10-Q 1 d188532d10q.htm 10-Q 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

 

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

For the transition period from                      to                     

Commission file number: 000-55601

 

 

REDWOOD MORTGAGE INVESTORS IX, LLC

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   26-3541068

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

1825 S. Grant Street, Suite 250, San Mateo, CA   94402-2678
(Address of principal executive offices)   (Zip Code)

(650) 365-5341

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer    ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company    x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  YES    x  NO

 

 

 


Part I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

REDWOOD MORTGAGE INVESTORS IX, LLC

Balance Sheets

March 31, 2016 (unaudited) and December 31, 2015 (audited)

 

     March 31,
2016
     December 31,
2015
 
ASSETS   

Cash and cash equivalents

   $ 2,910,835       $ 1,808,839   

Loans

     

Principal

     29,633,693         27,360,138   

Advances

     20,526         22,731   

Accrued interest

     216,231         177,209   
  

 

 

    

 

 

 

Loan balances secured by deeds of trust

     29,870,450         27,560,078   

Loan administrative fees, net

     68,058         86,398   
  

 

 

    

 

 

 

Total loans

     29,938,508         27,646,476   
  

 

 

    

 

 

 

Total assets

   $ 32,849,343       $ 29,455,315   
  

 

 

    

 

 

 

LIABILITIES, INVESTORS IN APPLICANT STATUS, AND MEMBERS’ CAPITAL

 

Liabilities – Accounts payable

   $ 2,251      $ 2,664   

Investors in applicant status

     2,116,929        1,022,865   

Members’ capital, net

     32,717,254        30,171,527   

Receivable from manager (formation loan)

     (1,987,091     (1,741,741
  

 

 

   

 

 

 

Members’ capital, net, less formation loan

     30,730,163        28,429,786   
  

 

 

   

 

 

 

Total liabilities, investors in applicant status and members’ capital

   $ 32,849,343      $ 29,455,315   
  

 

 

   

 

 

 

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

 

2


REDWOOD MORTGAGE INVESTORS IX, LLC

Statements of Income

For the Three Months Ended March 31, 2016 and 2015 (unaudited)

 

     Three Months Ended
March 31,
 
     2016      2015  

Revenues, net

     

Interest income

   $ 594,992       $ 398,467   

Late fees

     3,254         2,260   
  

 

 

    

 

 

 

Total revenues

     598,246         400,727   
  

 

 

    

 

 

 

Operations Expense

     

Mortgage servicing fees

     17,256         12,160   

Asset management fees, net (Note 3)

     —           —     

Costs from Redwood Mortgage Corp., net (Note 3)

     —           36,286   

Professional services, net (Note 3)

     6,625         643   

Other

     4,206         1,576   
  

 

 

    

 

 

 

Total operations expense

     28,087         50,665   
  

 

 

    

 

 

 

Net income

   $ 570,159       $ 350,062   
  

 

 

    

 

 

 

Members (99%)

   $ 564,457       $ 346,561   

Manager (1%)

     5,702         3,501   
  

 

 

    

 

 

 
   $ 570,159       $ 350,062   
  

 

 

    

 

 

 

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

 

3


REDWOOD MORTGAGE INVESTORS IX, LLC

Statement of Changes in Members’ Capital

For the Three Months Ended March 31, 2016 (unaudited)

 

           Members Capital, net  
     Investors
In
Applicant
Status
    Members’
Capital
    Manager’s
Capital
    Unallocated
Organization
and Offering
Expenses
    Members’
Capital, net
 

Balances at December 31, 2015

   $ 1,022,865        31,403,178        47,874        (1,279,525     30,171,527   

Contributions on application

     3,639,999        —          —          —          —     

Contributions admitted to members’ capital

     (2,545,935     2,545,935        2,553        —          2,548,488   

Premiums paid on application by RMC

     7,700        —          —          —          —     

Premiums admitted to members’ capital

     (7,700     7,700        —          —          7,700   

Net income

     —          564,457        5,702        —          570,159   

Earnings distributed to members

     —          (527,520     (17,571     —          (545,091

Earnings distributed used in DRIP

     —          302,515        —          —          302,515   

Members’ redemptions

     —          (232,208     —          —          (232,208

Organization and offering expenses

     —          —          —          (114,566     (114,566

Manager reimbursement

     —          —          —          8,730        8,730   

Early withdrawal penalties

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

   $ 2,116,929        34,064,057        38,558        (1,385,361     32,717,254   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


REDWOOD MORTGAGE INVESTORS IX, LLC

Statements of Cash Flows

For the Three Months Ended March 31, 2016 and 2015 (unaudited)

 

     2016     2015  

Operations

    

Interest received

   $ 574,310      $ 409,752   

Other loan income

     3,304        2,310   

Loan administrative fee paid

     —          (36,600

Operations expense

     (28,538     27,093   
  

 

 

   

 

 

 

Cash from operations

     549,076        402,555   
  

 

 

   

 

 

 

Investing – loan principal/advances

    

Principal collected on loans

     3,818,945        1,545,434   

Loans originated

     (6,092,500     (3,660,000

Advances on loans

     2,205        (154
  

 

 

   

 

 

 

Cash used in loan principal/advances, net

     (2,271,350     (2,114,720
  

 

 

   

 

 

 

Financing – members’ capital

    

Contributions by members

     3,650,241        2,183,809   

Organization and offering expenses paid, net

     (105,837     (124,679

Formation loan funding

     (245,350     (152,561

Formation loan collected

     —          8,366   
  

 

 

   

 

 

 

Cash from members’ capital

     3,299,053        1,914,935   
  

 

 

   

 

 

 

Net cash increase(decrease) before distributions to members

     1,576,780        202,770   
  

 

 

   

 

 

 

Distributions to members

    

Earnings distributed

     (242,576     (179,438

Redemptions

     (232,208     (153,474
  

 

 

   

 

 

 

Cash distributions to members

     (474,784     (332,912
  

 

 

   

 

 

 

Net increase(decrease) in cash

     1,101,996        (130,142
  

 

 

   

 

 

 

Cash, beginning of period

     1,808,839        1,264,314   
  

 

 

   

 

 

 

Cash, end of period

   $ 2,910,835      $ 1,134,172   
  

 

 

   

 

 

 
Reconciliation of net income to net cash provided by (used in) operating activities   
     2016     2015  

Net income

   $ 570,159      $ 350,062   

Adjustments to reconcile net income to net cash provided by (used in) operating activities

    

Amortization of loan administrative fees

     18,340        31,691   

Change in operating assets and liabilities

    

Accrued interest

     (39,022     (20,407

Receivable from affiliate

     —          77,347   

Loan administrative fees

     —          (36,600

Accounts payable

     2,124        —     

Other

     (2,525     462   
  

 

 

   

 

 

 

Total adjustments

     (21,083     52,493   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

   $ 549,076      $ 402,555   
  

 

 

   

 

 

 

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

 

5


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

NOTE 1 – ORGANIZATION AND GENERAL

In the opinion of the manager, the accompanying unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial information included therein. These financial statements should be read in conjunction with the audited financial statements included in the company’s Form 10-K for the fiscal year ended December 31, 2015 filed with the U.S. Securities and Exchange Commission (SEC). The results of operations for the three month period ended March 31, 2016 are not necessarily indicative of the operations results to be expected for the full year.

Redwood Mortgage Investors IX, LLC (RMI IX or the company) is a Delaware limited liability company formed in October 2008 to engage in business as a mortgage lender and investor by making and holding-for-investment mortgage loans secured by California real estate, primarily through first and second deeds of trust.

The company is externally managed. Redwood Mortgage Corp. (RMC) is the manager of the company. The manager is solely responsible for managing the business and affairs of the company, subject to the voting rights of the members on specified matters. The manager acting alone has the power and authority to act for and bind the company. The manager is required to contribute to capital one tenth of one percent (0.1%) of the aggregate capital accounts of the members. The mortgage loans the company funds and/or invests in are arranged and generally are serviced by RMC.

The rights, duties and powers of the members and manager of the company are governed by the company’s operating agreement, the Delaware Limited Liability Company Act and the California Revised Uniform Limited Liability Company Act. Members should refer to the company’s operating agreement for complete disclosure of its provisions.

Profits and losses are allocated among the members according to their respective capital accounts monthly after one percent (1%) of the profits and losses are allocated to the manager. The monthly results are subject to subsequent adjustment as a result of quarterly and year-end accounting and reporting. Federal and state income taxes are the obligation of the members, if and when taxes apply, other than the annual California franchise tax and any California LLC cash receipts taxes paid by the company.

The ongoing sources of funds for loans are the proceeds from (1) sale of members’ units, including units sold by reinvestment of distributions (DRIP), (2) loan payoffs, (3) borrowers’ monthly principal and interest payments, and, (4) to a lesser degree and, if obtained, a line of credit. Cash generated from loan payoffs and borrower payments of principal and interest is used for operating expenses, income distributions to members, reimbursements to RMC of origination and offering expenses and unit redemptions. The cash flow, if any, in excess of these uses is re-invested in new loans.

