UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Year Ended December 31, 2019
☐ |
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) |
177 Bovet Road, Suite 520, San Mateo, CA |
|
94402 |
(Address of principal executive offices) |
|
(Zip Code) |
(650) 365-5341
(Registrant’s telephone number, including area code)
|
|
|
||
Securities registered pursuant to Section 12(b) of the Act: |
|
|
||
|
|
|||
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
||
none |
|
|
||
Securities registered pursuant to Section 12(g) of the Act: |
|
Units of Limited Liability Company Interests |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ YES ☒ NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ YES ☒ NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ YES ☐ NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ YES ☐ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
☐ |
|
Accelerated filer |
|
☐ |
|
|
|
|
|||
Non-accelerated filer |
|
☐ |
|
Smaller reporting company |
|
☒ |
|
|
|
||||
|
|
|
|
Emerging Growth Company |
|
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ YES ☒ NO
The registrant’s units of limited liability company interests are not publicly traded and therefore have no market value. The registrant is conducting an ongoing offering of its units pursuant to a Registration Statement on Form S-3 (File No. 333-208315), which are being sold at $1.00 per unit. The registrant had 81,893,976 limited liability company interests outstanding as of February 29, 2020.
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Index to Form 10-K
December 31, 2019
i
Certain statements in this Report on Form 10-K 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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (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; forecasts of future sales and redemptions of units, forecasts of future funding of loans; loan payoffs and the possibility of future loan sales (and the gain thereon, net of expenses) to third parties, if any; forecasts of future financial support by the manager including the eventual elimination of financial support; future fluctuations in the net distribution rate; 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 California real estate markets, economic conditions, and/or interest rates; |
|
• |
the impact of competition on pricing for mortgage loans; |
|
• |
the manager’s capability to arrange loans that fit our investment criteria; |
|
• |
the credit risks to which we are exposed; |
|
• |
increases in payment delinquencies and/or defaults on our mortgage loans; |
|
• |
changes in government regulation and legislative actions affecting our business; and |
|
• |
the timing and dollar amount of the decreasing financial support from the manager and the corresponding impact on the net income, cash available for distributions and net distribution rate to members. |
All forward-looking statements and reasons why results may differ included in this Form 10-K 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.
Redwood Mortgage Investors IX, LLC (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.
The company is externally managed by Redwood Mortgage Corp (RMC or the manager). 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. RMC provides the personnel and services necessary for the company to conduct its business as the company has no employees of its own. 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 Ninth Amended and Restated Limited Liability Company Operating Agreement of RMI IX (the “Operating Agreement”), the Delaware Limited Liability Company Act and the California Revised Uniform Limited Liability Company Act.
1
Members representing a majority of the outstanding units may, without the concurrence of the managers, vote to: (i) dissolve the company, (ii) amend the Operating Agreement, subject to certain limitations, (iii) approve or disapprove the sale of all or substantially all of the assets of the company or (iv) remove or replace one or all of the managers. Where there is only one manager, a majority in interest of the members is required to elect a new manager to continue the company business after a manager ceases to be a manager due to its withdrawal.
The following is a summary of certain provisions of the Operating Agreement and is qualified in its entirety by the terms of the Operating Agreement. Members should refer to the company’s Operating Agreement for complete disclosure of its provisions.
The company’s primary investment objectives are to:
|
• |
yield a favorable rate of return from the company’s business of making and/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 cash flow from these mortgage lending and investing activities. |
The ongoing sources of funds for loans are the proceeds (net of redemption of members’ capital and operating expenses) from:
|
• |
loan payoffs; |
|
• |
borrowers’ monthly principal and interest payments, net of operating expenses; |
|
• |
a line of credit; |
|
• |
loan sales to unaffiliated 3rd parties and loan transfers by executed assignment to affiliated mortgage funds; |
|
• |
payments from RMC on the outstanding balance of the formation loan; and, |
|
• |
sale of units to members participating in the dividend reinvestment plan and – prior to May 2019 – sale of units net of reimbursement to RMC of organization and offering expenses (“O&O expenses”) and net of amounts advanced for the formation loan to RMC. |
The company intends to hold until maturity the loans in which it invests and does not presently intend to invest in mortgage loans primarily for the purpose of reselling such loans in the ordinary course of business; however, the company may sell mortgage loans (or fractional interests therein) when the manager determines that it appears to be advantageous for the company to do so, based upon then current interest rates, the length of time that the loan has been held by the company, the company’s credit risk and concentration risk and the overall investment objectives of the company. Loans sold to third parties may be sold for par, at a premium or, in the case of non-performing or under performing loans, at a discount. Company loans may be sold to third parties or to the manager or its affiliates; however, any loan sold to the manager or an affiliate thereof will be sold for a purchase price equal to the greater of (i) the par value of the loan or (ii) the fair market value of the loan. The manager will not receive commissions or broker fees with respect to loan sales conducted for the company; however, selling loans will increase members’ capital available for investing in new loans for which the manager will earn brokerage fees and other forms of compensation.
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 O&O expenses allocated to the members’ accounts for the applicable period pursuant to the company’s reimbursement to RMC and allocation to members’ accounts of O&O expenses. The amount otherwise distributable, less the respective amounts of O&O expenses allocated to members, is the net distribution. Per the terms of the company’s Operating Agreement, cash available for distribution to the members is allocated among the members in proportion to their percentage interests (except with respect to differences in the amounts of O&O 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.
2
See Note 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for a detailed discussion on the allocation of O&O expenses to members’ accounts, which presentation is incorporated by this reference into this Item 1.
Cash available for distributions allocable to members, other than those participating in the distribution reinvestment plan (DRIP) and the manager, is distributed at the end of each calendar month. Cash available for distribution allocable to members who participate in the DRIP is used to purchase additional units 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.
To determine the amount of cash to be distributed in any specific month, the company relies in part on its forecast of full year profits, which takes into account the difference between the forecasted and actual results in the year and the requirement to maintain a cash reserve.
The company’s net income, cash available for distribution, and net-distribution rate fluctuates depending on:
|
• |
loan origination volume and the balance of capital available to lend; |
|
• |
the current and future interest rates negotiated with borrowers; |
|
• |
the timing and amount of gains received from loan sales, if any; |
|
• |
payment of fees and cost reimbursements to RMC; |
|
• |
the amount and timing of other operating expenses, including expenses for professional services; |
|
• |
financial support, if any, from RMC; |
|
• |
payments from RMC on the outstanding balance of the formation loan; and, |
|
• |
a line of credit. |
Financial Support from RMC
Since commencement of operations in 2009, RMC, at its sole discretion, provided significant financial support to the company which increased the net income, cash available for distribution, and the net-distribution rate, by:
|
• |
charging less than the maximum allowable fees; |
|
• |
not requesting reimbursement of qualifying costs attributable to the company (“Costs from RMC” on the Statements of Income); and/or, |
|
• |
absorbing some, and in certain periods, all of the company’s direct expenses, such as professional fees. |
Such fee and cost-reimbursement waivers and the absorption of the company’s expenses by RMC were not made for the purpose of providing the company with sufficient funds to satisfy any required minimum level of distributions, as the Operating Agreement has no such required minimum level of distributions, nor to meet withdrawal requests. Decisions to waive fees or cost-reimbursements and/or to absorb direct expenses, such as professional fees, and the amount (if any) to be waived or absorbed, is made by RMC in its sole discretion. This support increased the company’s net income and cash available for distributions and resulted in an annual 6.5% net distribution rate to members (6.95% before O&O expenses allocation of 0.45% when applicable) for periods prior to February 28, 2018.
In March 2018, RMC communicated to the members its planned and ongoing reductions in financial support and that net income, cash available for distribution and the net distribution rate were expected to decrease correspondingly.
In April 2018, RMI IX began paying its direct expenses for professional-service fees (legal and audit/tax compliance) and other operating expenses (postage, printing etc.).
In June 2019, RMC began collecting from RMI IX the asset management fee of three quarters of one percent annually (0.75%), and plans to commence collection from RMI IX in 2020 of cost reimbursements to which RMC is entitled.
In 2019, the company began being invoiced directly and paying fees to an independent service bureau for information technology relating to the recordkeeping and reporting for the accounts of individual investors and their corresponding member accounts. In 2018 and prior years these fees were invoiced to RMC and then billed to the company.
3
Distribution reinvestment plan
On May 9, 2019, the company filed a Registration Statement on Form S-3 with the SEC (SEC File No. 333-231333) to offer up to 15,000,000 units ($15,000,000) to members of record as of April 30, 2019 that had previously elected to participate in the DRIP or that elect to participate in the DRIP. The Registration Statement on Form S-3 became effective on May 9, 2019.
Members of record as of April 30, 2019, that previously elected to participate in the DRIP, or that provide written notice to the manager, may elect to participate in the DRIP, in those states in which approval has been obtained.
As of December 31, 2019, the gross proceeds from sales of units to our members under our DRIP pursuant to the May 9, 2019 Form S-3 Registration Statement (after May 9, 2019) was approximately $1,614,000, and approximately $802,000 (for the four month period ended April 30, 2019) pursuant to our Form S-11 Registration Statement.
On June 11, 2019, the company filed a Post-Effective Amendment No. 5 with the SEC (SEC File No. 333-208315) to deregister all of the units which were registered under its Form S-11 Registration Statement that remained unsold as of April 30, 2019.
Liquidity and unit redemption program
There are substantial restrictions on transferability of units, and there is no established public trading and/or secondary market for the units and none is expected to develop. In order to provide liquidity to members, the company’s Operating Agreement includes a unit redemption program, whereby beginning one year from the date of purchase of the units, a member may redeem all or part of their units, subject to certain limitations.
The price paid for redeemed units is 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 is calculated based on the period from date of purchase as follows:
|
• |
after one year, 92% of the purchase price or of the capital account balance, whichever is less; |
|
• |
after two years, 94% of the purchase price or of the capital account balance, whichever is less; |
|
• |
after three years, 96% of the purchase price or of the capital account balance, whichever is less; |
|
• |
after four years, 98% of the purchase price or of the capital account balance, whichever is less; |
|
• |
after five years, 100% of the purchase price or of the capital account balance, whichever is less. |
The company redeems units quarterly, subject to certain limitations as provided in the Operating Agreement. The maximum number of units which may be redeemed per quarter per individual member shall not exceed the greater of (i) 100,000 units, or (ii) 25% of the member’s total outstanding units. 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. As provided in the Operating Agreement, 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. In the event unit withdrawal requests exceed 5% in any calendar year, units will be redeemed in the priority provided in the Operating Agreement.
4
Lending and investment guidelines, objectives and criteria
Our loans generally have shorter maturities than typical mortgages. In the event that a loan is performing, and collection is deemed probable at maturity, we may elect to extend the loan’s maturity. In the event a loan is not performing and the borrower is unable to repay in full the principal on the loan by the maturity date, we may elect to modify the loan payment terms and designate the loan as impaired or may foreclose on the loan.
Generally, interest rates on our mortgage loans are higher than conventional mortgage loans and have not been affected directly by market movements in interest rates. If, as expected, we continue to make and invest in fixed rate loans primarily, and interest rates were to rise, a possible result would be lower prepayments of the company’s loans. This increase in the duration of time loans are on the books may reduce overall liquidity, which itself may reduce our investment into new 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 members may possibly result.
Our primary investment objectives are to:
|
• |
yield a favorable rate of return from our business of making and/or investing in loans; |
|
• |
preserve and protect our 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 cash flow from these mortgage lending and investing activities. |
Loans are arranged and generally are serviced by RMC. We generally fund loans at fixed interest rates that provide for:
|
• |
monthly payments of either (i) interest only with a balloon payment at maturity or (ii) principal and interest based on a 30-year amortization schedule with a balloon payment at maturity; and |
|
• |
having maturities of 5 years or less. |
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 loan combined with the outstanding debt and claims secured by a senior deed of trust on the real property generally will not exceed a specified percentage of the appraised value of the property (the “loan-to-value ratio”, or LTV) as determined by an independent written appraisal at the time the loan is made. The LTV generally will not exceed 80% for residential properties (including multi-family), 75% for commercial properties, and 50% for land. The excess of the value of the collateral securing the loan over the company’s secured loan and any senior debt and/or claims on the property is the “protective equity.”
We believe our LTV policy gives us more potential protective equity than competing lenders who fund loans with a higher LTV. However, we may be viewed as an “asset” lender based on our emphasis on LTV in our underwriting process. Being an “asset” lender may increase the likelihood of payment defaults by borrowers. Accordingly, the company may have a higher level of payment delinquency and loans designated as impaired for financial reporting purposes than that of lenders, such as banks and other financial institutions subject to federal and state banking regulations, which are typically viewed as “credit” lenders.
See Results of Operations, Secured Loans included in Part II, Item 7 and Note 4 (Loans) to the financial statements included in Part II, Item 8 of this report for a detailed presentation on the secured loan portfolio, which presentation is incorporated by this reference into this Item 1.
5
The San Francisco Bay Area, including the South Bay/Silicon Valley, and the coastal metropolitan regions of Southern California are our most significant locations of lending activity and the economic vitality of these regions – as well as the stability of the national economy and the financial markets – is of primary importance in determining the availability of new lending opportunities and the performance of previously made loans.
The mortgage-lending business is highly competitive, and we compete with numerous established entities, some of which have more financial resources and experience in the mortgage lending business than our manager. We will encounter significant competition from banks, insurance companies, savings and loan associations, mortgage bankers, real estate investment trusts (“REITs”) and other lenders with objectives similar in whole or in part to ours.
