce income within a reasonable period of time after their acquisition, and for this purposes, two years will be deemed to be presumptively reasonable. We may not invest in real estate contracts of sale unless such contracts of sale are in recordable form and are appropriately recorded in the chain of title.
|
|
·
|
Reserve Liquidity Fund. A contingency reserve liquidity fund equal to the lesser of 2% of the gross proceeds of the offering or 2% of our capital originally committed to investment in mortgages will be established for the purpose of covering our unexpected cash needs.
|
|
·
|
issue senior securities;
|
|
·
|
invest in the securities of other public companies for the purpose of exercising control;
|
|
·
|
underwrite securities of other public companies; or
|
|
·
|
offer securities in exchange for property.
|
|
Note 4 - Loans (Detail) - Secured Loans Summarized by Payment Delinquency (USD $)
|
Dec. 31, 2012
|
Dec. 31, 2011
|
Dec. 31, 2010
|
|---|---|---|---|
| Secured loans | $ 11,891,017 | $ 8,253,328 | $ 3,155,628 |
|
Past Due 30-89 Days [Member]
|
|||
| Secured loans | 327,702 | 670,600 | |
|
Past Due 90-179 Days [Member]
|
|||
| Secured loans | 199,910 | ||
|
Total Past Due [Member]
|
|||
| Secured loans | 527,612 | 670,600 | |
|
Current [Member]
|
|||
| Secured loans | $ 11,363,405 | $ 7,582,728 |
|
Note 3 - Managers and Other Related Parties (Detail) - Syndication Costs (USD $)
|
12 Months Ended | |
|---|---|---|
|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
| Balance, January 1 | $ 503,698 | $ 266,530 |
| Costs incurred | 167,534 | 237,645 |
| Early withdrawal penalties applied | (477) | |
| Balance, December 31 | $ 671,232 | $ 503,698 |
|
Note 3 - Managers and Other Related Parties
|
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Dec. 31, 2012
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Related Party Transactions Disclosure [Text Block] |
NOTE 3
– MANAGERS AND OTHER RELATED PARTIES
The
managers are entitled to one percent of the profits and
losses, which amounted to $6,266 and $5,180 for the years
ended December 31, 2012 and 2011, respectively.
Formation
loan
Formation
loan transactions are presented in the following table for
the years ended December 31.
The
formation loan has been deducted from members’
capital in the balance sheets. As amounts are collected
from RMC, the deduction from capital will be reduced.
Interest has been imputed at the market rate of interest in
effect at the end of each quarter for the new additions to
the loan. If the managers are removed and RMC is no longer
receiving payments for services rendered, the formation
loan is forgiven.
The
future minimum payments on the formation loan are presented
in the following table ($ in thousands).
RMC
is required to repay the formation loan. During the offering
period, RMC will repay annually, one tenth of the principal
balance of the formation loan as of December 31 of the prior
year. Upon completion of the offering, the formation loan
will be amortized over 10 years and repaid in 10 equal annual
installments.
The
following commissions and fees are paid by the
borrowers.
Brokerage
commissions, loan originations
For
fees in connection with the review, selection, evaluation,
negotiation and extension of loans, RMC may collect a loan
brokerage commission that is expected to range from
approximately 2% to 5% of the principal amount of each loan
made during the year. Total loan brokerage commissions are
limited to an amount not to exceed 4% of the total company
assets per year. The loan brokerage commissions are paid by
the borrowers, and thus, are not an expense of the company.
In 2012 and 2011, loan brokerage commissions paid by the
borrowers were $168,435 and $134,678, respectively.
Other
fees
RMC
or Gymno will receive fees for processing, notary, document
preparation, credit investigation, reconveyance, and other
mortgage related fees. The amounts received are customary for
comparable services in the geographical area where the
property securing the loan is located, payable solely by the
borrower and not by the company. In 2012 and 2011, these fees
totaled $12,177 and $10,432, respectively.
The
following fees are paid by the company.
Loan
administrative fees
RMC
will receive a loan administrative fee in an amount up to 1%
of the principal amount of each new loan originated or
acquired on the company's behalf by RMC for services rendered
in connection with the selection and underwriting of
potential loans. Such fees are payable by the company upon
the closing of each loan. In 2012 and 2011, the loan
administration fees paid by the company to RMC were $104,630
and $62,391, respectively.
Mortgage
servicing fees
RMC
earns mortgage servicing fees of up to one-quarter of one
percent (0.25%) annually of the unpaid principal of the loan
portfolio or such lesser amount as is reasonable and
customary in the geographic area where the property securing
the mortgage is located from the company. RMC is entitled to
receive these fees regardless of whether specific mortgage
payments are collected. The mortgage servicing fees are
accrued monthly on all loans. Remittance to RMC is made
monthly unless the loan has been assigned a specific loss
reserve, at which point remittance is deferred until the
specific loss reserve is no longer required, or the property
has been acquired by the company. RMC, in its sole
discretion, may elect to accept less than the maximum amount
of the mortgage servicing fee to enhance the earnings of the
company. An increase or decrease in this fee within the
limits set by the operating agreement directly impacts the
yield to the members. Mortgage servicing fees incurred and
paid were $21,357 and $16,756 for the years ended December
31, 2012 and 2011, respectively.
Asset
management fees
The
managers are entitled to receive a monthly asset management
fee for managing the company's portfolio and operations in an
amount up to three-quarters of one percent (0.75%) annually
of the portion of the capital originally committed to
investment in mortgages, not including leverage, and
including up to two percent of working capital reserves. This
amount will be recomputed annually after the second full year
of operations by subtracting from the then fair value of the
company’s loans plus working capital reserves, an
amount equal to the outstanding debt.
The
managers, in their sole discretion, may elect to accept
less than the maximum amount of the asset management fee to
enhance the earnings of the company. For years ended
December 31, 2012 and 2011, the managers have waived the
entire asset management fee due them. An increase or
decrease in this fee within the limits set by the operating
agreement directly impacts the yield to the members. There
is no assurance the managers will decrease or waive these
fees in the future. The decision to waive fees and the
amount, if any, to be waived, is made by the managers in
their sole discretion.
Asset
management fees paid to the managers are presented in the
following table for the years ended December 31.
Clerical
costs through RMC
RMC,
a manager, is reimbursed by the company for operating
expenses incurred on behalf of the company, including without
limitation, accounting and audit fees, legal fees and
expenses, postage and preparation of reports to members, and
out-of-pocket general and administration expenses. The
decision to request reimbursement of any qualifying charges
is made by RMC in its sole discretion. Operating expenses
were $74,464 and $41,241, for the years ended December 31,
2012 and 2011, respectively.
Syndication
costs
Organizational
and syndication costs are limited to 4.5% of the gross
proceeds, with any excess being paid by the managers.
Applicable gross proceeds were $14,916,267. Related
expenditures, net of early withdrawal penalties applied,
totaled $671,232 or 4.5% of contributions.
Syndication
costs incurred by the company are summarized in the following
table for the years ended December 31.
RMC
is entitled to receive reimbursement of organizational and
offering expenses expended on our behalf. Through December
31, 2012, organizational and offering expenses totaled
approximately $2,346,000. Upon achieving the minimum unit
sales of 1,000,000 units, the company became obligated to
reimburse RMC for these costs up to an amount equal to 4.5%
of gross offering proceeds until RMC has been fully
reimbursed for organizational and offering expenses it
incurred. As of December 31, 2012, approximately $1,675,000
was to be reimbursed to RMC contingent upon future sales of
member units.
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