Ongoing public offering of units/ SEC registrations

In December, 2012, the company’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (SEC File No. 333-181953) to offer up to 150,000,000 units ($150,000,000) to the public and 37,500,000 units ($37,500,000) to its members pursuant to the DRIP became effective. The offering of units is ongoing and was extended by filing of a new, third registration statement on Form S-11 (SEC File No. 333-208315) in December 2015. The current, extended offering continues until the earlier of either the effective date of the third registration statement, or June 1, 2016. When the third registration statement is declared effective, the offering will continue for up to three (3) years thereafter.

The units have been registered pursuant to Section 12(g) of the Exchange Act. Such registration of the units, along with the satisfaction of certain other requirements under ERISA, enables the units to qualify as “publicly-offered securities” for purposes of ERISA and regulations issued thereunder. By satisfying those requirements, the underlying assets of the company should not be considered assets of a “benefit plan investor” (as defined under ERISA) by virtue of the investment by such benefit plan investor in the units.

 

6


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 1 – ORGANIZATION AND GENERAL (continued)

 

Distribution policy

Cash available for distribution at the end of each calendar month is allocated ninety-nine percent (99%) to the members and one percent (1%) to the manager. Cash available for distribution means cash flow from operations (excluding repayments for loan principal and other capital transaction proceeds) less amounts set aside for creation or restoration of reserves. The manager may withhold from cash available for distribution otherwise distributable to the members with respect to any period the respective amounts of organization and offering expenses allocated to the members for the applicable period pursuant to the company’s reimbursement and allocation of organization and offering expenses policy.

Per the terms of the company’s operating agreement, cash available for distribution allocated to the members is allocated among the members in proportion to their percentage interests (except with respect to differences in the amounts of organization and offering expenses allocated to the respective members during the applicable period) and in proportion to the number of days during the applicable month that they owned such percentage interests.

Distributions allocable to members, other than those participating in the distribution reinvestment plan (DRIP), are distributed to them in cash at the end of each calendar month. The manager’s allocable share of cash available for distribution is also distributed not more frequently than with cash distributions to members. Cash available for distribution allocable to members who participate in the DRIP is credited to their respective capital accounts at the end of each calendar month.

To determine the amount of cash to be distributed in any specific month, the company relies in part on its annual forecast of profits, which takes into account the difference between the forecasted and actual results in the prior year and the requirement to maintain a cash reserve.

Distribution reinvestment plan

The DRIP provision of the operating agreement permits members to elect to have all or a portion of their monthly distributions reinvested in additional units. Members may withdraw from the DRIP with written notice.

Liquidity and unit redemption program

No public trading market exists for the units and none is likely to develop. Thus, there is no certainty the units can be sold at a price equal to the stated value of the capital account. In order to provide liquidity, the company adopted a unit redemption program that provides for a member to redeem all or part of their units, subject to certain limitations.

After the one-year period, a member may redeem all or part of their units, subject to certain limitations. The price paid for redeemed units will be based on the lesser of the purchase price paid by the redeeming member or the member’s capital account balance as of the date of each redemption payment. Redemption value will be calculated as follows:

 

   After one year:     92% of purchase price or the capital account balance, whichever is less;
   After two years:     94% of purchase price or the capital account balance, whichever is less;
   After three years:     96% of purchase price or the capital account balance, whichever is less;
   After four years:     98% of purchase price or the capital account balance, whichever is less;
   After five years:   100% of purchase price or the capital account balance, whichever is less.

The company redeems units quarterly, subject to certain limitations as provided for in the operating agreement.

 

7


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 1 – ORGANIZATION AND GENERAL (continued)

 

Liquidity and unit redemption program (continued)

 

The number of units that may be redeemed per quarter per individual member is subject to a maximum of the greater of 100,000 units or 25% of the member’s units outstanding. For redemption requests requiring more than one quarter to fully redeem, the percentage discount amount that, if any, applies when the redemption payments begin continues to apply throughout the redemption period and applies to all units covered by such redemption request regardless of when the final redemption payment is made.

The company has not established a cash reserve from which to fund redemptions. The company’s capacity to redeem units upon request is limited by the availability of cash and the company’s cash flow. The company will not, in any calendar year, redeem more than five percent (5%) of the weighted average number of units outstanding during the twelve-month period immediately prior to the date of the redemption.

Lending and investment guidelines, objectives and criteria

The company’s loans generally have shorter maturity terms than typical mortgages. In the event a borrower is unable to repay in full the principal owing on the loan at maturity, the company may consider extending the term through a loan modification or may foreclose and take back the property for sale.

Generally, interest rates on the company’s mortgage loans are not affected by market movements in interest rates. If, as expected, we continue to make primarily fixed rate loans and interest rates were to rise, a possible result would be lower prepayments of the company’s loans. This increase in the duration of the time loans are on the books may reduce overall liquidity, which itself may reduce the partnership’s investment into loans at higher interest rates. Conversely, if interest rates were to decline, we could see a significant increase in borrower prepayments. If we then invest in new loans at lower rates of interest, a lower yield to partners would possibly result.

RMI IX’s primary investment objectives are to:

 

    Yield a favorable rate of return from the company’s business of making or investing in loans,

 

    Preserve and protect the company’s capital by making and/or investing in loans secured by California real estate, preferably income-producing properties geographically situated in the San Francisco Bay Area and the coastal metropolitan regions of Southern California, and,

 

    Generate and distribute net cash flow from these mortgage lending and investing activities.

The company generally funds loans:

 

    Having monthly payments of interest only or of principal and interest at fixed rates, calculated on a 30-year amortization basis, and,

 

    Having maturities of 5 years or less, not to exceed 15 years.

The cash flow and the income generated by the real property securing the loan factor into the credit decisions, as does the general creditworthiness, experience and reputation of the borrower. However, for loans secured by real property, other than owner-occupied personal residences, such 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 company’s loan combined with the outstanding debt and claims secured by a senior deed of trust on the real property, if any, generally is not to exceed a percentage of the appraised value of the property (the “loan to value ratio”, or LTV) specified in the lending guidelines.

 

8


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 1 – ORGANIZATION AND GENERAL (continued)

 

Unit sales commissions paid to broker-dealers/formation loan

Commissions for units sales to be paid to broker-dealers (B/D sales commissions) are paid by RMC and are not paid directly by the company out of offering proceeds. Instead, the company advances to RMC amounts sufficient to pay the B/D sales commissions and premiums to be paid to investors in connection with unsolicited orders up to seven percent (7%) of offering proceeds. The receivable arising from the advances is unsecured, and non-interest bearing and is referred to as the “formation loan.”

Reimbursement and allocation of organization and offering expenses

The manager is reimbursed for, or the company may pay directly, organization and offering expenses (or O&O expenses) incurred in connection with the organization of the company or offering of the units including, without limitation, attorneys’ fees, accounting fees, printing costs and other selling expenses (other than sales commissions) in a total amount not exceeding 4.5% of the original purchase price of all units (other than DRIP units) sold in all offerings (hereafter, the “maximum O&O expenses”), and the manager pays any O&O expenses in excess of the maximum O&O expenses. For each calendar quarter or portion thereof after December 31, 2015 that a member holds units (other than DRIP units) and for a maximum of forty such quarters, a portion of the O&O expenses borne by the company is allocated to and debited from that member’s capital account in an annual amount equal to 0.45% of the member’s original purchase price for those units, in equal quarterly installments of 0.1125% each commencing with the later of the first calendar quarter of 2016 or the first full calendar quarter after a member’s purchase of units, and continuing through the quarter in which such units are redeemed. If at any time the aggregate O&O expenses actually paid or reimbursed by the company since inception are less than the maximum O&O expenses, the company shall first reimburse the manager for any O&O expenses previously borne by it so long as it does not result in the company bearing more than the maximum O&O expenses, and any savings thereafter remaining shall be equitably allocated among (and serve to reduce any subsequent such cost allocations to) those members who have not yet received forty quarterly allocations of O&O expenses, as determined in the good faith judgment of the managers. Any O&O expenses with respect to a member’s units that remain unallocated upon redemption of such units shall be reimbursed to the company by the manager.

Term of the Company

The term of the company will continue until October 8, 2028, unless sooner terminated as provided in the operating agreement.

 

9


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Management estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the allowance for loan losses, including, when applicable, the valuation of impaired loans (which itself requires determining the fair value of the collateral), and the valuation of real estate held for sale and held as investment, at acquisition and subsequently. Actual results could differ significantly from these estimates.

-Fair value estimates

GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

Fair values of assets and liabilities are determined based on the fair-value hierarchy established in GAAP. The hierarchy is comprised of three levels of inputs to be used:

 

    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 in active markets and quoted prices for identical assets or liabilities that are not active, and inputs other than quoted prices that are observable or inputs derived from or corroborated by market data.

 

    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 fair value of the collateral is determined by exercise of judgment based on management’s experience informed by appraisals (by licensed appraisers), brokers’ opinion of values and publicly available information on in-market transactions. Appraisals of commercial real property generally present three approaches to estimating value: 1) market comparables or sales approach; 2) cost to replace; and 3) capitalized cash flows or investment approach. These approaches may or may not result in a common, single value. The market-comparables approach may yield several different values depending on certain basic assumptions, such as, determining highest and best use (which may or may not be the current use); determining the condition (e.g., as-is, when-completed or for land when-entitled); and determining the unit of value (e.g., as a series of individual unit sales or as a bulk disposition).