Regulations
We are engaged in business as a mortgage lender and investor by making and holding-for-investment loans secured by California real estate, primarily through first and second deeds of trust. We and RMC, which arranges and generally services our loans, are heavily regulated by laws governing lending practices at the federal, state and local levels. In addition, proposals for further regulation of the financial services industry continually are being introduced. The laws and regulations to which we and RMC are subject include rules and restrictions pertaining to:
|
• |
the conduct of a mortgage lending business by a licensed California real estate broker or lender under state and federal law; |
|
• |
real estate settlement procedures; |
|
• |
fair lending; |
|
• |
truth in lending; |
|
• |
federal and state loan disclosure requirements; |
|
• |
the establishment of maximum interest rates, finance charges and other charges; |
|
• |
loan-servicing procedures; |
|
• |
secured transactions and foreclosure proceedings; |
|
• |
privacy regulations providing for the use and safeguarding of non-public personal financial information of borrowers; and |
|
• |
with respect to the company and the offering of member units, required filings with the Securities and Exchange Commission (“SEC”) pursuant to federal securities laws, including periodic reports such as Form 10-K and Form 10-Q, and with the States’ securities agencies. |
Key federal and state laws, regulations, and rules relating to the conduct of our business include the following:
|
• |
California Real Estate Law. |
The California Real Estate Law, codified in California Business and Professions Code Sections 10000 et seq., together with the Real Estate Commissioner’s rules thereunder, govern the licensing, administration and activities of licensed real estate brokers (including mortgage loans brokers) in the State of California, including rules relating to, among other things, licensing, borrower and investor disclosures, compensation and fees, disciplinary action, and transactions involving trust deeds and real property sale contracts generally. We are not a licensed real estate broker but our manager, RMC, is so licensed and will be subject to those laws and regulations.
RMC’s loan files and other books and records are subject to examination by the California Department of Real Estate. Such examinations, as well as new regulations that may be issued in the future, could ultimately increase RMC’s and our administrative burdens and costs.
6
This federal law passed in 2010 imposes significant regulatory restrictions on the origination of residential mortgage loans, under sections concerning “Mortgage Reform and Anti-Predatory Lending.” For example, when a consumer loan is made, the lender is required to make a reasonable and good faith determination, based on verified and documented information concerning the consumer’s financial situation, as to whether the consumer has a reasonable ability to repay a residential mortgage loan before extending the loan. The act established regulations prohibiting a creditor from extending credit to a consumer secured by a high-cost mortgage without first receiving certification from an independent counselor approved by a government agency. The act also added new provisions prohibiting balloon payments for defined high-cost mortgages. The act established the Consumer Financial Protection Bureau (CFPB), giving it regulatory authority over most federal consumer-lending laws, including those relating to residential mortgage lending, and oversight over companies that provide consumer financial products or services, including us. Many of the federal regulations governing mortgage lending have been significantly amended and expanded through the passage of the Dodd Frank Act.
|
• |
Real Estate Settlement Procedures Act (“RESPA”). |
RESPA is a federal law passed in 1974 with the purpose of establishing settlement procedures for consumer real estate purchase and refinance transactions on residential (1-4 unit) properties. It establishes rules relating to affiliated business relationships, escrow accounts for property taxes and hazard insurance and loan servicing, among other things. It prohibits unearned referral fees from being charged in a covered transaction. RESPA also governs the format of the Loan Estimate and the Closing Disclosure forms provided to consumers in real estate transactions.
|
• |
Truth in Lending Act (“TILA”). |
TILA is a federal law passed in 1968 for the purpose of regulating consumer financing. For real estate lenders, TILA requires, among other things, advance disclosure of certain loan terms, calculation of the costs of the loan as demonstrated through an annual percentage rate, and the right of a consumer in a refinance transaction on their primary residence to rescind their loan within three days following signing of the loan document.
|
• |
Home Ownership and Equity Protection Act (“HOEPA”) and California Covered Loan Law. |
HOEPA is a federal law passed in 1994 to provide additional disclosures for certain closed-end home mortgages. These “high-cost” closed-end home mortgages are loans with interest rates and fees in excess of certain percentage or amount thresholds. These regulations primarily focus on additional disclosure with respect to the terms of the loan to the borrower, the timing of such disclosures, and the prohibition of certain loan terms, including balloon payments and negative amortization. Failure to comply with the regulations will render the loan rescindable for up to three years. Lenders can be held liable for attorneys’ fees, finance charges and fees paid by the borrower and certain other money damages. Similarly, in California, Financial Code Section 4970, et. seq., became effective in 2002. It provides for state regulation of “high-cost” consumer residential mortgage loans (also called “covered loans”) secured by liens on real property. Section 4970 defines covered loans as consumer loans on primary residences in which the original principal balance of the loan does not exceed the most current conforming loan limit for a single-family first mortgage loan established by the Federal National Mortgage Association, with interest rates and/or fees exceeding one of the statutorily defined percentage or amount thresholds. The law prohibits certain lending practices with respect to high-cost loans, including the making of a loan without regard to the borrower’s income or obligations. When making such loans, lenders must provide borrowers with a consumer disclosure and provide for an additional rescission period prior to closing the loan.
|
• |
Mortgage Disclosure Improvement Act. |
This federal law enacted in 2008, regulates the timing and delivery of loan disclosures for all mortgage loan transactions governed under the Real Estate Settlement Procedures Act.
7
This federal law enacted in 1975 provides for public access to information on a lender’s loan activity. It requires lenders to report to their federal regulator certain information about mortgage loan applications it receives, such as the race and gender of its customers, the disposition of the mortgage application, income of the borrowers and interest rate (i.e., APR) information. Amendments to HMDA became effective on January 1, 2018. Under the amended regulation lenders are required to report 40 additional data points on their loan applications, including borrower age and credit data, lender fees, debt-to-income ratios and loan-to-value ratios.
|
• |
Red Flags Rule. |
This federal rule was issued in 2007 under Section 114 of the Fair and Accurate Credit Transactions Act of 2003 and amended by the Red Flag Program Clarification Act of 2010. It requires lenders and creditors to implement an identity theft prevention program to identify and respond to account activity in which the misuse of a consumer’s personal identification may be suspected.
|
• |
Gramm-Leach-Bliley Act (aka Financial Services Modernization Act of 1999). |
This federal act passed in 1999 requires all businesses that have access to consumers’ personal identification information to implement a plan providing for security measures to protect that information. As part of this program, we provide applicants and borrowers with a copy of our privacy policy.
|
• |
The California Homeowner Bill of Rights (“HOBR”). |
This series of state laws, which initially became effective January 1, 2013, and was reinstated by Senate Bill No. 818 on September 14, 2018, is intended to ensure fair lending and borrowing practices for California homeowners by guaranteeing basic fairness and transparency during the foreclosure process. Key provisions include restrictions on dual-track foreclosures, a guaranteed single point of contact, civil penalties for lenders filing unverified documents, and protections for tenants of foreclosed properties. HOBR also provides borrowers with the authority to seek redress of material violations of its rules, such as by an injunction (prior to foreclosure sale) or recovery of damages (after foreclosure sale).
|
• |
California Consumer Privacy Act of 2018 (“CCPA”) |
Effective January 1, 2020, the CCPA provides California consumers with broad rights regarding the use and sale of personal information collected by businesses covered by the CCPA. The CCPA generally applies to businesses that both collect personal information from California consumers and either (i) have $25 million or more in annual gross revenues; or (ii) derive more than 50% of their annual revenue from selling consumers’ personal information. Covered businesses are required to disclose the categories of personal information collected about consumers and to adopt privacy policies and procedures that, among other things, specifically allow consumers to request the deletion of their information and to exclude their information from sale. Neither the company nor RMC has or will sell information collected from consumers in connection with their lending businesses. RMC does, however, collect personal information from potential borrowers, investors and other parties that constitutes personal information governed by the CCPA. Some of this personal information is also shared with the company and other loan programs it manages for the purposes of conducting their business operations. RMC and its loan programs currently do not have $25 million in gross revenues and are not directly subject to the CCPA. However, RMC, the company and RMC’s other loan programs may, in the aggregate, exceed this $25 million threshold in the future in which case one or more of them may become subject to the CCPA requirements. RMC may also elect to incorporate all or some of the CCPA requirements into the current privacy policy of RMC and the company at any time.
Key federal and state laws, regulations, and rules relating to the offering of our units include the following.
|
• |
Federal Securities Laws: The Securities Act of 1933 and The Exchange Act of 1944 |
Because our offering of units has been registered under the Securities Act and we have registered the units pursuant to Section 12(g) of the Exchange Act, we are a public reporting company. As a public reporting company, we are required to file annual, quarterly and other periodic reports with the SEC and
8
comply with applicable provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the related rules and regulations promulgated by the SEC. However, as discussed in Item 9A of this report, the company is externally managed by RMC and many of the requirements of Sarbanes-Oxley are not directly applicable to us since we do not have a board of directors, including an independent board member. The registration of our units pursuant to Section 12(g) of the Exchange Act, along with the satisfaction of certain other requirements under the Employee Retirement Income Security Act of 1974 (“ERISA”), enables the units to qualify as “publicly-offered securities” for purposes of ERISA and regulations issued thereunder. See Section 9A of this report.
|
• |
Sarbanes-Oxley Act of 2002 |
RMC, as our manager, is responsible for establishing and maintaining adequate internal control over financial reporting with respect to us as required by Section 404 of Sarbanes-Oxley and rules and regulations of the SEC thereunder. RMC is required to review and evaluate on an annual basis our internal control over financial reporting, and on a quarterly basis, to evaluate changes in our internal control over financial reporting.
|
• |
Financial Industry Regulatory Authority Regulatory Notice 15-02 |
In 2015 the SEC approved amendments to rules of the Financial Industry Regulatory Authority (“FINRA”) applicable to securities of direct participation programs, such as our units and to non-listed real estate investment trusts. The amendments, which became effective on April 11, 2016, provide, among other things, that (i) FINRA members distributing our units must include in customer account statements our per unit estimated value that must be developed using a methodology reasonably designed to ensure our per unit estimated value’s reliability; and (ii) our per unit estimated value disclosed from and after 150 days following the second anniversary of the admission of investors in our public offering must be based on an appraised valuation methodology developed by, or with the material assistance of, a third-party expert and updated on at least an annual basis. The rule changes also provide that the account statements must include additional disclosure regarding the sources of our distributions to unit holders.
|
• |
Blue Sky Laws |
We are subject to the state securities laws (“blue sky laws”) of the states in which we offer and sell our units. Under some state’s blue sky laws, we have to maintain the registration of our offering of units in the state through annual filings and payment of annual fees.
Term of the company
The term of the company will continue until October 2028, unless sooner terminated as provided in the Operating Agreement.
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered, in addition to the other information presented elsewhere in this report, in evaluating us and our business. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also adversely affect our business operations. If any of the following risks or additional risks and uncertainties actually occur, our business, operating results, and financial condition could be adversely affected.
9
10
11
12
13
14
15
Certain officers and other key personnel of our manager will face competing demands relating to their time and this may cause our operations and our investors’ investments to suffer. |
We rely on the executive officers and key personnel of our manager to provide services to us for the day-to-day operation of our business. In particular, as to Mr. Michael Burwell, President, Director, and Secretary/Treasurer of RMC, if he was to terminate his employment the manager’s capacity/capability to continue business operations and maintain loan origination volumes could be impacted adversely.
As a result of executive officers’ and key personnel’s interests in other programs, their obligations to other investors and the fact that they engage in and will continue to engage in other business activities on behalf of themselves and others, these individuals face conflicts of interest in allocating their time between us and other programs sponsored by our manager and other business activities in which they are involved. Should our manager devote insufficient time or resources to our business, our returns on our direct or indirect investments, and the value of our units, may decline.
|
|
We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect our liquidity, financial condition or results of operations.
|
Our business is dependent on third party communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control. There could be:
•sudden electrical or telecommunications outages; •natural disasters such as earthquakes, tornadoes and hurricanes; •disease pandemics; •events arising from local or larger scale political or social matters, including terrorist acts; and •cyber attacks. These events, in turn, could have a material adverse effect on our operating results and negatively affect the value of our units and our ability to pay distributions. |
16
MORTGAGE LENDING AND REAL ESTATE RISKS
A weak economy or real estate market could adversely affect us and your rate of return.
|
The ability to find suitable loans is more difficult when the economy is weaker and there is less activity in the real estate market. We may be unable to find a sufficient number of suitable loans, which could leave us with excess cash. In such event, we will make short-term, interim investments in government obligations, certificates of deposit, money market or other liquid-asset accounts, with the offering proceeds pending investment in suitable loans. Interest returns on these investments are usually lower than on mortgage loans, which would reduce our profits and return to members.
|
|
|
17
18
19
20
21
22
23
24
25
26
27
Risks of investment by benefit plan investors and other tax-exempt investors. |
If you elect to participate in the DRIP, you should consider the same factors that you had to consider when considering an investment in the units initially, including if you are a Benefit Plan Investor subject to the requirements of the Employee Retirement Income Security Act (“ERISA”), you should consider, among other things, (i) whether the investment satisfies the diversification requirements of Section 404(a)(1)(C) of ERISA; (ii) whether the investment is prudent, since it is not expected that there will be a market created in which you can sell or otherwise dispose of the units. In addition if you are a Benefit Plan Investor that is a tax-qualified pension or 401(k) plan, an IRA or a similar plan, you should consider (i) whether a distribution of units in kind from the plan or IRA would be accepted as a rollover by a trustee or custodian of a successor plan or IRA, and if not accepted, whether the automatic 20% income tax withholding would create the need to effectuate the rollover using assets other than the units; and (ii) whether a required distribution from a tax-qualified pension or 401(k) plan or IRA commencing on the April 1 following the calendar year in which the beneficiary attains age 70 1⁄2 (or if later with respect to a tax-qualified plan distribution, the date the beneficiary retires) could cause the beneficiary to become subject to income tax that the beneficiary would need to satisfy out of assets other than the units if such beneficiary were not able to transfer the units for cash. Finally, all Benefit Plan Investors, including tax-qualified pension and 401(k) plans and IRAs, should consider (i) whether the investment will impair the liquidity of your plan, IRA or other entity; and (ii) whether interests in us or the underlying assets owned by us constitute “plan assets” for purposes of Section 406 of ERISA or Section 4975 of the Code which could cause certain transactions with us to constitute non-exempt prohibited transactions. ERISA requires that the assets of a plan be valued at their fair market value as of the close of the plan year, and it may not be possible to adequately value the units from year to year, since there will not be a market for those units and the appreciation of any property may not be shown in the value of the units until we sell or otherwise dispose of our investments. If you are an employee benefit plan subject to federal, state or local law that is substantially similar to ERISA, you should consider whether an investment in the units would satisfy the requirements of such similar law.
|
Item 1B – Unresolved Staff Comments
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
We have not owned any real property since inception.
28
In the normal course of business, we may become involved in legal proceedings (such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc.) to collect the debt owed under the promissory notes, to enforce the provisions of the deeds of trust, to protect our interest in the real property subject to the deeds of trust and to resolve disputes with borrowers, lenders, lien holders and mechanics. None of these actions, in and of themselves, typically would be of any material financial impact to the net income or balance sheet of the company. As of the date hereof, we are not involved in any legal proceedings other than those that would be considered part of the normal course of business.
Item 4 – Mine Safety Disclosures
Not Applicable.
29
Item 5 – Market for the Registrant’s Units, Related Unitholder Matters and Issuer Purchases of Equity Securities
Investors will have limited ability to sell their units. Our units are not listed on an exchange or quoted through a quotation system, and there is no secondary market nor do we expect that any will develop in the foreseeable future. Units are not freely transferable, and they may not be acceptable by a lender as security for borrowing. Our operating agreement also imposes substantial restrictions upon your ability to transfer units. Therefore, an investment in our units is not suitable for investors who expect to require short-term liquidity from their investments. See “Liquidity and unit redemptions program” in Part I of this Report. As of February 29, 2020, we had approximately 1,400 unit holders, who held approximately 81,894,000 units.
Recent sales of unregistered securities
All sales of our units within the past three years were registered under the Securities Act.
DRIP/ SEC registrations
On May 9, 2019, the company filed a Registration Statement on Form S-3 with the SEC (SEC File No. 333-231333) to offer up to 15,000,000 units ($15,000,000) to members of record as of April 30, 2019 that had previously elected to participate in the DRIP or that elect to participate in the DRIP. The Registration Statement on Form S-3 became effective on May 9, 2019.
Members of record as of April 30, 2019, that previously elected to participate in the DRIP or that provide written notice to the manager may elect to participate in the DRIP, in those states in which approval has been obtained. As of December 31, 2019, the gross proceeds from sales of units to our members under our DRIP pursuant to the May 9, 2019 Form S-3 Registration Statement after May 9, 2019 was approximately $1,614,000, and approximately $802,000 for the four month period ended April 30, 2019 pursuant to our S-11 Registration Statement.
On June 11, 2019, the company filed a Post-Effective Amendment No. 5 with the SEC (SEC File No. 333-208315) to deregister all of the units which were registered under its Form S-11 Registration Statement that remained unsold as of April 30, 2019.
Redemption of units
Redemptions are made once a quarter, on the last business day of the quarter. 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 including, but limited to, the company will not:
|
• |
in any calendar year, redeem more than 5%; or |
|
• |
in any calendar quarter, redeem more than 1.25%, of the weighted average number of units outstanding during the twelve (12) month period immediately prior to the date of the redemption. |
In addition, the manager may, in its sole discretion, further limit the percentage of the total members’ units that may be redeemed or may adjust the timing of scheduled redemptions (including deferring withdrawals indefinitely), to the extent that such redemption would cause the company to be treated as a “publicly traded partnership” within the meaning of Section 7704 of the Code or any Treasury Regulations promulgated thereunder (determined without reference to Code Section 469(i)).
In the event that redemption requests in excess of the foregoing limitations are received by the managers, such redemption requests will be honored in the following order of priority:
|
• |
first, to redemptions upon the death of a member; and |
|
• |
next, to other redemption requests until all other requests for redemption have been met. |
30
All redemption requests shall be honored on a pro rata basis, based on the amount of redemption requests received in the preceding quarter plus unfulfilled redemption requests that the company was unable to honor in prior quarter(s).
There are substantial restrictions on transferability of units, and there is no established public trading and/or secondary market for the units and none is expected to develop. In order to provide liquidity to members, the company’s Operating Agreement includes a unit redemption program, whereby beginning one year from the date of purchase of the units, a member may redeem all or part of their units, subject to certain limitations.
The price paid for redeemed units is 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 is calculated based on the period from date of purchase as follows:
|
• |
after one year, 92% of the purchase price or of the capital account balance, whichever is less; |
|
• |
after two years, 94% of the purchase price or of the capital account balance, whichever is less; |
|
• |
after three years, 96% of the purchase price or of the capital account balance, whichever is less; |
|
• |
after four years, 98% of the purchase price or of the capital account balance, whichever is less; |
|
• |
after five years, 100% of the purchase price or of the capital account balance, whichever is less. |
Proceeds from sale of units
Proceeds from the sale of the units (including DRIP units) are used to:
|
• |
make additional loans; |
|
• |
fund working capital reserves; |
|
• |
pay RMC up to 4.5% of proceeds from sale of units for organization and offering expenses, excluding units sold in the DRIP; and, |
|
• |
fund a formation loan to RMC at up to 7% of proceeds from sale of units, excluding the DRIP. |
Commissions for unit sales were paid to broker-dealers (B/D sales commissions) and premiums paid to certain investors upon the purchase of units were paid by RMC and were not paid directly by us out of offering proceeds. Instead, the company advanced to RMC, from offering proceeds, amounts sufficient to pay the B/D sales commissions and premiums to be paid to investors. Such advances in total were not to exceed 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.” As of December 31, 2019, such advances totaled $5,626,566, of which $3,948,064 remains outstanding. Please refer to the information under “—Unit sales commissions paid to broker-dealers/formation loan” in Note 1 (Organization and General) and “—Reimbursement and allocation of organization and offering expenses” in Note 3 (Manager and Related Parties) to the financial statements included in Part II, Item 8 of this report for a discussion of the formation loan and organization and offering expenses, which discussions are incorporated herein by this reference.
RMC is required to repay the balance of the formation loan in equal annual installments of principal, without interest, such that repayment is completed in full by the end of the term of the company in 2028. In 2019 and years prior to the deregistration of the unsold units, RMC made annual payments on the formation loan in the amount of one tenth of the principal balance outstanding at December 31 of the prior year.
Distributions
Distributions totaled $4,534,952 and $4,462,623 in 2019 and 2018, respectively. See “Distribution policy” under Item 1- Business in Part I of this annual report, which discussion is incorporated by reference herein.
31
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 of record as of April 30, 2019, that previously elected to participate in the DRIP or that provide written notice to the manager may elect to participate in the DRIP, in those states in which approval has been obtained.
Liquidity and unit redemption program
Units redeemed in 2019 and 2018 by quarter are presented in the following table.
For the quarterly period ended |
|
2019 |
|
|
2018 |
|
||
|
$ |
1,092,396 |
|
|
$ |
403,400 |
|
|
June 30 |
|
|
823,654 |
|
|
|
299,240 |
|
September 30 |
|
|
760,856 |
|
|
|
787,524 |
|
December 31 |
|
|
571,576 |
|
|
|
1,243,607 |
|
Total |
|
$ |
3,248,482 |
|
|
$ |
2,733,771 |
|
All redemptions are made on the last business day of the quarter, and valued at $1 per unit.
Fair market value / unit value
In compliance with FINRA Rule 2310 concerning direct-participation-program value per unit estimates, RMC obtained information regarding fair market valuations of the net assets and unit value as of December 31, 2019, for RMI IX. The valuations were performed with the assistance of an independent valuation firm that provides asset valuations to retirement plan sponsors, plan administrators, banking and trust companies, and ERISA plans. The fair values of the individual properties were taken from appraisals which referenced the most current available market information such as listing agreements, offers, and pending and closed sales. Industry standard valuation approaches, including the Income Approach, were utilized in deriving the fair values, as appropriate. There is no assurance that this estimated fair value of the membership units is or will remain accurate, and it does not determine the amount that a member is entitled to receive upon redemption of units. The redemption amount is determined by the applicable provisions of the Operating Agreement.
The fair value of a unit of RMI IX was determined to be $1.00, after consideration of the fair values of the net assets held, the restrictions in the unit redemption program in the Operating Agreement and the restrictions on transferability of units with consideration to the expected net distribution rate on the units.
The fair value of loan balances (i.e., principal plus interest) secured by deeds of trust, per the Market Approach, is deemed to approximate the recorded amount (per the financial statements) as our loans:
|
• |
are of shorter terms at origination than commercial real estate loans by institutional lenders and conventional single-family home mortgage lenders; |
|
• |
are written without a prepayment penalty; and |
|
• |
are not yet sellable into an established secondary market as companies or individuals originating loans similar to those originated by RMC on behalf of the company typically intend to hold the loans until maturity. |
Market Approach - The market approach measures value based on what other purchasers in the market have paid for assets that can be considered reasonably similar to those being valued. When the market approach is utilized, data is collected on the prices paid for reasonably comparable assets. Adjustments are made to the comparable assets to compensate for differences between those assets and the asset being valued. In the case of real estate for example, adjustments might be made for location, quality or construction, and/or building amenities. The application of the market approach results in an estimate of the price reasonably expected to be realized from the sale of the property.
32
Income Approach - The income approach is a valuation technique that provides an estimation of the fair value of an asset, such as RMI IX’s loans, based on the cash flows that an asset can be expected to generate over its estimated remaining economic term. This approach begins with an estimation of the annual cash flows a prudent investor would expect the subject asset to generate over a discrete projection period. The estimated cash flows for each of the years in the discrete projection period are then converted to their present value equivalent using a rate of return appropriate for the risk of achieving the asset’s projected cash flows.
The primary purpose of the valuation was to determine the fair value of a unit of membership interest in RMI IX. There is no assurance that this estimated value is or will remain accurate, and it does not determine the amount that a member is entitled to receive upon withdrawal of units. RMC makes no representation, express or implied, that a unit of RMI IX could or would be transferred by an investor for the stated fair value.
Item 6 – Selected Financial Data
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the audited financial statements and notes thereto, which are included in Part II, Item 8 of this report.
Manager and Other Related Parties
See Notes 1 (Organization and General) and 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 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 7.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 owned, at acquisition and subsequently. Actual results could differ significantly from these estimates.
Allowance for loan losses
Loans and the related accrued interest and advances (i.e. the loan balance) are analyzed on a periodic basis for ultimate recoverability. Collateral fair values are reviewed quarterly and the protective equity for each loan is computed. As used herein, “protective equity” is the dollar amount by which the fair value of the collateral, net of any senior liens, exceeds 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.
A provision for loan losses to adjust the allowance for loan losses (principal and/or interest) is made to an amount such that the net carrying amount is reduced to the lower of the loan balance or the estimated fair value of the related collateral, net of any costs to sell in arriving at net realizable value and net of any senior loans and/or claims.
At foreclosure, any excess of the recorded investment in the loan (accounting basis) over the net realizable value of the collateral is charged against the allowance for loan losses.
33
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 income 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).
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.
Results of Operations
General economic conditions – California
COVID-19 (Coronavirus) – COVID-19 is a new strain of the novel coronavirus that causes illness ranging from the common cold to more severe symptoms including fever, cough, breathing difficulties, and in more severe cases, pneumonia, acute respiratory syndrome, kidney failure and death. COVID-19, which is highly contagious, was first publicly reported in Wuhan, China on December 31, 2019 and has since been reported in over 170 countries and territories including the United States and both Northern and Southern California. In response to the COVID-19 outbreak, federal, state and local governments as well as the business community have implemented voluntary and increasingly mandatory “social distancing” polices including quarantines, travel bans, work from home initiatives, cancellation or postponement of public events and school closures, among others. On March 4, 2020, California Governor Gavin Newsom declared a State of Emergency to exist in California with respect to the COVID-19. On March 19, 2020 Governor Newsom issued Executive Order N-33-20 ordering all California residents to stay at home except as needed to maintain continuity of operations of the federal critical infrastructure sectors and other sectors designated by the Governor. These measures and the general uncertainty around the COVID-19 virus have recently caused increased volatility in the United States financial markets and economic uncertainty at the state, local and national level. The overall impact of COVID-19 on the California economy and the California real estate markets is not known at this time. The company's revenues and financial results depend upon the ability of borrowers to make payments of principal and interest in a timely manner and on the interest rates charged on loans. In addition, the company's loans are secured by real properties located in Northern and Southern California and the overall impact of COVID-19 on the California real estate market cannot be predicted at this time. If there is prolonged uncertainty with respect to COVID-19 in California and the United States, it could result in an economic downturn or recession in national and local economies including but not limited to increases in unemployment rates and disruptions to businesses, which could have a negative impact on the ability of borrowers to make principal and interest payments, as well as the company's volume of loan originations. These factors combined with a decline in California real estate values could have a short or long term material adverse impact on the company’s business, financial performance and results of operations.
34
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 dependent significantly on economic activity and employment conditions in California. Wells Fargo’s Economics Group periodically provides timely, relevant information and analysis in its reports and commentary regarding California’s employment and economic conditions. Highlights from a recently issued report from Wells Fargo Securities Economics Group is presented below.