 

10


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Management estimates (continued)

 

Management has the requisite familiarity with the real estate markets it lends in generally and of the properties lent on specifically to analyze sales-comparables and assess their suitability/applicability. Management is acquainted with market participants – investors, developers, brokers, lenders – that are useful, relevant secondary sources of data and information regarding valuation and valuation variability. These secondary sources may have familiarity with and perspectives on pending transactions, successful strategies to optimize value and the history and details of specific properties – on and off the market – that enhance the process and analysis that is particularly and principally germane to establishing value in distressed markets and/or property types.

Collateral fair values are reviewed quarterly and the protective equity for each loan is computed. As used herein, “protective equity” is the arithmetic difference between the fair value of the collateral, net of any senior liens, and the loan balance, where “loan balance” is the sum of the unpaid principal, advances and the recorded interest thereon. This computation is done for each loan (whether impaired or performing), and while loans secured by collateral of similar property type are grouped, there is enough distinction and variation in the collateral that a loan-by-loan, collateral-by-collateral analysis is appropriate.

Cash and cash equivalents

The company considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Periodically, company cash balances in banks exceed federally insured limits.

Loans and interest income

Loans generally are stated at the unpaid principal balance (principal). Management has discretion to pay amounts (advances) to third parties on behalf of borrowers to protect the company’s interest in the loan. Advances include, but are not limited to, the payment of interest and principal on a senior lien to prevent foreclosure by the senior lien holder, property taxes, insurance premiums and attorney fees. Advances generally are stated at the amounts paid out on the borrower’s behalf and any accrued interest on amounts paid out, until repaid by the borrower.

The company may fund a specific loan origination net of an interest reserve to insure timely interest payments at the inception (one to two years) of the loan. As monthly interest payments become due, the company funds the payments into the affiliated trust account. In the event of an early loan payoff, any unapplied interest reserves would be first applied to any accrued but unpaid interest and then as a reduction to the principal.

If events and or changes in circumstances cause management to have serious doubts about the collectability of the payments of interest and principal in accordance with the loan agreement, a loan may be designated as impaired. Impaired loans are included in management’s periodic analysis of recoverability. Any subsequent payments on impaired loans are applied to late fees, then to the accrued interest, then to advances, and lastly to principal.

From time to time, the company negotiates and enters into loan modifications with borrowers whose loans are delinquent. In the normal course of the company’s operations, loans that mature may be renewed at then current market rates and terms for new loans. Such renewals are not designated as impaired, unless the renewed loan was previously designated as impaired.

 

11


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Loans and interest income

Interest is accrued daily based on the principal of the loans. An impaired loan continues to accrue as long as the loan is in the process of collection and is considered to be well-secured. Loans are placed on non-accrual status at the earlier of management’s determination that the primary source of repayment will come from the foreclosure and subsequent sale of the collateral securing the loan (which usually occurs when a notice of sale is filed) or when the loan is no longer considered well-secured. When a loan is placed on non-accrual status, the accrual of interest is discontinued; however, previously recorded interest is not reversed. A loan may return to accrual status when all delinquent interest and principal payments become current in accordance with the terms of the loan agreement.

Loan administration fees are capitalized and amortized over the life of the loan on a straight-line method which approximates the effective interest method.

Allowance for loan losses

Loans and the related accrued interest and advances are analyzed on a periodic basis for ultimate recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. For impaired loans, a provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral values, such that the net carrying amount (unpaid principal balance, plus advances, plus accrued interest less the specific allowance) is reduced to the present value of future cash flows discounted at the loan’s effective interest rate, or, if a loan is collateral dependent, to the estimated fair value of the related collateral, net of any senior loans, and net of any costs to sell in arriving at net realizable value if planned disposition of the asset securing a loan is by way of sale.

The fair value estimates are derived from information available in the real estate markets including similar property, and may require the experience and judgment of third parties such as commercial real estate appraisers and brokers.

Loans determined not to be individually impaired are grouped by the property type of the underlying collateral, and for each loan and for the total by property type, the amount of protective equity or amount of exposure to loss is computed.

Based on its knowledge of the borrowers and their historical (and expected) performance, and the exposure to loss as indicated in the analysis, management estimates an appropriate reserve by property type for probable credit losses in the portfolio. Because the company is an asset-based lender, except as to owner-occupied residences, and because specific regions, neighborhoods and even properties within the same neighborhoods vary significantly as to real estate values and transaction activity, general market trends, which may be indicative of a change in the risk of a loss, and a borrower’s creditworthiness are secondary to the condition of the property, the property type and the neighborhood/region in which the property is located, and do not enter substantially into the determination of the amount of the non-specific (i.e., general) reserves

The company charges off uncollectible loans and related receivables directly to the allowance account once it is determined the full amount is not collectible.

 

12


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Real estate owned (REO)

Real estate owned (REO) is property acquired in full or partial settlement of loan obligations generally through foreclosure, and is recorded at acquisition at the lower of the amount owed on the loan (legal basis), plus any senior indebtedness, or at the property’s net realizable value, which is the fair value less estimated costs to sell, as applicable. The fair value estimates are derived from information available in the real estate markets, including similar property, and often require the experience and judgment of third parties such as commercial real estate appraisers and brokers. The estimates figure materially in calculating the value of the property at acquisition, the level of charge to the allowance for loan losses and any subsequent valuation reserves. After acquisition, costs incurred relating to the development and improvement of property are capitalized to the extent they do not cause the recorded value to exceed the net realizable value, whereas costs relating to holding and disposition of the property are expensed as incurred. After acquisition, REO is analyzed periodically for changes in fair values and any subsequent write down is charged to operations expenses. Any recovery in the fair value subsequent to such a write down is recorded and is not to exceed the value recorded at acquisition. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale, including potential seller financing.

Recently issued accounting pronouncements

There are no recently effective or issued but not yet effective accounting pronouncements which would have a material effect on the company’s reported financial position or results of operations.

NOTE 3 – MANAGER AND OTHER RELATED PARTIES

RMC’s allocated one percent (1%) of the profits and losses was $5,702 and $3,501 for the three months ended March 31, 2016 and 2015, respectively.

The manager, at its sole discretion, provided financial support in the form of fee waivers and cost actions that improved net income and the return to investors in both 2016 and 2015. Total support provided, as detailed below, was approximately $235,000 and $78,000 for the three months ended March 31, 2016 and 2015, respectively.

The fee waivers and cost actions were not made for the purpose of providing the company with sufficient funds to satisfy withdrawal requests, nor to meet any required level of distributions, as the company has no such required level of distributions. RMC does not use any specific criteria in determining the exact amount of fees to be waived and/or costs to be absorbed. Any decision to waive fees and/or to absorb costs, and the amount (if any) to be waived or absorbed, is made by RMC in its sole discretion

 

13


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 3 – MANAGER AND OTHER RELATED PARTIES (continued)

 

Formation loan

Formation loan transactions are presented in the following table at March 31, 2016.

 

     Three months
ended
     Since
Inception
 

Balance, January 1

   $ 1,741,741       $ —     

Formation loan advances to RMC

     245,350         2,443,832   

Payments received from RMC

     —           (445,123

Early withdrawal penalties applied

     —           (11,618
  

 

 

    

 

 

 

Balance, March 31

   $ 1,987,091       $ 1,987,091   
  

 

 

    

 

 

 

Subscription proceeds since inception

      $ 34,806,878   
     

 

 

 

Formation loan advance rate

        7
     

 

 

 

The future minimum payments on the formation loan are presented in the following table as of March 31, 2016.

 

2016

   $ 174,174   

2017

     174,174   

2018

     174,174   

2019

     174,174   

2020

     174,174   

Thereafter

     1,116,221   
  

 

 

 

Total

   $ 1,987,091   
  

 

 

 

The annual payments on the formation loan are one-tenth of the principal balance outstanding at December 31 of the prior year. Upon termination of the offering, the principal balance outstanding will be paid over 10 years, in equal annual installments. The formation loan is forgiven if the manager is removed and RMC is no longer receiving payments for services rendered.

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 in any year are limited to an amount not to exceed 4% of the total company assets at the beginning of the year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the company. These fees totaled $132,088 and $27,925 for the three months ended, March 31, 2016 and 2015, respectively.

 

14


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 3 – MANAGER AND OTHER RELATED PARTIES (continued)

 

-Other fees

RMC receives 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. These fees totaled $22,249 and $4,322 for the three months ended March 31, 2016 and 2015, respectively.

The following fees are paid by the company.

-Loan administrative fees

RMC is entitled to 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 or acquisition of each loan. The loan administration fees paid by the company to RMC were $0 and $36,600 for the three months ended, March 31, 2016 and 2015, respectively. In August 2015 RMC, at its sole discretion, began waiving loan administrative fees. Loan administrative fees waived for the three months ending March 31, 2016 were approximately $60,925. There is no assurance RMC will waive these fees in the future.