In the publication “The Fed Announces a Barrage of Policy Changes” dated March 16, 2020:
“The Federal Reserve surprised many market participants on Sunday evening, March 15, when it announced a barrage of policy changes, which we will address in more detail subsequently. But to summarize, the FOMC cut the target range for the fed funds rate 100 bps, returning it to 0.00% to 0.25%, where it was maintained from December 2008 to December 2015. The FOMC re-instated its quantitative easing (QE) program via renewed purchases of Treasury and mortgage-backed securities. It slashed its discount rate to only 0.25%, an all-time low, and it encouraged banks to draw on Fed facilities and to use their capital and liquidity buffers to lend to households and businesses. Finally, the Federal Reserve, in concert with other major central banks, cut the interest rate that it charges on its swap lines, which foreign central banks use to borrow dollars from the Fed. All of these steps are an effort by the Fed to ease strains in financial markets and cushion the U.S. economy, as much as possible, from the growth-halting effects of the COVID-19 pandemic. In our view, the FOMC stands ready to do even more, within its legal authority, to support financial and credit markets.”
“Let’s start with the cut in the target range for the fed funds rate. As we wrote in a report last week, we were anticipating that the FOMC would cut 100 bps at its scheduled meeting on March 18, “if not sooner,” so the timing of yesterday’s rate cut was not totally unexpected. We wrote in another report last month that lower rates will offer some support to businesses and household via lower interest payments on floating-rate debt obligations.”
“The FOMC also authorized the trading desk at the Federal Reserve Bank of New York to purchase $500 billion worth of Treasury securities and $200 billion worth of mortgage-backed securities (MBS) “in coming months.” The Fed hopes that these renewed QE purchases of securities will help reduce tensions in other financial markets via an eventual narrowing of credit spreads (over U.S. Treasury securities). In that regard, MBS spreads have widened significantly in recent weeks. Renewed QE purchases of MBS by the Fed should eventually bring those spreads down, which then should help to bring mortgage rates for new purchases and refinancing lower as well…”
“…In sum, all of the moves that the FOMC announced on March 15 are intended to ease strains in financial markets and to support the credit-creation process in the economy as much as possible. In our view, the FOMC stands ready to do even more, within its legal authority, to support financial and credit markets. In that regard, the committee could re-instate some of the programs, or variants thereof, which it created during the financial crisis to keep credit markets functioning. But many of the steps that the Fed is undertaking will offer only limited support to economic activity directly. The federal government has announced some fiscal measures already. In our view, it will need to do more to support the economy in coming months.”
35
Key performance indicators are presented in the following table for 2019 and 2018.
|
|
2019 |
|
|
2018 |
|
|
||
Secured loans principal – end of period balance |
|
$ |
70,660,284 |
|
|
$ |
62,115,713 |
|
|
Secured loans principal– average daily balance |
|
$ |
66,808,000 |
|
|
$ |
61,069,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on loans |
|
$ |
5,994,790 |
|
|
$ |
5,200,702 |
|
|
Portfolio interest rate(1) |
|
|
8.8 |
% |
|
|
8.5 |
% |
|
Effective yield rate(2) |
|
|
9.0 |
% |
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
$ |
87,000 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
Total operations expense(7) |
|
$ |
1,006,908 |
|
|
$ |
457,848 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income(7) |
|
$ |
4,973,712 |
|
|
$ |
4,790,272 |
|
|
Percent of average members’ capital(3)(4) |
|
|
6.1 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
Member Distributions, net |
|
$ |
4,534,952 |
|
|
$ |
4,462,623 |
|
|
Percent of average members’ capital(3)(5) |
|
|
5.6 |
% |
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Members’ capital, gross – end of period balance |
|
$ |
81,755,930 |
|
|
$ |
79,198,453 |
|
|
Members’ capital, gross – average daily balance |
|
$ |
81,340,000 |
|
|
$ |
74,469,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Member Redemptions(6) |
|
$ |
3,248,482 |
|
|
$ |
2,733,771 |
|
|
(1) |
Stated note interest rate of secured loans - weighted daily average |
(2) |
Percent of secured loans – average daily balance |
(3) |
Percent of members’ capital, gross – average daily balance |
(4) |
Percent based on the net income available to members (excluding 1% allocated to the manager) |
(5) |
Members Capital Distributed during 2019 is net of O&O costs allocated to members during the year. |
(6) |
Scheduled member redemptions as of December 31, 2019 were $447,417, payable in 2020. Scheduled member redemptions as of December 31, 2018 were $1,253,669. |
(7) See Note 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for a detailed discussion on fees and reimbursements waived and costs absorbed by the manager, which presentation is incorporated by this reference into this Item 7.
Secured loans
The secured loan principal – end of period at December 31, 2019 of $70,660,284 was an increase of approximately 13.8% ($8.5 million) over 2018’s $62,115,713.The increase in secured loan principal – end of period is due primarily to the timing of loan payoffs and new loan fundings at year end 2019, as well as an increase in members’ capital, end of period of approximately 3.2% ($2.6 million) at December 31, 2019. New loans originated were approximately $58.1 million for the year ended December 31, 2019. Secured loans as a percent of member’s capital (based on average balances) was 82.1% and 82.0% for 2019 and 2018, respectively.
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 (i.e., safety margins to outstanding debt) as indicated by the overall conservative weighted average loan-to-value ratio (LTV) which at December 31, 2019 was approximately 55.3%. Thus, per the appraisal-based valuations at the time of loan inception, borrowers have, in the aggregate, equity of 44.7% in the property, and we as lenders have lent in the aggregate 55.3% (including other senior liens on the property) against the properties we hold as collateral for the repayment of our loans.
36
Secured loans, principal by LTV and lien position are presented in the following table as of December 31, 2019.
|
|
Principal - secured loans |
|
||||||||||||||||||
LTV |
|
First trust deeds |
|
Percent of total principal |
|
|
Second trust deeds |
|
Percent of total principal |
|
|
Total principal |
|
Percent of total principal |
|
||||||
<40% |
|
$ |
6,949,302 |
|
|
9.8 |
% |
|
$ |
2,493,655 |
|
|
3.5 |
% |
|
$ |
9,442,957 |
|
|
13.3 |
% |
40-49% |
|
|
2,680,367 |
|
|
3.8 |
% |
|
|
990,236 |
|
|
1.4 |
% |
|
|
3,670,603 |
|
|
5.2 |
% |
50-59% |
|
|
16,779,468 |
|
|
23.7 |
% |
|
|
7,151,619 |
|
|
10.1 |
% |
|
|
23,931,087 |
|
|
33.8 |
% |
60-69% |
|
|
15,440,914 |
|
|
21.9 |
% |
|
|
15,819,135 |
|
|
22.4 |
% |
|
|
31,260,049 |
|
|
44.3 |
% |
Subtotal <70% |
|
|
41,850,051 |
|
|
59.2 |
% |
|
|
26,454,645 |
|
|
37.4 |
% |
|
|
68,304,696 |
|
|
96.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70-79% |
|
|
861,986 |
|
|
1.2 |
% |
|
|
1,243,974 |
|
|
1.8 |
% |
|
|
2,105,960 |
|
|
3.0 |
% |
Subtotal <80% |
|
|
42,712,037 |
|
|
60.4 |
% |
|
|
27,698,619 |
|
|
39.2 |
% |
|
|
70,410,656 |
|
|
99.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
>80%(1) |
|
|
— |
|
|
0.0 |
% |
|
|
249,628 |
|
|
0.4 |
% |
|
|
249,628 |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
42,712,037 |
|
|
60.4 |
% |
|
$ |
27,948,247 |
|
|
39.6 |
% |
|
$ |
70,660,284 |
|
|
100.0 |
% |
Non-performing secured loans, principal by LTV and lien position are presented in the following table as of December 31, 2019.
|
|
Principal - secured loans - non-performing |
|
||||||||||||||||||
LTV |
|
First trust deeds |
|
Percent total principal |
|
|
Second trust deeds |
|
Percent total principal |
|
|
Total |
|
Percent total principal |
|
||||||
<40% |
|
$ |
2,856,650 |
|
|
4.0 |
% |
|
$ |
— |
|
|
0.0 |
% |
|
$ |
2,856,650 |
|
|
4.0 |
% |
40-49% |
|
|
— |
|
|
0.0 |
% |
|
|
345,706 |
|
|
0.5 |
% |
|
|
345,706 |
|
|
0.5 |
% |
50-59% |
|
|
— |
|
|
0.0 |
% |
|
|
441,367 |
|
|
0.6 |
% |
|
|
441,367 |
|
|
0.6 |
% |
60-69% |
|
|
1,072,682 |
|
|
1.5 |
% |
|
|
3,329,342 |
|
|
4.7 |
% |
|
|
4,402,024 |
|
|
6.2 |
% |
Subtotal <70% |
|
|
3,929,332 |
|
|
5.5 |
% |
|
|
4,116,415 |
|
|
5.8 |
% |
|
|
8,045,747 |
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70-79% |
|
|
190,769 |
|
|
0.3 |
% |
|
|
— |
|
|
0.0 |
% |
|
|
190,769 |
|
|
0.3 |
% |
Subtotal <80% |
|
|
4,120,101 |
|
|
5.8 |
% |
|
|
4,116,415 |
|
|
5.8 |
% |
|
|
8,236,516 |
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
>80%(1) |
|
|
— |
|
|
0.0 |
% |
|
|
249,628 |
|
|
0.4 |
% |
|
|
249,628 |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,120,101 |
|
|
5.8 |
% |
|
$ |
4,366,043 |
|
|
6.2 |
% |
|
$ |
8,486,144 |
|
|
12.0 |
% |
Payments in arears for non-performing secured loans, (i.e., principal and interest payments past due 30 or more days) totaled approximately $1,316,000, of which $230,000 was accrued interest receivable, and $1,086,000 was principal.
See Note 4 (Loans) to the financial statements included in Part II, Item 8 of this report for detailed presentations on the secured loan portfolio, payments in arears on non-performing loans, and on the allowance for loan losses, which presentations are incorporated by this reference into this Item 7.
37
Revenue from the interest on loans, net for the year ended December 31, 2019 increased by approximately $794,000, over the same period in 2018, due to the increased average secured loan principal of approximately $5.7 million, approximately $68,000 in default interest collected on loans that had been non-performing, and an increase in the average portfolio interest rate (8.8% in 2019 and 8.5% in 2018).
Operations expense for the year ended December 31, 2019 increased by approximately $549,000, over the same period in 2018 due to the termination of RMC electing to absorb some (or all) of our direct operating expenses (e.g. professional services and other direct operating expenses) beginning April 1, 2018. Additionally an increase in mortgage servicing fees due to an increased loan portfolio, fees paid to an independent service bureau for information technology related to recordkeeping and reporting for the accounts of individual members’ which had previously been included in Costs from RMC, and RMC, at its sole discretion, electing to begin collecting asset management fees in June 2019 contributed to the increase in operations expense.
The secured loan, and members’ capital balances are used as a base for the calculation for fees charged by RMC, and increases or decreases in the balances will have a similar effect on the total amount chargeable by RMC. In all periods presented, the manager, at its sole discretion, provided financial support that increased net income and the return to investors.
RMC support provided, totaled approximately $1,437,000 and $2,031,000 for the years ended December 31, 2019 and 2018, respectively. The decision to waive all or a portion of these fees is made by RMC, in its sole discretion.
See Note 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for a detailed discussion on fees and reimbursements waived and costs absorbed by the manager, which presentation is incorporated by this reference into this Item 7.
Analysis and discussion of income from operations 2019 v. 2018
Significant changes to revenue and expenses during 2019 and 2018 are summarized in the following table.
|
|
Interest on loans, net |
|
|
Provision For Loan Losses |
|
|
Operations Expense |
|
|
Net Income |
|
||||
For the years ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
$ |
5,994,790 |
|
|
|
87,000 |
|
|
|
1,006,908 |
|
|
|
4,973,712 |
|
December 31, 2018 |
|
|
5,200,702 |
|
|
|
— |
|
|
|
457,848 |
|
|
|
4,790,272 |
|
Change |
|
$ |
794,088 |
|
|
|
87,000 |
|
|
|
549,060 |
|
|
|
183,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan balance increase |
|
$ |
383,448 |
|
|
|
— |
|
|
|
15,421 |
|
|
|
368,027 |
|
Loan portfolio effective yield rate |
|
|
410,640 |
|
|
|
— |
|
|
|
— |
|
|
|
410,640 |
|
Reduced support from RMC |
|
|
— |
|
|
|
— |
|
|
|
157,399 |
|
|
|
(157,399 |
) |
Cost allocated from RMC |
|
|
— |
|
|
|
— |
|
|
|
(87,037 |
) |
|
|
87,037 |
|
Gain on sale, loans |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,300 |
) |
Late fees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31,712 |
|
Capital balance increase |
|
|
— |
|
|
|
— |
|
|
|
56,928 |
|
|
|
(56,928 |
) |
Information technology for members' capital |
|
|
— |
|
|
|
— |
|
|
|
87,795 |
|
|
|
(87,795 |
) |
California tax payment |
|
|
— |
|
|
|
— |
|
|
|
11,790 |
|
|
|
(11,790 |
) |
RMC fees/costs reimbursements waived |
|
|
— |
|
|
|
— |
|
|
|
308,212 |
|
|
|
(308,212 |
) |
Allowance for loan losses, general reserve |
|
|
— |
|
|
|
50,000 |
|
|
|
— |
|
|
|
(50,000 |
) |
Allowance for loan losses, specific reserve |
|
|
— |
|
|
|
37,000 |
|
|
|
— |
|
|
|
(37,000 |
) |
Other |
|
|
— |
|
|
|
— |
|
|
|
(1,448 |
) |
|
|
1,448 |
|
Change |
|
$ |
794,088 |
|
|
|
87,000 |
|
|
|
549,060 |
|
|
|
183,440 |
|
The table above displays only significant changes to net income for the period, and is not intended to cross foot.
38
See Note 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for a detailed discussion on fees and cost reimbursements waived and costs absorbed by the manager, which presentation is incorporated by this reference into this Item 7. See “Performance Overview” for a discussion of RMC’s plans to reduce and eventually eliminate fee and cost waivers.
Interest on loans, net
Interest on loans increased due to growth of the secured loan portfolio, approximately $68,000 collected in default interest collected on non-performing loans during 2019, and an increase in the average portfolio interest rate (8.8% in 2019 and 8.5% in 2018). The portfolio has a strong payment history, with 3 loans (representing 1.7% of the aggregate principal balance of the company’s loan portfolio) currently designated as in non-accrual status. The Secured loans – average daily balance at December 31, 2019 was approximately $66.8 million, an increase of approximately $5.7 million, or approximately 9.4%, over the average daily balance at December 31, 2018 of approximately $61.1.
Provision for loan losses/Allowance for loan losses
At December 31, 2019, RMI IX recorded a $87,000 provision for loan losses, primarily for secured loans in a second lien position, as the manager may – from time to time – agree to concessions to borrowers to facilitate a sale of collateral or refinance transactions. Included in the provision for loan losses at December 31, 2019 is a $37,000 specific provision on a secured loan in second lien position, to facilitate the sale of the underlying collateral, which was sold in February 2020.
Operations expense
Operations expense as a percent of interest on loans, net was approximately 16.8% and 8.8% during 2019, and 2018, respectively. The increase in operations expense was due primarily to RMC ceasing to absorb our direct operating expenses (e.g. professional service expense and other direct operating expenses), beginning April 1, 2018, an increase in mortgage servicing fees due to an increased average daily balance in the secured loan portfolio, fees paid to an independent service bureau for information technology related to recordkeeping and reporting for the accounts of individual members’ which fees had previously been included in Costs from RMC, and RMC, in its sole discretion, electing to collect asset management fees commencing June 1, 2019 and ongoing.
Significant changes to operations expense during 2019 and 2018, are summarized in the following table.
|
|
Mortgage Servicing Fees |
|
|
Asset Management Fees, net |
|
|
Costs From RMC, net |
|
|
Professional Services, net |
|
|
Other |
|
|
Total |
|
||||||
For the years ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
$ |
166,878 |
|
|
|
278,103 |
|
|
|
— |
|
|
|
524,940 |
|
|
|
36,987 |
|
|
|
1,006,908 |
|
December 31, 2018 |
|
|
151,457 |
|
|
|
— |
|
|
|
— |
|
|
|
289,053 |
|
|
|
17,338 |
|
|
|
457,848 |
|
Change |
|
$ |
15,421 |
|
|
|
278,103 |
|
|
|
— |
|
|
|
235,887 |
|
|
|
19,649 |
|
|
|
549,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan balance increase |
|
$ |
15,421 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15,421 |
|
Capital balance increase |
|
|
— |
|
|
|
56,928 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
56,928 |
|
Cost allocated from RMC |
|
|
— |
|
|
|
— |
|
|
|
(87,037 |
) |
|
|
— |
|
|
|
— |
|
|
|
(87,037 |
) |
RMC fees/costs reimbursements waived |
|
|
— |
|
|
|
221,175 |
|
|
|
87,037 |
|
|
|
— |
|
|
|
— |
|
|
|
308,212 |
|
Information technology for members' capital |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
87,795 |
|
|
|
— |
|
|
|
87,795 |
|
Reduced support from RMC |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
143,152 |
|
|
|
14,247 |
|
|
|
157,399 |
|
California tax payment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,790 |
|
|
|
11,790 |
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,940 |
|
|
|
(6,388 |
) |
|
|
(1,448 |
) |
Change |
|
$ |
15,421 |
|
|
|
278,103 |
|
|
|
— |
|
|
|
235,887 |
|
|
|
19,649 |
|
|
|
549,060 |
|
See Note 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for a detailed discussion on fees and cost reimbursements waived and costs absorbed by the manager, which
39
presentation is incorporated by this reference into this Item 7. See “Performance Overview” for a discussion of RMC’s plans to reduce and eventually eliminate fee and cost waivers.
Mortgage servicing fees
The increase in mortgage servicing fees of $15,421 was attributed to the increase in the average daily secured loan portfolio from approximately $61,069,000 for the year ended December 31, 2018 to $66,808,000, for the year ended December 31, 2019, at the annual rate of 0.25%.
Asset management fees
The total amount of asset management fees chargeable were $476,748 and $419,820 for the years ended December 31, 2019 and 2018, respectively. The increase in asset management fees chargeable was due to the increase in total capital. Total members capital at December 31, 2019 and 2018 was approximately $81,756,000 and $79,198,000, respectively. RMC, at its sole discretion, elected to begin collecting asset management fees in June 2019. Of the total asset management fees chargeable, RMC, at its sole discretion, waived $198,645 and $419,820 during 2019 and 2018, respectively.
The asset management fee is chargeable 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 to be recomputed annually after the second full year of operations by subtracting from the then fair value of the company’s loans plus working capital reserves, an amount equal to the outstanding debt.
Costs from RMC, net
Cost incurred by RMC, for which reimbursement could have been requested were $657,864 and $744,901 for the years ended December 31, 2019 and 2018, respectively. RMC, at its sole discretion, waived all reimbursements for the years ended December 31, 2019 and 2018. The decrease in costs from RMC, net chargeable was due primarily to a decrease in allocable expenses incurred by RMC, specifically relating to payroll and consultant expenses.
The Operating Agreement provides that RMC may request reimbursement from the company for operations expense incurred on behalf of the company, including without limitation, the cost of preparation of reports to members and out-of-pocket general and administration expenses. Certain of these qualifying costs (e.g. postage) can be tracked by RMC as specifically attributable to the company. Other costs (e.g. RMC’s accounting and audit fees, legal fees and expenses, qualifying payroll expenses, occupancy, and insurance premium) are allocated on a pro-rata basis based on the company’s percentage of total capital of all mortgage funds managed by RMC. Payroll and consulting fees are allocated based on activity, and then allocated to the company pro-rata, based on percentage of capital to the total capital of all affiliated mortgage funds managed by RMC. Increases or decreases in members’ capital or secured loan principal will have a similar effect on the total amount chargeable by RMC. The decision to waive all or a portion of fees otherwise payable to RMCs is made by RMC, in its sole discretion.
Professional services
Professional services consist primarily of legal, audit and tax compliance, information technology related to recordkeeping and reporting for individual members accounts, and regulatory (including SEC/FINRA compliance) expenses. Professional service expense incurred during the years ended December 31, 2019 and 2018 was $524,940 and $432,205, respectively. Beginning April 1, 2018, RMI IX paid for all professional service expenses directly. Prior to April 1, 2018, RMC, at its sole discretion, had elected to absorb some or all of RMI IX’s expenses for professional services. During the year ended December 31, 2018, RMC, in its sole discretions, reimbursed $143,152 of professional service expense.
40
Summary comparison – 4th quarter v. 3rd quarter
Significant changes to income or expense items for the three-month period ended December 31, 2019 compared to the three-month period ended September 30, 2019 is summarized in the following table.
|
|
Interest on loans, net |
|
|
Provision For Loan Losses |
|
|
Operations Expense |
|
|
Net Income |
|
||||
For the three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
$ |
1,589,783 |
|
|
|
87,000 |
|
|
|
296,298 |
|
|
|
1,213,693 |
|
September 30, 2019 |
|
|
1,526,142 |
|
|
|
— |
|
|
|
338,408 |
|
|
|
1,226,729 |
|
Change |
|
$ |
63,641 |
|
|
|
87,000 |
|
|
|
(42,110 |
) |
|
|
(13,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan balance increase |
|
|
131,890 |
|
|
|
— |
|
|
|
4,418 |
|
|
|
127,472 |
|
Loan portfolio effective yield rate |
|
|
(68,249 |
) |
|
|
— |
|
|
|
— |
|
|
|
(68,249 |
) |
Gain on sale, loans |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(20,833 |
) |
Late fees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,954 |
) |
Cost allocated from RMC |
|
|
— |
|
|
|
— |
|
|
|
(10,360 |
) |
|
|
10,360 |
|
California tax payment |
|
|
— |
|
|
|
— |
|
|
|
12,590 |
|
|
|
(12,590 |
) |
RMC fees/costs reimbursements waived |
|
|
— |
|
|
|
— |
|
|
|
10,360 |
|
|
|
(10,360 |
) |
Professional Service Timing |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Allowance for loan losses, general reserve |
|
|
— |
|
|
|
50,000 |
|
|
|
— |
|
|
|
(50,000 |
) |
Allowance for loan losses, specific reserve |
|
|
— |
|
|
|
37,000 |
|
|
|
— |
|
|
|
(37,000 |
) |
Other |
|
|
— |
|
|
|
— |
|
|
|
(59,118 |
) |
|
|
59,118 |
|
Change |
|
$ |
63,641 |
|
|
|
87,000 |
|
|
|
(42,110 |
) |
|
|
(13,036 |
) |
The table above displays only significant changes to net income for the period, and is not intended to cross foot.
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members’ capital, cash flows and liquidity
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below shows cash flows by business activity for 2019 and 2018.
|
|
|
|
|||||
|
|
2019 |
|
|
2018 |
|
||
Members’ capital |
|
|
|
|
|
|
|
|
Contributions by members |
|
$ |
2,682,081 |
|
|
$ |
10,479,930 |
|
Organization and offering costs, net |
|
|
(89,259 |
) |
|
|
(510,692 |
) |
Formation loan, net |
|
|
168,645 |
|
|
|
(434,325 |
) |
Redemptions, net |
|
|
(3,166,435 |
) |
|
|
(2,733,771 |
) |
Earnings distributed to manager |
|
|
(45,000 |
) |
|
|
— |
|
Earnings distributed to members, net of DRIP |
|
|
(2,119,145 |
) |
|
|
(2,080,785 |
) |
Cash – members’ capital, net |
|
|
(2,569,113 |
) |
|
|
4,720,357 |
|
Loan principal/advances/interest |
|
|
|
|
|
|
|
|
Principal collected |
|
|
44,597,043 |
|
|
|
41,506,194 |
|
Loans sold to non-affiliate, net |
|
|
4,994,818 |
|
|
|
22,128,128 |
|
Interest received, net |
|
|
5,732,666 |
|
|
|
5,042,952 |
|
Other loan income |
|
|
52,797 |
|
|
|
18,499 |
|
Loan funding & advances, net |
|
|
(58,052,653 |
) |
|
|
(64,966,301 |
) |
Loans transferred from affiliates |
|
|
— |
|
|
|
(5,889,819 |
) |
Cash – loans, net |
|
|
(2,675,329 |
) |
|
|
(2,160,347 |
) |
|
|
|
|
|
|
|
|
|
Operations expense |
|
|
(979,982 |
) |
|
|
(394,909 |
) |
|
|
|
|
|
|
|
|
|
Net change in cash |
|
$ |
(6,224,424 |
) |
|
$ |
2,165,101 |
|
Cash, end of period |
|
$ |
4,450,529 |
|
|
$ |
10,674,953 |
|
Redemptions of members capital
The table below sets forth redemptions of members capital.
|
|
2019 |
|
|
2018 |
|
||
Capital redemptions-without penalty |
|
$ |
1,281,768 |
|
|
$ |
1,923,685 |
|
Capital redemptions-subject to penalty |
|
|
1,966,714 |
|
|
|
810,086 |
|
Total |
|
$ |
3,248,482 |
|
|
$ |
2,733,771 |
|
|
|
|
|
|
|
|
|
|
Early withdrawal penalties |
|
$ |
111,551 |
|
|
$ |
54,429 |
|
|
|
|
|
|
|
|
|
|
At December 31, 2019, scheduled redemptions of members' capital equaled $447,417, and is scheduled to be paid in 2020.
Contractual obligations, other than redemptions of members capital
At December 31, 2019, the company had no construction or rehabilitation loans outstanding.
At December 31. 2019, the company has no off-balance sheet arrangements as such arrangements are not permitted by the Operating Agreement.
42
Item 7A – Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 8 – Financial Statements and Supplementary Data
A – Financial Statements
The following financial statements of Redwood Mortgage Investors IX, LLC at and for the years ended December 31, 2019 and 2018 are included in Item 8:
|
44 |
|
|
45 |
|
|
46 |
|
|
47 |
|
|
48 |
|
|
50 |
B – Financial Statement Schedules
None.
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members
Redwood Mortgage Investors IX, LLC
San Mateo, California
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Redwood Mortgage Investors IX, LLC (a Delaware Limited Liability Company) (the “Company”) as of December 31, 2019 and 2018, the related statements of income, changes in members’ capital, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of a Matter – Support from Manager
As discussed in Note 3, in 2019 and 2018 Redwood Mortgage Corp (the “Manager”), at its sole discretion, provided financial support to the Company that improved net income and the return to investors in the form of waived fees, and by the decision not to seek reimbursement for certain operating costs incurred by the Manager for which reimbursement is allowable under the operating agreement. Collectively, these actions increased net income to the Company during the years ended December 31, 2019 and 2018 by approximately $1,437,025 and $2,030,610, respectively.
Emphasis of a Matter – COVID-19
As more fully described in Note 6 to the financial statements, the Company may be materially impacted by the outbreak of a novel coronavirus (COVID-19), which was declared a global pandemic by the World Health Organization in March 2020.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2015.