-Mortgage servicing fees

RMC earns mortgage servicing fees from the company of up to one-quarter of one percent (0.25%) annually of the unpaid principal balance of the loan portfolio or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. 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. To enhance the earnings of the company, RMC, in its sole discretion, may elect to accept less than the maximum amount of the mortgage servicing fee. 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 $17,256 and $12,160 for the three months ended March 31, 2016 and 2015, respectively. RMC did not waive any mortgage servicing fees during the three months ended March 31, 2016 and 2015.

-Asset management fees

RMC is 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 (2%) of working capital reserves. This amount is recomputed annually by subtracting from the then fair value of the company’s loans plus working capital reserves, an amount equal to the outstanding debt.

RMC, at its sole discretion, may elect to accept less than the maximum amount of the asset management fee. 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 RMC will decrease or waive these fees in the future.

 

15


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 3 – MANAGER AND OTHER RELATED PARTIES (continued)

 

-Asset management fees (continued)

 

Asset management fees paid to RMC are presented in the following table for the three months ended March 31.

 

     2016      2015  

Maximum chargeable by RMC

   $ 60,107       $ 44,149   

Waived by RMC

     (60,107      (44,149
  

 

 

    

 

 

 

Charged

   $ —         $ —     
  

 

 

    

 

 

 

-Costs through RMC

RMC, per the operating agreement, may request reimbursement by the company for operations expense 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. Certain costs (e.g. postage) can be allocated specifically to the company. Other costs are allocated on a pro-rata basis (e.g. by the company’s percentage of total capital of all mortgage funds managed by RMC). Payroll and consulting fees are broken out first based on activity, and then allocated to the company on a pro-rata basis based on percentage of capital to the total capital of all mortgage funds. The decision to request reimbursement of any qualifying charges is made by RMC at its sole discretion. For the three months ended March 31, 2016 and 2015, costs incurred by RMC, for which reimbursement could have been requested, were $58,459 and $36,286, respectively. For the three months ended March 31, 2016 and 2015, $0 and $36,286 of fees were collected.

In addition, RMC, at its sole discretion, may elect to reimburse the company for professional services (primarily audit and tax expense). An increase or decrease in reimbursements by RMC directly impacts the yield to the members. RMC reimbursed the company for professional services of $55,389 and $33,531 for the three months ended, March 31, 2016 and 2015, respectively.

 

16


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 3 – MANAGER AND OTHER RELATED PARTIES (continued)

 

Reimbursement and allocation of organization and offering expenses

Organization and offering expenses (O & O expenses) are summarized in the following table for the three months ended March 31, 2016 and 2015.

 

     2016     2015  

Balance, January 1

   $ 1,279,525      $ 953,271   

O&O expenses reimbursed to RMC

     114,566        124,679   

Early withdrawal penalties applied (1)

     —          (201

O&O expenses allocated

     —          —     

O&O expenses reimbursed by manager (2)

     (8,730     —     
  

 

 

   

 

 

 

Balance, March 31

   $ 1,385,361      $ 1,077,749   
  

 

 

   

 

 

 

Gross proceeds admitted

   $ 32,689,949      $ 23,954,735   

Percent reimbursed to RMC

     4.50     4.50

O & O expenses incurred by RMC, RMI IX inception to date

   $ 4,355,425      $ 3,175,384   

O & O expenses incurred by RMC and remaining to be reimbursed to RMC contingent upon future sales of units

   $ 2,884,378      $ 2,097,635   

 

(1) Early withdrawal penalties collected are applied to the next installment of principal due under the formation loan and to reduce the amount owed RMC for O&O expenses. The amounts credited will be determined by the ratio between the amount of the formation loan and the amount of offering costs incurred by the company.
(2) The manager reimburses the company for any unallocated O&O expenses on units redeemed.

NOTE 4 – LOANS

Loans generally are funded at a fixed interest rate with a loan term of up to five years. Loans acquired are generally done so within the first six months of origination, and purchased at the current par value, which approximates fair value. As of March 31, 2016, 78 of the company’s 81 loans (representing 99% of the aggregate principal of the company’s loan portfolio) have a loan term of five years or less from loan inception. The remaining loans have terms longer than five years. Substantially all loans are written without a prepayment penalty provision. As of March 31, 2016, 20 loans outstanding (representing 31% of the aggregate principal balance of the company’s loan portfolio) provide for monthly payments of interest only, with the principal due in full at maturity. The remaining loans require monthly payments of principal and interest, typically calculated on a 30-year amortization, with the remaining principal balance due at maturity.

Secured loans unpaid principal balance (principal)

Secured loan transactions are summarized in the following table for the three months ended March 31.

 

     2016      2015  

Principal, January 1

   $ 27,360,138       $ 19,185,660   

Loans Funded

     —           —     

Loans acquired from affiliates

     6,092,500         3,660,000   

Principal payments received

     (3,818,945      (1,545,434
  

 

 

    

 

 

 

Principal, March 31

   $ 29,633,693       $ 21,300,226   
  

 

 

    

 

 

 

 

17


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 4 – LOANS (continued)

 

Loan characteristics

Secured loans had the characteristics presented in the following table.

 

     March 31,
2016
    December 31,
2015
 

Number of secured loans

     81        75   

Secured loans – principal

   $ 29,633,693      $ 27,360,138   

Secured loans – lowest interest rate (fixed)

     7.5     7.5

Secured loans – highest interest rate (fixed)

     10.0     10.0

Average secured loan – principal

   $ 365,848      $ 364,801   

Average principal as percent of total principal

     1.2     1.3

Average principal as percent of members’ capital

     1.2     1.3

Average principal as percent of total assets

     1.1     1.2

Largest secured loan – principal

   $ 1,200,000      $ 1,200,000   

Largest principal as percent of total principal

     4.0     4.4

Largest principal as percent of members’ capital

     3.9     4.2

Largest principal as percent of total assets

     3.7     4.1

Smallest secured loan – principal

   $ 38,002      $ 45,906   

Smallest principal as percent of total principal

     0.1     0.2

Smallest principal as percent of members’ capital

     0.1     0.2

Smallest principal as percent of total assets

     0.1     0.2

Number of counties where security is located (all California)

     17        17   

Largest percentage of principal in one county

     28.1     32.3

Number of secured loans in foreclosure

     1        1   

Secured loans in foreclosure – principal

   $ 191,411      $ 191,772   

Number of secured loans with an interest reserve

     —          —     

Interest reserves

   $ —        $ —     

As of March 31, 2016, the company’s largest loan with a principal balance of $1,200,000 represented 4.0% of outstanding secured loans and 3.7% of company assets. The loan is secured by a residential property located in San Francisco, California, bears an interest rate of 8.5% per annum and matures on July 1, 2016. The loan listed as in foreclosure is current in terms of loan payments, and is expected to perform in accordance with the note.

 

18


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 4 – LOANS (continued)

 

Lien position

Secured loans had the lien positions presented in the following table.

 

    March 31, 2016     December 31, 2015  
    Loans     Principal     Percent     Loans     Principal     Percent  

First trust deeds

    66      $ 24,796,222        84     59      $ 21,204,614        77

Second trust deeds

    15        4,837,471        16        16        6,155,524        23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total secured loans

    81        29,633,693        100     75        27,360,138        100

Liens due other lenders at loan closing

      9,124,335            9,564,255     
   

 

 

       

 

 

   

Total debt

    $ 38,758,028          $ 36,924,393     
   

 

 

       

 

 

   

Appraised property value at loan closing

    $ 76,081,840          $ 71,836,840     
   

 

 

       

 

 

   

Percent of total debt to appraised values (LTV) at loan closing(1)

      54.1         54.8  
   

 

 

       

 

 

   

 

(1) Based on appraised values and liens due other lenders at loan closing. The weighted-average loan-to-value (LTV) computation above does not take into account subsequent increases or decreases in property values following the loan closing nor does it include decreases or increases of the amount owing on senior liens to other lenders.

Property type

Secured loans summarized by property type are presented in the following table.

 

     March 31, 2016     December 31, 2015  
     Loans      Principal      Percent     Loans      Principal      Percent  

Single family(2)

     62       $ 20,527,138         69     58       $ 19,664,462         72

Multi-family

     5         2,806,815         10        4         2,266,402         8   

Commercial

     14         6,299,740         21        13         5,429,274         20   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total secured loan balance

     81       $ 29,633,693         100     75       $ 27,360,138         100
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(2) Single family property type as of March 31, 2016 consists of seven loans with principal of $2,434,838 that are owner occupied and 55 loans with principal of $18,092,300 that are non-owner occupied. At December 31, 2015, single family property consisted of six loans with principal of $2,098,628 that were owner occupied and 52 loans with principal of $13,193,373 that were non-owner occupied.

 

19


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 4 – LOANS (continued)

 

Delinquency

Secured loans summarized by payment delinquency are presented in the following table.

 

     March 31, 2016      December 31, 2015  
     Loans      Amount      Loans      Amount  

Past Due

           

30-89 days

     2       $ 640,600         1       $ 318,020   

90-179 days

     —           —           —           —     

180 or more days

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     2         640,600         1         318,020   

Current

     79         28,993,093         74         27,042,118   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total secured loan balance

     81       $ 29,633,693         75       $ 27,360,138   
  

 

 

    

 

 

    

 

 

    

 

 

 

Modifications and troubled debt restructurings

There were no loan modifications made during the three months ended March 31, 2016, and no modifications were in effect as of March 31, 2016 or December 31, 2015.