San Francisco, California
March 30, 2020
44
REDWOOD MORTGAGE INVESTORS IX, LLC
December 31, 2019 and 2018
|
|
December 31, |
|
|
December 31, |
|
||
ASSETS |
|
2019 |
|
|
2018 |
|
||
Cash and cash equivalents |
|
$ |
4,450,529 |
|
|
$ |
10,674,953 |
|
Loans |
|
|
|
|
|
|
|
|
Principal |
|
|
70,660,284 |
|
|
|
62,115,713 |
|
Advances |
|
|
14,040 |
|
|
|
21,041 |
|
Accrued interest |
|
|
680,146 |
|
|
|
473,966 |
|
Loan balances secured by deeds of trust |
|
|
71,354,470 |
|
|
|
62,610,720 |
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(87,000 |
) |
|
|
— |
|
Loan balances secured by deeds of trust, net |
|
|
71,267,470 |
|
|
|
62,610,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
75,717,999 |
|
|
$ |
73,285,673 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES, INVESTORS IN APPLICANT STATUS, AND MEMBERS’ CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
36,933 |
|
|
$ |
9,321 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investors in applicant status |
|
|
— |
|
|
|
651,500 |
|
|
|
|
|
|
|
|
|
|
Members’ capital, net |
|
|
79,629,130 |
|
|
|
76,804,195 |
|
Receivable from manager (formation loan) |
|
|
(3,948,064 |
) |
|
|
(4,179,343 |
) |
Members’ capital, net, less formation loan |
|
|
75,681,066 |
|
|
|
72,624,852 |
|
Total liabilities, investors in applicant status and members’ capital |
|
$ |
75,717,999 |
|
|
$ |
73,285,673 |
|
The accompanying notes are an integral part of these financial statements.
45
REDWOOD MORTGAGE INVESTORS IX, LLC
For the Years Ended December 31, 2019 and 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
2018 |
|
||
Revenues, net |
|
|
|
|
|
|
|
|
|
Interest income |
|
|
$ |
5,994,790 |
|
|
$ |
5,200,702 |
|
Late fees |
|
|
|
51,997 |
|
|
|
20,285 |
|
Gain on sale, loans |
|
|
|
20,833 |
|
|
|
27,133 |
|
Total revenues |
|
|
|
6,067,620 |
|
|
|
5,248,120 |
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
|
87,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Operations expense |
|
|
|
|
|
|
|
|
|
Mortgage servicing fees |
|
|
|
166,878 |
|
|
|
151,457 |
|
Asset management fees, net (Note 3) |
|
|
|
278,103 |
|
|
|
— |
|
Costs from Redwood Mortgage Corp., net (Note 3) |
|
|
|
— |
|
|
|
— |
|
Professional services, net (Note 3) |
|
|
|
524,940 |
|
|
|
289,053 |
|
Other |
|
|
|
36,987 |
|
|
|
17,338 |
|
Total operations expense |
|
|
|
1,006,908 |
|
|
|
457,848 |
|
Net income |
|
|
$ |
4,973,712 |
|
|
$ |
4,790,272 |
|
Members (99%) |
|
|
|
4,923,975 |
|
|
|
4,742,369 |
|
Manager (1%) |
|
|
|
49,737 |
|
|
|
47,903 |
|
|
|
|
$ |
4,973,712 |
|
|
$ |
4,790,272 |
|
The accompanying notes are an integral part of these financial statements.
46
REDWOOD MORTGAGE INVESTORS IX, LLC
Statements of Changes in Members’ Capital
For the Years Ended December 31, 2019 and 2018
|
|
|
|
|
|
Members' Capital, net |
|
|||||||||||||
|
|
Investors In Applicant Status |
|
|
Members’ Capital |
|
|
Manager’s Capital |
|
|
Unallocated Organization and Offering Expenses |
|
|
Members’ Capital, net |
|
|||||
Balance at December 31, 2018 |
|
$ |
651,500 |
|
|
$ |
79,198,453 |
|
|
$ |
125,200 |
|
|
$ |
(2,519,458 |
) |
|
$ |
76,804,195 |
|
Contributions on application |
|
|
2,666,508 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Contributions admitted to members' capital |
|
|
(3,318,008 |
) |
|
|
3,318,008 |
|
|
|
3,331 |
|
|
|
— |
|
|
|
3,321,339 |
|
Premiums paid on application by RMC |
|
|
12,355 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Premiums admitted to members' capital |
|
|
(12,355 |
) |
|
|
12,355 |
|
|
|
— |
|
|
|
— |
|
|
|
12,355 |
|
Net income |
|
|
— |
|
|
|
4,923,975 |
|
|
|
49,737 |
|
|
|
— |
|
|
|
4,973,712 |
|
Earnings distributed to members |
|
|
— |
|
|
|
(4,534,952 |
) |
|
|
(45,000 |
) |
|
|
— |
|
|
|
(4,579,952 |
) |
Earnings distributed used in DRIP |
|
|
— |
|
|
|
2,415,807 |
|
|
|
— |
|
|
|
— |
|
|
|
2,415,807 |
|
Members’ redemptions |
|
|
— |
|
|
|
(3,248,482 |
) |
|
|
— |
|
|
|
— |
|
|
|
(3,248,482 |
) |
Organization and offering expenses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(185,332 |
) |
|
|
(185,332 |
) |
Organization and offering expenses allocated |
|
|
— |
|
|
|
(329,234 |
) |
|
|
— |
|
|
|
329,234 |
|
|
|
— |
|
Organization and offering expenses repaid by RMC |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
96,073 |
|
|
|
96,073 |
|
Early withdrawal penalties |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,415 |
|
|
|
19,415 |
|
Balance at December 31, 2019 |
|
$ |
— |
|
|
$ |
81,755,930 |
|
|
$ |
133,268 |
|
|
$ |
(2,260,068 |
) |
|
$ |
79,629,130 |
|
|
|
|
|
|
Members' Capital, net |
|
||||||||||||||
|
|
Investors In Applicant Status |
|
|
Members’ Capital |
|
|
Manager’s Capital |
|
|
Unallocated Organization and Offering Expenses |
|
|
Members’ Capital, net |
|
|||||
Balance at December 31, 2017 |
|
$ |
3,270,312 |
|
|
$ |
66,450,424 |
|
|
$ |
102,902 |
|
|
$ |
(2,335,325 |
) |
|
$ |
64,218,001 |
|
Contributions on application |
|
|
10,413,923 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Contributions admitted to members' capital |
|
|
(13,025,630 |
) |
|
|
13,025,630 |
|
|
|
13,085 |
|
|
|
— |
|
|
|
13,038,715 |
|
Premiums paid on application by RMC |
|
|
52,990 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Premiums admitted to members' capital |
|
|
(60,095 |
) |
|
|
60,095 |
|
|
|
— |
|
|
|
— |
|
|
|
60,095 |
|
Net income |
|
|
— |
|
|
|
4,742,369 |
|
|
|
47,903 |
|
|
|
— |
|
|
|
4,790,272 |
|
Earnings distributed to members |
|
|
— |
|
|
|
(4,462,623 |
) |
|
|
(38,690 |
) |
|
|
— |
|
|
|
(4,501,313 |
) |
Earnings distributed used in DRIP |
|
|
— |
|
|
|
2,420,528 |
|
|
|
— |
|
|
|
— |
|
|
|
2,420,528 |
|
Members’ redemptions |
|
|
— |
|
|
|
(2,733,771 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,733,771 |
) |
Organization and offering expenses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(591,907 |
) |
|
|
(591,907 |
) |
Organization and offering expenses allocated |
|
|
— |
|
|
|
(304,199 |
) |
|
|
— |
|
|
|
304,199 |
|
|
|
— |
|
Organization and offering expenses rebated by RMC |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
81,215 |
|
|
|
81,215 |
|
Early withdrawal penalties |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,360 |
|
|
|
22,360 |
|
Balance at December 31, 2018 |
|
$ |
651,500 |
|
|
$ |
79,198,453 |
|
|
$ |
125,200 |
|
|
$ |
(2,519,458 |
) |
|
$ |
76,804,195 |
|
The accompanying notes are an integral part of these financial statements.
47
REDWOOD MORTGAGE INVESTORS IX, LLC
For the Years Ended December 31, 2019 and 2018
|
|
|
|
|||||
|
|
2019 |
|
|
2018 |
|
||
Operations |
|
|
|
|
|
|
|
|
Interest income received |
|
$ |
5,732,666 |
|
|
$ |
5,039,822 |
|
Other loan revenue received |
|
|
52,797 |
|
|
|
18,499 |
|
Loan administrative fee reimbursed |
|
|
— |
|
|
|
3,130 |
|
Operations expense |
|
|
(979,982 |
) |
|
|
(394,909 |
) |
Total cash provided by operations |
|
|
4,805,481 |
|
|
|
4,666,542 |
|
Investing – loans |
|
|
|
|
|
|
|
|
Loans originated |
|
|
(58,051,600 |
) |
|
|
(64,959,250 |
) |
Loans sold to non-affiliate, net |
|
|
4,994,818 |
|
|
|
22,128,128 |
|
Loans transferred from affiliates |
|
|
— |
|
|
|
(5,889,819 |
) |
Principal collected |
|
|
44,597,043 |
|
|
|
41,506,194 |
|
Advances (made) on loans |
|
|
(1,053 |
) |
|
|
(7,051 |
) |
Total cash used in investing |
|
|
(8,460,792 |
) |
|
|
(7,221,798 |
) |
Financing – members’ capital |
|
|
|
|
|
|
|
|
Contributions by members, net |
|
|
|
|
|
|
|
|
Contributions by members |
|
|
2,682,081 |
|
|
|
10,479,930 |
|
Organization and offering expenses paid, net |
|
|
(89,259 |
) |
|
|
(510,692 |
) |
Formation loan funding |
|
|
(186,656 |
) |
|
|
(779,964 |
) |
Formation loan collected |
|
|
355,301 |
|
|
|
345,639 |
|
Total cash provided by members, net |
|
|
2,761,467 |
|
|
|
9,534,913 |
|
Distributions to members |
|
|
|
|
|
|
|
|
Earnings distributed, net of DRIP |
|
|
(2,119,145 |
) |
|
|
(2,080,785 |
) |
Earnings distributed to manager |
|
|
(45,000 |
) |
|
|
— |
|
Redemptions, net of early withdrawal penalties |
|
|
(3,166,435 |
) |
|
|
(2,733,771 |
) |
Cash distributions to members |
|
|
(5,330,580 |
) |
|
|
(4,814,556 |
) |
Total cash (used in) provided by financing |
|
|
(2,569,113 |
) |
|
|
4,720,357 |
|
Net (decrease) increase in cash |
|
|
(6,224,424 |
) |
|
|
2,165,101 |
|
Cash, beginning of period |
|
|
10,674,953 |
|
|
|
8,509,852 |
|
Cash, December 31, |
|
$ |
4,450,529 |
|
|
$ |
10,674,953 |
|
Non-cash financing activity for the years ended December 31, 2019 and 2018 includes early withdrawal penalties of $82,047 and $54,430, respectively, which reduced members’ capital by $19,415 and $22,360, respectively, as they were applied to unallocated O&O and the formation loan by $62,632 and $32,070, respectively.
Non-cash financing activity for the year ended December 31, 2019 includes investors in applicant status amounts totaling $651,500 representing cash amounts received in 2018 but not admitted until 2019. Non-cash financing activity for the year ended December 31, 2018 includes investors in applicant status amounts totaling $3,270,312 representing cash amounts received in 2017 but not admitted until 2018..
48
REDWOOD MORTGAGE INVESTORS IX, LLC
Statements of Cash Flows
For the Years Ended December 31, 2019 and 2018
Reconciliation of net income to total cash provided by operations
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
2018 |
|
||
Net income |
|
$ |
4,973,712 |
|
|
$ |
4,790,272 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
(Gain) on sale, loans |
|
|
(20,833 |
) |
|
|
(27,133 |
) |
Provision of loan losses |
|
|
87,000 |
|
|
|
— |
|
Amortization of loan administrative fees |
|
|
— |
|
|
|
5,878 |
|
Change in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accrued interest |
|
|
(262,124 |
) |
|
|
(166,758 |
) |
Loan administrative fees reimbursed |
|
|
— |
|
|
|
3,130 |
|
Accounts payable and accrued liabilities |
|
|
27,726 |
|
|
|
3,419 |
|
Other |
|
|
— |
|
|
|
57,734 |
|
Total adjustments |
|
|
(168,231 |
) |
|
|
(123,730 |
) |
Total cash provided by operations |
|
$ |
4,805,481 |
|
|
$ |
4,666,542 |
|
The accompanying notes are an integral part of these financial statements.
49
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
December 31, 2019 and 2018
NOTE 1 – ORGANIZATION AND GENERAL
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 by Redwood Mortgage Corp (RMC or the manager). 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. RMC provides the personnel and services necessary for the company to conduct its business as the company has no employees of its own. 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 Ninth Amended and Restated Limited Liability Company Operating Agreement of RMI IX (the “Operating Agreement”), the Delaware Limited Liability Company Act and the California Revised Uniform Limited Liability Company Act.
The following is a summary of certain provisions of the Operating Agreement and is qualified in its entirety by the terms of the Operating Agreement. Members should refer to the company’s Operating Agreement for complete disclosure of its provisions.
The company’s primary investment objectives are to:
|
• |
yield a favorable rate of return from the company’s business of making and/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 cash flow from these mortgage lending and investing activities. |
The ongoing sources of funds for loans are the proceeds (net of redemption of members’ capital and operating expenses) from:
|
• |
loan payoffs; |
|
• |
borrowers’ monthly principal and interest payments, net of operating expenses; |
|
• |
a line of credit; |
|
• |
loan sales to unaffiliated 3rd parties and loan transfers by executed assignment to affiliated mortgage funds; |
|
• |
payments from RMC on the outstanding balance of the formation loan; and, |
|
• |
sale of units to members participating in the dividend reinvestment plan and – prior to May 2019 – sale of units net of reimbursement to RMC of organization and offering expenses (“O&O expenses”) and net of amounts advanced for the formation loan to RMC. |
The company intends to hold until maturity the loans in which it invests and does not presently intend to invest in mortgage loans primarily for the purpose of reselling such loans in the ordinary course of business; however, the company may sell mortgage loans (or fractional interests therein) when the manager determines that it appears to be advantageous for the company to do so, based upon then current interest rates, the length of time that the loan has been held by the company, the company’s credit risk and concentration risk and the overall investment objectives of the company. Loans sold to third parties may be sold for par, at a premium or, in the case of non-performing or under performing loans, at a discount. Company loans may be sold to third parties or to the manager or its affiliates; however, any loan sold to the manager or an affiliate thereof will be sold for a purchase price equal to the greater of (i) the par value of the loan or (ii) the fair market value of the loan. The manager will not receive commissions or broker fees with respect loan sales conducted for the company; however, selling loans will increase members’
50
capital available for investing in new loans for which the manager will earn brokerage fees and other forms of compensation.