Loans in non-accrual status

At March 31, 2016 and December 31, 2015, there were no loans designated in non-accrual status.

Impaired loans/allowance for loan losses

At March 31, 2016 and December 31, 2015, the company had not designated any loans as impaired and had not recorded an allowance for loan losses, as all loans were deemed to have protective equity such that collection is reasonably assured for amounts owing.

Scheduled maturities

Secured loans are scheduled to mature as presented in the following table.

 

Scheduled maturities, as of March 31, 2016

   Loans      Principal      Percent  

2016(3)

     15       $ 7,129,374         24

2017

     17         6,770,394         22   

2018

     15         5,345,913         18   

2019

     14         4,340,619         14   

2020

     15         4,049,103         14   

2021

     3         1,837,331         6   

Thereafter

     1         62,002         1   
  

 

 

    

 

 

    

 

 

 

Total future maturities

     80         29,534,736         99   

Matured as of March 31, 2016(4)

     1         98,957         1   
  

 

 

    

 

 

    

 

 

 

Total secured loan balance

     81       $ 29,633,693         100
  

 

 

    

 

 

    

 

 

 

 

(3) Loans maturing in 2016 from April 1 to December 31.
(4) Loan matured in March of 2016 and was in the process of being renewed at the quarter end.

 

20


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 4 – LOANS (continued)

 

Scheduled maturities (continued)

 

Loans may be repaid or refinanced before, at or after the contractual maturity date. On matured loans, the company may continue to accept payments while pursuing collection of amounts owed from borrowers. Therefore, the above tabulation for scheduled maturities is not a forecast of future cash receipts.

For the three months ended March 31, 2016, there were no renewals made.

Distribution of loans within California

The distribution of secured loans outstanding by California counties is presented in the following table.

 

     March 31, 2016     December 31, 2015  
     Principal      Percent     Principal      Percent  

San Francisco Bay Area

          

Alameda

   $ 5,523,481         18.6   $ 5,121,849         18.7

San Francisco

     3,178,200         10.7        3,885,098         14.2   

San Mateo

     2,752,331         9.3        3,057,222         11.2   

Santa Clara

     2,683,758         9.0        1,383,633         4.9   

Contra Costa

     1,901,850         6.4        1,303,036         4.7   

Solano

     824,549         2.8        —           —     

Marin

     379,021         1.3        379,758         1.5   

Sonoma

     38,002         0.1        45,906         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

 
     17,281,192         58.2        15,176,502         55.4   

Other Northern California

          

Monterey

     888,174         3.0        559,304         2.1   

Placer

     358,441         1.2        359,118         1.3   

Yolo

     171,294         0.6        174,927         0.6   

San Joaquin

     159,245         0.5        159,533         0.6   

Sacramento

     —           —          214,607         0.8   
  

 

 

    

 

 

   

 

 

    

 

 

 
     1,577,154         5.3        1,467,489         5.4   

Northern California Total

     18,858,346         63.5        16,643,991         60.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Los Angeles & Coastal

          

Los Angeles

     8,311,025         28.1        8,841,419         32.3   

San Diego

     819,022         2.8        593,019         2.2   

Orange

     747,263         2.5        747,708         2.7   
  

 

 

    

 

 

   

 

 

    

 

 

 
     9,877,310         33.4        10,182,146         37.2   

Other Southern California

          

Riverside

     762,266         2.6        397,973         1.5   

San Bernardino

     135,771         0.5        136,028         0.5   
  

 

 

    

 

 

   

 

 

    

 

 

 
     898,037         3.1        534,001         2.0   

Southern California Total

     10,775,347         36.5        10,716,147         39.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Secured Loans

   $ 29,633,693         100.0   $ 27,360,138         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

21


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 4 – LOANS (continued)

 

Commitments/loan disbursements/construction and rehabilitation loans

The company may make construction loans that are not fully disbursed at loan inception. Construction loans are determined by the manager to be those loans made to borrowers for the construction of entirely new structures or dwellings, whether residential, commercial or multi-family properties. The company will approve and fund the construction loan up to a maximum loan balance. Disbursements will be made periodically as phases of the construction are completed or at such other times as the loan documents may require. Undisbursed construction funds will be held in escrow pending disbursement. Upon project completion, construction loans are reclassified as permanent loans. Funding of construction loans is limited to 10% of the loan portfolio. At March 31, 2016, the company had no construction loans outstanding.

The company may also make rehabilitation loans. A rehabilitation loan will be approved up to a maximum principal balance and, at loan inception, will be either fully or partially disbursed. If fully disbursed, a rehabilitation escrow account is established and advanced periodically as phases of the rehabilitation are completed or at such other times as the loan documents may require. If not fully disbursed, the rehabilitation loan will be funded from available cash balances and future cash receipts. The company does not maintain a separate cash reserve to fund undisbursed rehabilitation loan obligations. Rehabilitation loan proceeds are generally used to acquire and remodel single family homes for future sale or rental. Upon project completion, rehabilitation loans are reclassified as permanent loans. Funding of rehabilitation loans is limited to 15% of the loan portfolio. At March 31, 2016, the company had no rehabilitation loans outstanding.

Fair Value

The company does not record its loans at fair value on a recurring basis. Loans designated impaired (i.e., that are collateral dependent) are measured at fair value on a non-recurring basis. The company did not have any loans designated impaired at March 31, 2016 or December 31, 2015.

 

  Secured loans, performing (i.e., not designated as impaired) (Level 2) - Each loan is reviewed quarterly for its delinquency, LTV adjusted for the most recent valuation of the underlying collateral, remaining term to maturity, borrower’s payment history and other factors. Also considered is the limited resale market for the loans. Most companies or individuals making similar loans as the company intend to hold the loans until maturity as the average contractual term of the loans (and the historical experience of the time the loan is outstanding due to pre-payments) is shorter than conventional mortgages. As there are no prepayment penalties to be collected, loan buyers may be hesitant to risk paying above par. Due to these factors, sales of the loans are infrequent, because an active market does not exist. The recorded amount of the performing loans (i.e., the loan balance) is deemed to approximate the fair value, although the intrinsic value of the loans would reflect a premium due to the interest to be received.

 

  Secured loans, designated impaired (Level 2) - Secured loans designated impaired are deemed collateral dependent, and the fair value of the loan is the lesser of the fair value of the collateral or the enforceable amount owing under the note. The fair value of the collateral is determined by exercise of judgment based on management’s experience informed by appraisals (by licensed appraisers), brokers’ opinion of values and publicly available information on in-market transactions (Level 2 inputs).

The following methods and assumptions are used to determine the fair value of the collateral securing a loan.

Single family – Management’s preferred method for determining the fair market value of the company’s single-family residential assets is the sale comparison (sale comps) method. Management primarily obtains sale comps through its subscription to the RealQuest service, but also uses free online services such as Zillow.com and other available resources to supplement this data. Sale comps are reviewed for similarity to the subject property, examining features such as proximity to subject, number of bedrooms and bathrooms, square footage, sale date, condition and year built.

 

22


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 4 – LOANS (continued)

 

Fair Value (continued)

 

If applicable sale comps are not available or deemed unreliable, management will seek additional information in the form of brokers’ opinions of value or appraisals.

Multi-family residential – Management’s preferred method for determining the aggregate retail value of the company’s multifamily units is the sale comparison method. Sale comps are reviewed for similarity to the subject property, examining features such as proximity to subject, rental income, number of units, composition of units by the number of bedrooms and bathrooms, square footage, condition, amenities and year built.

Where adequate sale comps are not available, management will seek additional information in the form of brokers’ opinions of value or appraisals.

Management’s secondary method for valuing multifamily assets as income-producing rental operations is the direct capitalization method. In order to determine market cap rates for properties of the same class and location as the subject, management refers to published data from reliable third-party sources such as the CBRE Cap Rate Survey. Management applies the appropriate cap rate to the subject’s most recent available annual net operating income to determine the property’s value as an income-producing project. When reliable net operating income information is not available or the project is under development or is under-performing to market, management will seek additional information and analysis to determine the cost to improve and the intrinsic fair value.

Commercial buildings – Where commercial rental income information is available, management’s preferred method for determining the fair value of the company’s commercial real estate assets is the direct capitalization method. In order to determine market cap rates for properties of the same class and location as the subject, management refers to reputable third-party sources such as the CBRE Cap Rate Survey. Management then applies the appropriate cap rate to the subject’s most recent available annual net operating income to determine the property’s value as an income-producing commercial rental project. When reliable net operating income information is not available or the project is under development or is under-performing to market, management will seek additional information and analysis to determine the cost to improve and the intrinsic fair value.

Management supplements the direct capitalization method with additional information in the form of a sale comparison analysis (where adequate sale comps are available), brokers’ opinion of value, or appraisal.

Commercial land – Commercial land has many variations/uses, thus requiring management to employ a variety of methods depending upon the unique characteristics of the subject land. Management may rely on information in the form of a sale comparison analysis (where adequate sale comps are available), brokers’ opinion of value, or appraisal.