Members representing a majority of the outstanding units may, without the concurrence of the managers, vote to: (i) dissolve the company, (ii) amend the Operating Agreement, subject to certain limitations, (iii) approve or disapprove the sale of all or substantially all of the assets of the company or (iv) remove or replace one or all of the managers. Where there is only one manager, a majority in interest of the members is required to elect a new manager to continue the company business after a manager ceases to be a manager due to its withdrawal.
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 O&O expenses allocated to the members’ accounts for the applicable period pursuant to the company’s reimbursement to RMC and allocation to members’ accounts of O&O expenses. The amount otherwise distributable, less the respective amounts of O&O expenses allocated to members, is the net distribution. Per the terms of the company’s Operating Agreement, cash available for distribution to the members is allocated among the members in proportion to their percentage interests (except with respect to differences in the amounts of O&O 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.
See Note 3 (Manager and Other Related Parties) to the financial statements for a detailed discussion on the allocation of O&O expenses to members’ accounts.
The distribution reinvestment plan (DRIP) provision of the Operating Agreement permits members to elect to have all or a portion of their monthly distributions reinvested in the purchase of additional units.
Cash available for distributions allocable to members, other than those participating in the DRIP and the manager, is distributed at the end of each calendar month. Cash available for distribution allocable to members who participate in the DRIP is used to purchase additional units 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.
To determine the amount of cash to be distributed in any specific month, the company relies in part on its forecast of full year profits, which takes into account the difference between the forecasted and actual results in the year and the requirement to maintain a cash reserve.
The company’s net income, cash available for distribution, and net-distribution rate fluctuates depending on:
|
• |
loan origination volume and the balance of capital available to lend; |
|
• |
the current and future interest rates negotiated with borrowers; |
|
• |
the timing and amount of gains received from loan sales, if any; |
|
• |
payment of fees and cost reimbursements to RMC; |
|
• |
the amount and timing of other operating expenses, including expenses for professional services; |
|
• |
financial support, if any, from RMC; |
|
• |
payments from RMC on the outstanding balance of the formation loan; and, |
|
• |
a line of credit. |
Financial Support from RMC
Since commencement of operations in 2009, RMC, at its sole discretion, provided significant financial support to the company which increased the net income, cash available for distribution, and the net-distribution rate, by:
51
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
|
• |
not requesting reimbursement of qualifying costs attributable to the company (“Costs from RMC” on the Statements of Income); and/or, |
|
• |
absorbing some, and in certain periods, all of the company’s direct expenses, such as professional fees. |
Such fee and cost-reimbursement waivers and the absorption of the company’s expenses by RMC were not made for the purpose of providing the company with sufficient funds to satisfy any required level of distributions, as the Operating Agreement has no such required level of distributions, nor to meet withdrawal requests. Any decision to waive fees or cost-reimbursements and/or to absorb direct expenses, and the amount (if any) to be waived or absorbed, is made by RMC in its sole discretion. This support increased the company’s financial performance and resulted in an annual 6.5% net distribution rate (6.95% before O&O expenses allocation of 0.45% when applicable) for periods prior to February 28, 2018.
In April 2018, RMI IX began paying its direct expenses for professional-service fees (legal and audit/tax compliance) and other operating expenses (postage, printing etc.).
In June 2019, RMC began collecting from RMI IX the asset management fee of three quarters of one percent annually (0.75%), and plans to commence collection from RMI IX in 2020 of cost reimbursements to which RMC is entitled.
In 2019, the company began being invoiced directly and paying fees to an independent service bureau for information technology relating to the recordkeeping and reporting for the accounts of individual investors and their corresponding member accounts. In prior years these fees were invoiced to RMC and then billed to the company.
Liquidity and unit redemption program
There are substantial restrictions on transferability of units, and there is no established public trading and/or secondary market for the units and none is expected to develop. In order to provide liquidity to members, the company’s Operating Agreement includes a unit redemption program, whereby beginning one year from the date of purchase of the units, a member may redeem all or part of their units, subject to certain limitations.
The price paid for redeemed units is 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 is calculated based on the period from date of purchase as follows:
|
• |
after one year, 92% of the purchase price or of the capital account balance, whichever is less; |
|
• |
after two years, 94% of the purchase price or of the capital account balance, whichever is less; |
|
• |
after three years, 96% of the purchase price or of the capital account balance, whichever is less; |
|
• |
after four years, 98% of the purchase price or of the capital account balance, whichever is less; |
|
• |
after five years, 100% of the purchase price or of the capital account balance, whichever is less. |
The company redeems units quarterly, subject to certain limitations as provided in the Operating Agreement. The maximum number of units which may be redeemed per quarter per individual member shall not exceed the greater of (i) 100,000 units, or (ii) 25% of the member’s total outstanding units. 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. As provided in the Operating Agreement, 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. In the event unit withdrawal requests exceed 5% in any calendar year, units will be redeemed in the priority provided in the Operating Agreement.
52
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
Prior to April 30, 2019, the manager was required to contribute to capital one tenth of one percent (0.1%) of the aggregate capital accounts of the members.
Manager’s interest
If a manager is removed, withdrawn or terminated, the company will pay to the manager all amounts then accrued and due to the manager. Additionally, the company will terminate the manager’s interest in the company’s profits, losses, distributions and capital by payment of an amount in cash equal to the then-present fair value of such interest. The formation loan is forgiven if the manager is removed and RMC is no longer receiving payments for services rendered.
Distribution reinvestment plan (DRIP)/Unit sales
On May 9, 2019, the company filed a Registration Statement on Form S-3 with the SEC (SEC File No. 333-231333) to offer up to 15,000,000 units ($15,000,000) to members of record as of April 30, 2019 that had previously elected to participate in the DRIP or that elect to participate in the DRIP. The Registration Statement on Form S-3 became effective on May 9, 2019.
Members of record as of April 30, 2019, that previously elected to participate in the DRIP or that provide written notice to the manager may elect to participate in the DRIP, in those states in which approval has been obtained. As of December 31, 2019, the gross proceeds from sales of units to our members under our DRIP pursuant to the May 9, 2019 Form S-3 Registration Statement (after May 9, 2019) was approximately $1,614,000, and approximately $802,000 (for the four month period ended April 30, 2019) pursuant to the company’s Form S-11 Registration Statement.
On June 11, 2019, the company filed a Post-Effective Amendment No. 5 with the SEC (SEC File No. 333-208315) to deregister all of the units which were registered under its Form S-11 Registration Statement that remained unsold as of April 30, 2019.
The company used the gross proceeds from the sale of the units to:
|
• |
make additional loans; |
|
• |
fund working capital reserves; |
|
• |
pay RMC up to 4.5% of proceeds from sale of units for O&O expenses, excluding units sold in the DRIP; and |
|
• |
fund a formation loan to RMC at up to 7% of proceeds from sale of units, excluding units sold in the DRIP. |
Unit sales – commissions paid to broker-dealers/formation loan
Commissions for unit sales were previously paid to broker-dealers (B/D sales commissions) by RMC and were not paid directly by the company out of offering proceeds. Instead, the company advanced to RMC, from offering proceeds, amounts sufficient to pay the B/D sales commissions and premiums paid to investors 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.” RMC is required to make annual payments on the formation loan in the amount of one tenth of the principal balance outstanding at December 31 of the prior year.
Term of the company
The term of the company will continue until 2028, unless sooner terminated as provided in the Operating Agreement.
53
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
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 owned, at acquisition and subsequently. Actual results could differ significantly from these estimates.
Fair value estimates
GAAP defines fair value as the 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 real property 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 income 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).
54
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
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.
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. At December 31, 2019, substantially all of the company’s cash balances in banks exceed federally insured limits of $250,000. The bank or banks in which funds are deposited are reviewed periodically for their general credit-worthiness/investment grade credit rating.
Performing loans are carried at amortized cost which is generally equal to 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. For performing loans, interest is accrued daily on the principal plus advances, if any.
Non-performing loans (i.e., loans with a payment in arears) less than 180 days delinquent continue to recognize interest income as long as the loan is in the process of collection and is considered to be well-secured. Non-performing loans are placed on non-accrual status if 180 days delinquent or earlier if management determines 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. Late fees are recognized in the period received.
The company may fund a specific loan origination net of an interest reserve (one to two years) to insure timely interest payments at the inception of the loan. Any interest reserve is amortized over the period that the amount is prepaid. 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.
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.
From time to time, the manager negotiates and enters into loan modifications with borrowers whose loans are delinquent. If a loan modification were to result in an economic concession to the borrower (i.e., a significant delay or reduction in cash flows compared to the original note), the modification is deemed a troubled debt restructuring.
The company originates loans with the intent to hold the loans until maturity. From time to time the company may sell certain loans. Loans are classified as held-for-sale once a decision has been made to sell loans and the loans held-for-sale have been identified. In 2019 and 2018 certain performing loans were sold at an immaterial gain (net of expenses).
55
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
Loans and the related accrued interest and advances (i.e., the loan balance) are analyzed on a periodic basis for ultimate recoverability. Collateral fair values are reviewed quarterly and the protective equity for each loan is computed. As used herein, “protective equity” is the dollar amount by which the net realizable value (i.e., fair value less the cost to sell) of the collateral, net of any senior liens exceeds the loan balance, where “loan balance” is the sum of the unpaid principal, advances and the recorded interest thereon.
If based upon current information and events, it is probable the partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement, then a loan may be designated as impaired. Impaired loans are included in management’s periodic analysis of recoverability. Payments on impaired loans are applied to late fees, then to the accrued interest, then to advances, and lastly to principal.
A provision for loan losses to adjust the allowance for loan losses (principal and/or recorded interest) is made to an amount such that the net carrying amount (unpaid principal less the specific allowance) is reduced to the lower of the loan balance or the estimated fair value of the related collateral, net of any costs to sell in arriving at net realizable value and net of any senior loans.
The company charges off uncollectible loans and related receivables directly to the allowance account once it is determined the full amount is not collectible. Any amounts collected after a charge off is deemed a recovery of loan losses.
At foreclosure, any excess of the recorded investment in the loan (accounting basis) over the net realizable value of the collateral is charged against the allowance for loan losses.
Real estate owned (REO)
Real estate owned, or REO, is property acquired in full or partial settlement of loan obligations generally through foreclosure, and is recorded at acquisition at 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. REO is analyzed periodically for changes in fair values and any subsequent write down is charged to operations expenses as an adjustment to the valuation allowance. 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
-Accounting and Financial reporting for Expected Credit Losses
The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that significantly changes how entities will account for credit losses for most financial assets that are not measured at fair value through net income. The new standard will supersede currently in effect guidance and applies to all entities. Entities will be required to use a current expected credit loss (CECL) model to estimate credit impairment. This estimate will be forward-looking, meaning management will be required to use not only historical trends and current conditions, but must also consider forecasts about future economic conditions to determine the expected credit loss over the remaining life of an instrument. This will be a significant change from the current incurred credit loss model, and generally may result in allowances being recognized in earlier periods than under the current credit loss model. The ASU is effective for smaller reporting companies for interim and annual reporting periods in 2023.
56
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
RMI IX invests in real estate secured loans made with the expectation that the possibility of credit losses is remote as a result of substantial protective equity provided by the underlying collateral. The real estate secured programs and low loan-to-value ratios have caused RMC to expect that the adoption of the CECL model from the incurred loss models presently in use as to credit loss recognition will likely not materially impact the reported results of operations or financial position.
NOTE 3 – MANAGER AND OTHER RELATED PARTIES
The Operating Agreement provides for compensation to the manager, as detailed below. RMC is entitled to 1% of the net income or loss of the company.
Loan administrative fees and operating expenses, including amounts for fees and cost reimbursements waived and/or expenses absorbed by RMC for the year ended December 31, 2019 is presented in the following table.
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|||||||||||||||||
For the year ended |
|
Loan Admin Fees |
|
|
Mortgage Servicing Fees |
|
|
Asset Management Fee |
|
|
Costs from RMC |
|
|
Professional Services |
|
|
Other |
|
|
Total |
|
|||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeable/reimbursable |
|
$ |
580,516 |
|
|
$ |
166,878 |
|
|
$ |
476,748 |
|
|
$ |
657,864 |
|
|
$ |
524,940 |
|
|
$ |
36,987 |
|
|
$ |
2,443,933 |
|
RMC support |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waived |
|
|
(580,516 |
) |
|
|
— |
|
|
|
(198,645 |
) |
|
|
(657,864 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,437,025 |
) |
Expenses absorbed by RMC |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total RMC support |
|
|
(580,516 |
) |
|
|
— |
|
|
|
(198,645 |
) |
|
|
(657,864 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,437,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charged |
|
$ |
— |
|
|
$ |
166,878 |
|
|
$ |
278,103 |
|
|
$ |
— |
|
|
$ |
524,940 |
|
|
$ |
36,987 |
|
|
$ |
1,006,908 |
|
Loan administrative fees and operating expenses, including amounts for fees and cost reimbursements waived and/or expenses absorbed by RMC for the year ended December 31, 2018 is presented in the following table.