NOTE 5 – COMMITMENTS AND CONTINGENCIES, OTHER THAN LOAN COMMITMENTS AND ORGANIZATION AND OFFERING COSTS

Legal proceedings

In the normal course of business, the company may become involved in various legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc. to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes or protect or recoup its investment from the real property secured by the deeds of trust and to resolve disputes between borrowers, lenders, lien holders and mechanics. None of these actions typically would be of any material importance. As of March 31, 2016, the company was not involved in any legal proceedings other than those that would be considered part of the normal course of business.

Commitments

The company had no contractual obligations, except to reimburse RMC for O&O expenses.

 

23


REDWOOD MORTGAGE INVESTORS IX, LLC

Notes to Financial Statements

March 31, 2016 (unaudited)

 

NOTE 6 – SUBSEQUENT EVENTS

None.

 

24


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto, which are included in Item 1 of this report on Form 10-Q, as well as the audited financial statements and the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the company’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the U.S. Securities and Exchange Commission. The results of operations for the three month period ended March 31, 2016 are not necessarily indicative of the operations results to be expected for the full year.

Forward-Looking Statements

Certain statements in this Report on Form 10-Q which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (or the Exchange Act), including statements regarding the company’s expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements, which are based on various assumptions (some of which are beyond our control), may be identified by reference to a future period or periods or by use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” “possible” or similar terms or variations on those terms or the negative of those terms. Forward-looking statements include statements regarding trends in the California real estate market, future interest rates and economic conditions and their effect on the company and its assets, estimates as to the allowance for loan losses, estimates of future redemptions of units, future funding of loans by the company, and beliefs relating to how the company will be affected by current economic conditions and trends in the financial and credit markets. Actual results may be materially different from what is projected by such forward-looking statements. Factors that might cause such a difference include, but are not limited to, the following:

 

    changes in economic conditions and interest rates,

 

    the impact of competition and competitive pricing for mortgage loans,

 

    downturns in the California real estate markets which affect the manager’s and our ability to find suitable loans in a weaker economy where there is less activity in the real estate market,

 

    our ability to grow our mortgage lending business,

 

    the manager’s ability to make and arrange for loans that fit our investment criteria,

 

    the concentration of credit risks to which we are exposed,

 

    increases in payment delinquencies and defaults on our mortgage loans, and

 

    changes in government regulation and legislative actions affecting our business.

All forward-looking statements and reasons why results may differ included in this Form 10-Q are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ.

Overview

Redwood Mortgage Investors IX, LLC (or we, RMI IX or the company) is a Delaware limited liability company formed in October 2008 to engage in business as a mortgage lender and investor by making and holding-for-investment mortgage loans secured by California real estate, primarily through first and second deeds of trust.

See Note 1 (Organization and General) to the financial statements included in Part I, Item 1 of this report on Form 10-Q for additional detail on the organization and operations of RMI IX which detail is incorporated by this reference into this Item 2.

 

25


Ongoing public offering of units/ SEC Registrations

In December, 2012, the company’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (SEC File No. 333-181953) to offer up to 150,000,000 units ($150,000,000) to the public and 37,500,000 units ($37,500,000) to its members pursuant to the DRIP became effective. The offering of units is ongoing and was extended by filing of a new, third registration statement on Form S-11 (SEC File No. 333-208315) in December 2015. The current, extended offering continues until the earlier of either the effective date of the third registration statement or June 1, 2016. When the third registration statement is declared effective, the offering will continue for up to three (3) years thereafter.

The units have been registered pursuant to Section 12(g) of the Exchange Act. Such registration of the units, along with the satisfaction of certain other requirements under ERISA, enables the units to qualify as “publicly-offered securities” for purposes of ERISA and regulations issued thereunder. By satisfying those requirements, the underlying assets of the company should not be considered assets of a “benefit plan investor” (as defined under ERISA) by virtue of the investment by such benefit plan investor in the units.

The following summarizes the proceeds from sales of units, from inception (October 5, 2009) through March 31, 2016.

 

     Proceeds  

Gross proceeds admitted from investors

   $ 32,689,949   

From electing members under our distribution reinvestment plan

     3,181,681   

From premiums paid by RMC

     156,604 (1) 
  

 

 

 

Total proceeds from unit sales

   $ 36,028,234   
  

 

 

 

 

(1) If a member acquired units through an unsolicited sale, the member’s capital account is credited with their capital contribution plus a premium paid by RMC equal to the amount of the sales commissions that otherwise would have been paid to a broker-dealer by RMC. This amount is reported in the year paid as taxable income to the member.

The proceeds from the sales of the units will not be segregated but will be commingled with the company’s cash. The ongoing sources of funds for loans are the proceeds from (1) sale of units, including units sold by reinvestment of distributions, (2) loan payoffs, (3) borrowers’ monthly principal and interest payments, and (4) to a lesser degree and, if obtained, a line of credit. Cash generated from loan payoffs and borrower payments of principal and interest is used for operating expenses, income distributions to members, reimbursements to RMC of organization and offering expenses, and unit redemptions. The cash flow, if any, in excess of these uses is reinvested in new loans.

Critical Accounting Policies

See Note 2 (Summary of Significant Accounting Policies) to the financial statements included in Part I, Item 1 of this report on Form 10-Q for a detailed presentation of critical accounting policies, which presentation is incorporated by this reference into this Item 2.

Manager and Other Related Parties

See Note 1 (Organization and General) and Note 3 (Manager and Other Related Parties) to the financial statements included in Part I, Item 1 of this report for a detailed presentation of the company activities for which related parties are compensated and related transactions, including the formation loan to RMC, which presentation is incorporated by this reference into this Item 2.

Results of Operations

General Economic Conditions

All of our mortgage loans are secured by California real estate. Our secured-loan investment activity and the value of the real estate securing our loans is significantly dependent on economic activity and employment conditions in the state. Wells Fargo’s Economics Group periodically provides timely, relevant information and analysis in its commentary and reports. Highlights from recently issued reports are presented below.

 

26


In the publication “California Employment Conditions” February 2016, the Wells Fargo Economics Group notes:

California continues to see strong overall job growth. Nonfarm payrolls added 39,900 jobs in February on a seasonally-adjusted basis. The increase more than offsets January’s surprising 4,000-job drop and leaves the year-to-year gain near its recent average of 2.8 percent. California’s unemployment rate fell 0.2 percentage points in February to 5.5 percent. While the jobless rate remains above the national rate, it has fallen faster over the past year, declining by 1.2 percentage points compared to a 0.6 percentage-point drop nationwide. The gap between the two unemployment rates has narrowed by 2.3 percentage points over the past 5 years.

From an overall perspective, job growth still looks exceptionally strong in California, with a net gain of 450,000 new jobs added over the past 12 months. As good as the latest employment figures are, however, they may be near the high water mark for California. Hiring in the state’s technology sector, which has been the fastest growing part of the economy, has moderated in recent months. A larger proportion of the new jobs being created are coming from the leisure & hospitality sector and construction, which is booming in the state’s larger metropolitan areas. The state’s important motion picture industry is also doing well, adding 7,700 jobs over the past year.

The slowdown in the tech sector bears watching. Professional & technical services and the information sector have added 301,000 jobs since January 2010, accounting for 14.2 percent of all new jobs added statewide during this period. These highly paid positions have also helped drive hiring in other areas, as the tech sector is widely believed to have an exceptionally large multiplier. Hiring appears to have moderated in most of the fastest growing subcategories. Professional & technical services, which includes computer systems design and scientific research & development, lost 4,300 jobs in February. Employment in this sector has been essentially flat for the past three months. Seasonally-adjusted data are not available for the subcomponents of this series but the year-to-year gains for both industries have slowed over the past year.

Southern California accounted for the bulk of California’s job gains in February, with 21,400 jobs added to nonfarm payrolls in Los Angeles and Anaheim-Orange County adding 3,600 jobs during the month. On a year-to-year basis, the Los Angeles-Long Beach-Anaheim metropolitan area added 133,600 new jobs, which was second only to New York-Newark-Jersey City. The continued strength in Southern California reflects the recent upswing in hiring in the region’s motion picture business as well as continued strong gains in tourism and construction. By contrast, metropolitan areas where the tech sector is more dominant, such as San Francisco, San Jose and San Diego, all saw more modest gains. San Francisco actually posted a slight job loss in February, with payrolls falling for the second time in the past four months. San Jose added 700 jobs during February and San Diego added 1,800 jobs.

San Diego’s economy has expanded rapidly over the past several years, with job growth outpacing the national average since 2012. The local economy benefits from a well-diversified employment base that includes life sciences, telecommunications technology, wearable devices, and healthcare. The U.S. Navy and Marine Corps also maintain a huge presence in the region and provide some stability to the economy. San Diego surpassed its prerecession employment peak back in late 2013, six months before the state (Figure 3). The service sector has been the principal driver of growth, with professional & business services and education & health services producing some of the strongest growth. The two sectors rose 2.8 percent and 4.5 percent over the past year, respectively. Construction has also gotten back on track. The only industry to show weakness on an annual basis has been information (Figure 4), which has been true in many areas across the nation. Most of the losses in this sector have not been in the technology industry per se, but rather have come in legacy industries such as newspapers and landline telecommunications.

San Diego’s biotechnology and life science industries have played a key role in the area’s recent expansion. San Diego’s biotech cluster is one of the largest and most prosperous in the nation, as the region is home to many world-renowned research facilities, including the La Jolla Cancer Research Center, the Scripps Research Institution, the Salk Institute for Biological Studies and the University of California at San Diego. Employment in the research & biotechnology subsector continues to grow rapidly, rising 4.6 percent year-to-year through the third quarter of last year, which is the most recent data available. San Diego has the third-highest concentration of professions in the scientific research & development services sector, trailing only Trenton and Boulder. Moreover, the region continues to attract scores of new companies. OncoSec Medical Inc., a biotech company developing DNA-based cancer immunotherapies, recently opened a new 34,000-square foot headquarters and research facility in San Diego.

Tourism is another key area of strength. Over 30 million visitors flock to San Diego each year for its ideal weather, coastal beaches and attractions, including the San Diego Zoo, SeaWorld, Old Town San Diego, Mission Bay, the Wild Animal Park and LEGOLAND San Diego. Hiring in the tourist sector has risen 4.0 percent over the year.

 

27


Performance highlights

Members’ capital, net of O&O expenses, at March 31, 2016, was approximately $32,679,000, an increase of $10,620,000 since March 31, 2015. The company is continuing to increase the number of FINRA registered broker-dealer firms and their associated representatives that can sell our units and focusing on increasing the states in which our units can be offered.

In turn, our investment in mortgage loans is increasing steadily as we strive to be fully invested. Mortgage loan balances grew to approximately $29,634,000 at March 31, 2016, an increase of approximately $8,334,000 since March 31, 2015.

Net income for the three months ended March 31, 2016 and 2015 was $570,159 and $350,062, respectively. Revenue from the interest on loans for the three months ended March 31, 2016 increased by approximately $197,000 over the same period in 2015, due to the growth of the secured loan portfolio. Operations expense for the three months ended March 31, 2016 decreased by approximately $23,000, over the same period in 2015, due primarily to an increase in manager reimbursements and waived fees. In all periods presented, the manager, at its sole discretion, provided significant support to the company which affects the net income results.

 

28


Key Performance Indicators

The table below shows key performance indicators at and for the three months ended March 31.

 

     2016     2015     2014  

Members’ capital, gross – end of period balance

   $ 34,064,057       24,525,148        18,144,032  

Members’ capital, gross – average balance

   $ 32,733,618       23,123,000        17,753,000  

Secured loans – end of period balance

   $ 29,633,693       21,300,226        15,005,845   

Secured loans – average daily balance

   $ 28,103,384       19,965,000        15,192,000   

Interest on loans, gross

   $ 613,332       430,159        346,686  

Portfolio interest rate(1)

     8.6 %     8.7     9.3

Effective yield rate(2)

     8.6 %     8.6     9.1

Amortization of loan administrative fees, net

   $ 18,339       31,691        31,509   

Percent of average daily balance(3)

     0.3 %     0.6     0.8

Interest on loans, net

   $ 594,992       398,467        315,177  

Percent of average daily balance(3)

     8.5 %     8.0     8.3

Provision for loan losses

   $ —          —          —    

Percent of average daily balance(3)

     —          —          —     

Total operations expense

   $ 28,087       50,665        114,598  

Net Income

   $ 570,159       350,062        201,846  

Percent of average members’ capital(4)(5)

     6.9 %     6.0     4.5

Member Distributions

   $ 527,520       387,250        297,916  

Percent

     6.5 %     6.5     6.5

Member Redemptions

   $ 232,208       153,474        —    

 

(1) Stated note interest rate, weighted daily average
(2) Yield rate of interest on loans, annualized
(3) Percent of secured loans – average daily balance, annualized
(4) Percent of members’ capital, gross – average balance, annualized
(5) Percent based on the net income available to members (excluding 1% allocated to manager)

 

29


Members’ capital, gross – end of period balance

The March 31 end of period gross members’ capital balance for 2016 of $34,064,057, was an increase of approximately 39% ($9.5 million) over 2015’s $24,525,148. The increase was due to new member sales and participation in our distribution reinvestment plan (DRIP), which were partially offset by redemptions.

Units redeemed by month in the first quarter are presented in the following table.

 

2016 Q1

   Price per unit(1)      Units redeemed  

January

   $ 1         —     

February

   $ 1         —     

March

   $ 1       $ 232,208   
     

 

 

 

Total

      $ 232,208   
     

 

 

 

 

(1) The unit redemption program is ongoing and available to members beginning one year after the purchase of the units. The maximum number of units that may be redeemed in any year and the maximum amount of redemption available in any period to members are subject to certain limitations.

The table below shows distributions reinvested by members under the distribution reinvestment plan, cash distributions to members, the total distributions to members, and the percent of members’ capital electing cash distribution for the three months ended March 31, 2016 and 2015, respectively.

 

     2016     2015  

Reinvesting

   $ 302,515      $ 218,749   

Distributing

     225,005        168,501   
  

 

 

   

 

 

 

Total

   $ 527,520      $ 387,250   
  

 

 

   

 

 

 

Percent of members’ capital, electing distribution

     43     44
  

 

 

   

 

 

 

Net cash provided by (used in) operations, net income and distributions to members, for the three months ended March 31, 2016, are summarized in the following table:

 

                          Percent Of        

Quarter

   Net Cash
Provided By
(Used In)
Operations
     Net Income
Available
To Members
     Distributions
To
Members (1)
     Distributions
Paid From
Net Cash
Provided By
(Used In)
Operations
    Percent Of
Net
Income
Covering
Total
Distributions (2)
 

2016 Q1

   $ 549,076       $ 564,457       $ 527,520         104     107
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Includes distributions reinvested pursuant to our distribution reinvestment plan (DRIP).
(2) Net income includes support provided by the manager during the period of $235,000. For the quarter ending March 31, 2015, percent of net income covering total distributions was 90%, which included support from the manager of $78,000. For the year 2015, the percent of net income covering total distributions was 101%, with $634,000 of support provided by the manager.

 

30


Secured loans – end-of-period balance

The March 31 end of period secured loan balance for 2016 of $29,633,693 was an increase of approximately 39% ($8.3 million) over 2015’s $21,300,226. The increase in the balance of the secured loan portfolio are due to increased members’ capital available for lending and increased investment in California real estate markets, which expands the market for new loans. Secured loans as a percent of members’ capital (based on average daily balances) was 86% for the three months ended March 31, 2016 and 2015.

As of March 31, 2016, 78 of the company’s 81 loans (representing 99% of the aggregate principal of the company’s loan portfolio) had a loan term of five years or less from loan inception. The remaining loans had terms longer than five years. Substantially all loans are written without a prepayment penalty provision. As of March 31, 2016, 20 loans outstanding (representing 31% of the aggregate principal balance of the company’s loan portfolio) provided for monthly payments of interest only, with the principal due in full at maturity. The remaining loans required monthly payments of principal and interest, typically calculated on a 30-year amortization, with the remaining principal balance due at maturity.

We have sought to exercise strong discipline in underwriting loan applications and lending against collateral at amounts that create a mortgage portfolio that has substantial protective equity as indicated by the overall conservative weighted average loan-to-value ratio (LTV) which at March 31, 2016 was approximately 54%. Thus, per the appraisal-based valuations at the time of loan inception, borrowers have, in the aggregate, equity of 46% in the property, and we as lender have lent in the aggregate 54% (including other senior liens on the property) against the properties we hold as collateral for the repayment of our loans.

See Note 4 (Loans) to the financial statements included in Part I, Item 1 of this report for detailed presentations on the secured loan portfolio and on the allowance for loan losses, which presentations are incorporated by this reference into this Item 2.

Analysis and discussion of income/(loss) from operations 2016 v. 2015

Significant changes to income or expense areas for the three month period ended March 31, 2016 compared to the same period in 2015 are summarized in the following table.

 

     Interest
Income
     Provision/
Allowance
For Loan
Losses
     Late
Fees
     Operations
Expense
    Net
Income
 
             
             

For the three months ended

             

March 31, 2016

   $ 594,992         —           3,254         28,087        570,159   

March 31, 2015

     398,467         —           2,260         50,665        350,062   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Change

   $ 196,525         —           994         (22,578     220,097   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Change

             

Loan Balance Increase

   $ 174,633         —           —           5,096        169,537   

Loan Portfolio Effective Yield Rate

     21,892         —           —           —          21,892   

Late Fees

     —           —           994         —          994   

Capital Balance Increase

     —           —           —           38,130        (38,130

Managers Fees Waived

     —           —           —           (74,416     74,416   

Expense Recognition Timing

     —           —           —           5,982        (5,982

Other

     —           —           —           2,630        (2,630
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Change

   $ 196,525         —           994         (22,578     220,097   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Interest income

Interest on loans, net increased $196,525 (49%) for the three months ended March 31, 2016, compared to the same period in 2015 due to growth of the secured loan portfolio. The portfolio’s strong payment history to date has resulted in no loans being designated as non-accrual.

 

31


Provision for loan losses/allowance for loan losses

At March 31, 2016, the company had not recorded an allowance for loan losses as no loans were designated as impaired, and all loans had protective equity such that at March 31, 2016, collection was deemed probable for amounts owing. There were no loans past due more than 90 days at March 31, 2016.

Operations Expense

Significant changes to operating expense areas for the three month period ended March 31, 2016 compared to the same period in 2015 are summarized in the following table.

 

     Mortgage
Servicing
Fees
     Asset
Management
Fees
    Costs
Through
RMC
    Professional
Services
     Other      Total  

For the three months ended

               

March 31, 2016

   $ 17,256         —          —          6,625         4,206         28,087   

March 31, 2015

     12,160         —          36,286        643         1,576         50,665   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Change

   $ 5,096         —          (36,286     5,982         2,630         (22,578
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Change

               

Loan Balance Increase

   $ 5,096         —          —          —           —           5,096   

Capital Balance Increase

     —           15,957        22,173        —           —           38,130   

Managers Fees Waived

     —           (15,957     (58,459     —           —           (74,416

Professional Service Timing

     —           —          —          5,982         —           5,982   

Other

     —           —          —          —           2,630         2,630   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Change

   $ 5,096         —          (36,286     5,982         2,630         (22,578
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

– Mortgage servicing fees

The increase in mortgage servicing fees of $5,096 for the three months ended March 31, 2016, compared to the same period in 2015 was consistent with the increase in the secured loan portfolio.

– Asset management fees

Total asset management fees chargeable increased by $15,957 for the three months ended March 31, 2016, compared to the same period in 2015 due to the increase in members capital, and was offset by an increase in fees waived by RMC, at its sole discretion. There is no assurance RMC will waive its right to receive such fees in future periods.

– Costs through RMC

Costs incurred by RMC, for which reimbursement could have been requested increased by $22,173 for the three months ended March 31, 2016, compared to the same period in 2015 primarily due to the increases in members capital and the secured loan portfolio. This was offset by an increase in the amount waived by RMC, at its sole discretion, of $58,549 for the three months ended March 31, 2016 compared to the same period in 2015. There is no assurance RMC will waive its right to receive such reimbursements in future periods.

– Professional services

Professional fees consists primarily of legal, audit and tax expenses. The increase in professional services for the three months ended March 31, 2015, was due primarily to manager reimbursements and expense recognition timing.

 

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Liquidity and Capital Resources

The ongoing sources of funds for loans are the proceeds from (1) sale of units, including units sold by reinvestment of distributions, (2) loan payoffs, (3) borrowers’ monthly principal and interest payments, and, (4) to a lesser degree and, if obtained, a line of credit. Cash generated from loan payoffs and borrower payments of principal and interest is used for operating expenses, income distributions to members, reimbursements to RMC of origination and offering expenses and unit redemptions in the next 12 months. The cash flow, if any, in excess of these uses is re-invested in new loans.

Cash Receipts and disbursements

Cash receipts and disbursements by business activity are presented in the following table for the three months ended March 31.

 

     2016      2015  

Loan principal/advances/interest

     

Principal & advances collected

   $ 3,821,150       $ 1,545,280   

Interest received, net

     574,310         373,152   

Other loan income

     3,304         2,310   

Loan funding

     (6,092,500      (3,660,000
  

 

 

    

 

 

 

Cash – loans, net

     (1,693,736      (1,739,258
  

 

 

    

 

 

 

Operations expense

     (28,538      27,093   

Members’ capital

     

Gross subscription proceeds

     3,650,240         2,183,809   

Organization and offering costs, net

     (105,837      (124,679

Formation loan, net

     (245,350      (144,195

Distributions and redemptions, net

     (474,784      (332,912
  

 

 

    

 

 

 

Cash – members’ capital, net

     2,824,269         1,582,023   
  

 

 

    

 

 

 

Net change in cash

   $ 1,101,995       $ (130,142
  

 

 

    

 

 

 

Contractual obligations

At March 31, 2016 the company had no contractual obligations, except to reimburse RMC for O&O expenses. See Note 3 (Manager and Other Related Parties) to the financial statements included in Part I, Item 1 of this report for detailed presentations of the company activities for which related parties are compensated and related transactions, which presentations are incorporated by this reference into this Item 2.

At March 31, 2016 the company had no construction or rehabilitation loans outstanding.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not included because the company is a smaller reporting company.

 

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The company carried out an evaluation, under the supervision and with the participation of the manager of the effectiveness of the design and operation of the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the manager concluded the company’s disclosure controls and procedures were effective.

 

33


Changes to Internal Control Over Financial Reporting

There have not been any changes in internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the manager’s or company’s internal control over financial reporting.

PART II – OTHER INFORMATION

 

ITEM 1. Legal Proceedings

In the normal course of business, the company may become involved in various legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc. to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes or protect or recoup its investment from the real property secured by the deeds of trust and to resolve disputes between borrowers, lenders, lien holders and mechanics. None of these actions typically would be of any material importance. As of the date hereof, the company was not involved in any legal proceedings other than those that would be considered part of the normal course of business.

 

ITEM 1A. Risk Factors

There have been no material changes to the risk factors set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

There were no sales of securities by the company which were not registered under the Securities Act of 1933.

Use of Proceeds from Registered Securities

In December, 2012, the company’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (SEC File No. 333-181953) to offer up to 150,000,000 units ($150,000,000) to the public and 37,500,000 units ($37,500,000) to its members pursuant to the DRIP became effective. The 2012 filing enabled us to continue the offer to sell units that commenced in an initial public offering with the filing of a Registration Statement on Form S-11 in June 2008 (SEC File No. 333-155428). The offering of units is ongoing and was extended by filing a new, third registration statement on Form S-11 (SEC File No. 333-208315) in December 2015. The current offering continues until the earlier of either the effective date of the third registration statement or June 1, 2016. When the third registration statement is declared effective, the offering will continue for up to three (3) years thereafter.

The units have been registered pursuant to Section 12(g) of the Exchange Act. Such registration of the units, along with the satisfaction of certain other requirements under ERISA, enables the units to qualify as “publicly-offered securities” for purposes of ERISA and regulations issued thereunder. By satisfying those requirements, the underlying assets of the company should not be considered assets of a “benefit plan investor” (as defined under ERISA) by virtue of the investment by such benefit plan investor in the units.

 

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The following summarizes the proceeds from sales of units, from inception (October 5, 2009) through March 31, 2016.

 

     Proceeds  

Gross proceeds admitted from investors

   $ 32,689,949   

From electing members under our distribution reinvestment plan

     3,181,681   

From premiums paid by RMC

     156,604 (1) 
  

 

 

 

Total proceeds from unit sales

   $ 36,028,234   
  

 

 

 

 

  (1) If a member acquired units through an unsolicited sale, the member’s capital account is credited with its capital contribution plus a premium paid by RMC equal to the amount of the sales commissions that otherwise would have been paid to a broker-dealer by RMC. This amount is reported in the year paid as taxable income to the member.

Units redeemed by month in the first quarter are presented in the following table.

 

2016 Q1

   Price per unit(2)      Units redeemed  

January

   $ 1         —     

February

   $ 1         —     

March

   $ 1       $ 232,208   
     

 

 

 

Total

      $ 232,208   
     

 

 

 

 

  (2) The unit redemption program is ongoing and available to members beginning one year after the purchase of the units. The maximum number of units that may be redeemed in any year and the maximum amount of redemption available in any period to members are subject to certain limitations.

The proceeds from the sales of the units will not be segregated but will be commingled with the company’s cash. The ongoing sources of funds for loans are the proceeds from (1) sale of units, including units sold by reinvestment of distributions, (2) loan payoffs, (3) borrowers’ monthly principal and interest payments, and (4) to a lesser degree and, if obtained, a line of credit. Cash generated from loan payoffs and borrower payments of principal and interest is used for operating expenses, reimbursements to RMC of organization and offering expenses, and unit redemptions. The cash flow, if any, in excess of these uses is reinvested in new loans.

 

ITEM 3. Defaults Upon Senior Securities

Not Applicable.

 

ITEM 4. Mine Safety Disclosures

Not Applicable.

 

ITEM 5. Other Information

None.

 

ITEM 6. Exhibits

 

Exhibit

No.

  

Description of Exhibits

    3.1    Ninth Amended and Restated Limited Liability Company Operating Agreement (incorporated by reference to Exhibit 3.1 to the company’s pre-effective amendment no. 1 to the registration statement on Form S-11 filed with the SEC on April 20, 2016 (file no. 333-208315))
  31.1    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
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

 

35


SIGNATURES

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

 

  REDWOOD MORTGAGE INVESTORS IX, LLC
                            (Registrant)
Date: May 16, 2016   By:   Redwood Mortgage Corp., Manager
    By:  

/s/ Michael R. Burwell

    Name:   Michael R. Burwell
    Title:   President, Secretary and Treasurer
      (On behalf of the registrant, and in the capacity of principal financial officer)

 

36


EXHIBIT INDEX

 

Exhibit

No.

  

Description of Exhibits

    3.1    Ninth Amended and Restated Limited Liability Company Operating Agreement (incorporated by reference to Exhibit 3.1 to the company’s pre-effective amendment no. 1 to the registration statement on Form S-11 filed with the SEC on April 20, 2016 (file no. 333-208315))
  31.1    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
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

 

37