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
||||||||||||||||||
For the year ended |
|
Loan Admin Fees |
|
|
Mortgage Servicing Fees |
|
|
Asset Management Fee |
|
|
Costs from RMC |
|
|
Professional Services |
|
|
Other |
|
|
Total |
|
|||||||
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeable/reimbursable |
|
$ |
708,491 |
|
|
$ |
151,457 |
|
|
$ |
419,820 |
|
|
$ |
744,901 |
|
|
$ |
432,205 |
|
|
$ |
31,584 |
|
|
$ |
2,488,458 |
|
RMC support |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waived |
|
|
(708,491 |
) |
|
|
— |
|
|
|
(419,820 |
) |
|
|
(744,901 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,873,212 |
) |
Expenses absorbed by RMC |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(143,152 |
) |
|
|
(14,246 |
) |
|
|
(157,398 |
) |
Total RMC support |
|
|
(708,491 |
) |
|
|
— |
|
|
|
(419,820 |
) |
|
|
(744,901 |
) |
|
|
(143,152 |
) |
|
|
(14,246 |
) |
|
|
(2,030,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charged |
|
$ |
— |
|
|
$ |
151,457 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
289,053 |
|
|
$ |
17,338 |
|
|
$ |
457,848 |
|
Loan administrative fees
RMC is entitled to receive a loan administrative fee in an amount up to one percent (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 would be payable by the company upon the closing or acquisition of each loan. Since August 2015, RMC, at its sole discretion, waived and continues to waive, the loan administrative fees.
57
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
The manager acting as servicing agent with respect to all loans is entitled to receive a servicing fee 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.
Asset management fees
The manager 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. In June 2019, the company began paying the manager asset management fees.
Costs from RMC
The manager is entitled to request reimbursement by the company for operations expense incurred on behalf of the company, including without limitation, accounting, tax and data processing, postage and preparation of reports to members and out-of-pocket general and administration expenses. Certain of these qualifying costs (e.g., postage) can be tracked by RMC as specifically attributable to the company. Other costs (e.g., RMC’s accounting and audit fees, legal fees and expenses, qualifying payroll expenses, occupancy, and insurance premium) 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 allocated first based on activity, and then to the company on a pro-rata basis based on percentage of capital to the total capital of all affiliated mortgage funds managed by RMC. RMC, at its sole discretion, has elected to waive reimbursement for operating expenses during the years ended December 31, 2019 and 2018.
Professional Services
Professional services consist primarily of legal, audit and tax compliance, information technology related to recordkeeping and reporting for individual investor accounts, and regulatory (including SEC/FINRA compliance) expenses. Prior to April 2018, RMC, at its sole discretion, had elected to absorb some or all of RMI IX’s expenses for professional services (and other operating expenses directly incurred by the company).
Commissions and fees are paid by the borrowers to RMC
- 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 1.5% to 5% of the principal amount of each loan made during the year. Total loan brokerage commissions are limited to an amount not to exceed 4% of the total company assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the company.
- 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.
During the year ended December 31, 2018, Redwood Mortgage Investors VIII, LP, an affiliated mortgage fund, transferred to the company two performing loans in-full at par value, which approximates fair value, of approximately $5,890,000. The company paid cash for the loans and the affiliated mortgage fund has no continuing obligation or involvement on the loans. No loans were transferred during the year ended December 31, 2019.
58
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
Formation loan transactions are presented in the following table.
|
2019 |
|
|
Since Inception |
|
|||
Balance, beginning of period |
|
$ |
4,179,343 |
|
|
$ |
— |
|
Formation loan advances to RMC |
|
|
186,656 |
|
|
|
5,626,566 |
|
Payments received from RMC |
|
|
(355,301 |
) |
|
|
(1,555,017 |
) |
Early withdrawal penalties applied |
|
|
(62,634 |
) |
|
|
(123,485 |
) |
Balance, December 31, 2019 |
|
$ |
3,948,064 |
|
|
$ |
3,948,064 |
|
Subscription proceeds since inception |
|
|
|
|
|
$ |
80,256,995 |
|
Formation loan advance rate |
|
|
|
|
|
|
7 |
% |
The future minimum payments on the formation loan of December 31, 2019 are presented in the following table.
2020 |
|
$ |
493,508 |
|
2021 |
|
|
493,508 |
|
2022 |
|
|
493,508 |
|
2023 |
|
|
493,508 |
|
2024 |
|
|
493,508 |
|
Thereafter |
|
|
1,480,524 |
|
Total |
|
$ |
3,948,064 |
|
RMC is required to make annual payments on the formation loan of one tenth of the principal balance outstanding at December 31 of the prior year. The formation loan is forgiven if the manager is removed and RMC is no longer receiving payments for services rendered.
Member capital withdrawals
The table below presents the company’s unit redemptions for the years ended December 31, 2019 and 2018.
|
|
2019 |
|
|
2018 |
|
||
Capital redemptions-without penalty |
|
$ |
1,281,768 |
|
|
$ |
1,923,685 |
|
Capital redemptions-subject to penalty |
|
|
1,966,714 |
|
|
|
810,086 |
|
Total |
|
$ |
3,248,482 |
|
|
$ |
2,733,771 |
|
|
|
|
|
|
|
|
|
|
Early withdrawal penalties |
|
$ |
111,551 |
|
|
$ |
54,429 |
|
At December 31, 2019, scheduled redemptions of members’ capital was $447,417, all of which was scheduled for payment in 2020.
Reimbursement and allocation of organization and offering expenses
Per the Operating Agreement, the manager is reimbursed for, or the company may pay directly, 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.
59
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
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 (40) 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 such subsequent cost allocations to) those members who have not yet received forty (40) quarterly allocations of O&O expenses, as determined in the good faith judgment of the manager.
Unallocated O&O transactions are summarized in the following table.
|
|
2019 |
|
|
Since Inception |
|
||
Balance, beginning of period |
|
$ |
2,519,458 |
|
|
$ |
— |
|
O&O expenses reimbursed to RMC |
|
|
185,332 |
|
|
|
3,671,853 |
|
Early withdrawal penalties applied (1) |
|
|
(19,415 |
) |
|
|
(60,290 |
) |
O&O expenses allocated(2) |
|
|
(329,234 |
) |
|
|
(1,015,590 |
) |
O&O expenses repaid to Members' Capital by RMC(3) |
|
|
(96,073 |
) |
|
|
(335,905 |
) |
Balance, December 31 |
|
$ |
2,260,068 |
|
|
$ |
2,260,068 |
|
|
(1) |
Prior to June 30, 2019, early withdrawal penalties collected were applied to the next installment of principal due under the formation loan and to reduce the amount owed to RMC for O&O expenses. The amounts credited were determined by the ratio between the amount of the formation loan and the amount of offering costs incurred by the company. |
|
(2) |
Beginning in 2016, O&O expenses reimbursed to RMC by RMI IX are allocated to members’ capital accounts over 40 quarters. |
|
(3) |
RMC is obligated under the Operating Agreement to repay the company for unallocated O&O expenses attributed to units redeemed prior to the 40 quarterly allocations. RMC estimated its future obligations to repay unallocated O&O expenses on scheduled redemptions as of December 31, 2019, to be $10,761, which is expected to be offset by early withdrawal penalties. |
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. No loans were acquired from affiliates in 2019.
As of December 31, 2019, 74 loans (representing 98% 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 provision.
As of December 31, 2019, 53 loans outstanding (representing 45% of the aggregate principal balance of the company’s loan portfolio) provide from monthly payments of principal and interest, typically calculated on a 30-year amortization schedule, with the remaining principal balance due at maturity. The remaining loans provide for monthly payments of interest only, with the principal balance due at maturity.
60
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
Secured loans unpaid principal balance (principal)
Secured loan transactions are summarized in the following table for 2019 and 2018.
|
|
2019 |
|
|
2018 |
|
||
Principal, beginning of period |
|
$ |
62,115,713 |
|
|
$ |
54,768,689 |
|
Loans originated |
|
|
58,051,600 |
|
|
|
64,959,250 |
|
Loans transferred from affiliates |
|
|
— |
|
|
|
5,889,819 |
|
Loans sold to non-affiliate |
|
|
(4,909,986 |
) |
|
|
(21,995,851 |
) |
Principal collected |
|
|
(44,597,043 |
) |
|
|
(41,506,194 |
) |
Principal December 31 |
|
$ |
70,660,284 |
|
|
$ |
62,115,713 |
|
During each of the years ended December 31, 2019 and 2018, the company renewed eight loans with aggregated principal of approximately$5,195,000 and $5,004,000, respectively, which are not included in the activity shown in the table above. See Note 3 (Manager and Other Related Parties) for a description of loans transferred by executed assignments between affiliates.
Pursuant to California regulatory requirements, borrower payments are deposited into a trust account established by RMC with an independent bank. Funds are disbursed to the company as collected which can range from same day for wire transfers and up to two weeks after deposit for checks. Borrower payments held in the trust account that are yet to be disbursed to the company are not included in the financial statements. At December 31, 2019, $71,416, of borrower payments made by check, was on deposit in the bank trust account, which was fully disbursed to the company’s account by January 23, 2020. At December 31, 2018, $67,214 of borrower payments made by check, was on deposit in the trust account, all of which was disbursed to the company’s bank account by January 17, 2019, when they were recorded by the company.
The company originates loans with the intent to hold the loans until maturity, although from time to time the company may sell certain loans when the manager determines it to be in the best interest of the company.
|
• |
In September 2019, a loan with principal of $500,000, that had been designated as impaired, was sold to an unaffiliated third party which specializes in the resolution of such loans. There was no gain recognized upon sale. |
|
• |
In July 2019, 8 loans with aggregate principal of $4,273,346 and accrued interest of $31,830 were sold to an unaffiliated third party, at a price that netted an immaterial gain. |
|
• |
In March 2019, a loan with principal of $136,640, was sold to an unaffiliated third party, for an amount that approximated the loan balance at the time of sale. |
61
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
|
|
December 31, |
|
|
December 31, |
|
||
|
|
2019 |
|
|
2018 |
|
||
Number of secured loans |
|
|
77 |
|
|
|
83 |
|
Secured loans – principal |
|
$ |
70,660,284 |
|
|
$ |
62,115,713 |
|
Secured loans – lowest interest rate (fixed) |
|
|
7.8 |
% |
|
|
7.0 |
% |
Secured loans – highest interest rate (fixed) |
|
|
10.5 |
% |
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
Average secured loan – principal |
|
$ |
917,666 |
|
|
$ |
748,382 |
|
Average principal as percent of total principal |
|
|
1.3 |
% |
|
|
1.2 |
% |
Average principal as percent of members’ capital, net |
|
|
1.2 |
% |
|
|
1.0 |
% |
Average principal as percent of total assets |
|
|
1.2 |
% |
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
Largest secured loan – principal |
|
$ |
6,735,000 |
|
|
$ |
4,000,000 |
|
Largest principal as percent of total principal |
|
|
9.5 |
% |
|
|
6.4 |
% |
Largest principal as percent of members’ capital, net |
|
|
8.5 |
% |
|
|
5.2 |
% |
Largest principal as percent of total assets |
|
|
8.9 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
Smallest secured loan – principal |
|
$ |
125,656 |
|
|
$ |
74,390 |
|
Smallest principal as percent of total principal |
|
|
0.2 |
% |
|
|
0.1 |
% |
Smallest principal as percent of members’ capital, net |
|
|
0.2 |
% |
|
|
0.1 |
% |
Smallest principal as percent of total assets |
|
|
0.2 |
% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
Number of California counties where security is located |
|
|
17 |
|
|
|
15 |
|
Largest percentage of principal in one California county |
|
|
27.0 |
% |
|
|
25.0 |
% |
|
|
|
|
|
|
|
|
|
Number of secured loans with filed notice of default |
|
|
— |
|
|
|
2 |
|
Secured loans in foreclosure – principal |
|
$ |
— |
|
|
$ |
565,685 |
|
As of December 31, 2019, the company’s largest loan with principal of $6,735,000 is secured by an office building located in Santa Clara county, bears an interest rate of 8.25% and matures on October 1, 2021.
As of December 31, 2019, the company had no loans with filed notices of default. As of December 31, 2019, the company had no construction loans outstanding and had no rehabilitation loans outstanding. As of December 31, 2019, the company had no commitments to fund construction or rehabilitation loans. The company had no loan commitments to lend as of December 31, 2019.
62
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
Secured loans had the lien positions in the following table.
|
December 31, 2019 |
|
|
December 31, 2018 |
|
|||||||||||||||||||
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
||||||
First trust deeds |
|
|
42 |
|
|
$ |
42,712,037 |
|
|
|
60 |
% |
|
|
41 |
|
|
$ |
29,699,888 |
|
|
|
48 |
% |
Second trust deeds |
|
|
35 |
|
|
|
27,948,247 |
|
|
|
40 |
|
|
|
42 |
|
|
|
32,415,825 |
|
|
|
52 |
|
Total principal, secured loans |
|
|
77 |
|
|
|
70,660,284 |
|
|
|
100 |
% |
|
|
83 |
|
|
|
62,115,713 |
|
|
|
100 |
% |
Liens due other lenders at loan closing |
|
|
|
|
|
|
54,062,023 |
|
|
|
|
|
|
|
|
|
|
|
65,941,118 |
|
|
|
|
|
Total debt |
|
|
|
|
|
$ |
124,722,307 |
|
|
|
|
|
|
|
|
|
|
$ |
128,056,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appraised property value at loan closing |
|
|
|
|
|
$ |
237,453,000 |
|
|
|
|
|
|
|
|
|
|
$ |
240,307,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total debt to appraised values (LTV) at loan closing(1) |
|
|
|
|
|
|
55.3 |
% |
|
|
|
|
|
|
|
|
|
|
54.5 |
% |
|
|
|
|
|
(1) |
based on appraised values and liens due to 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 of senior liens to other lenders. |
Property type
Secured loans summarized by property type are presented in the following table as of December 31, 2019 and 2018.
|
December 31, 2019 |
|
|
December 31, 2018 |
|
|||||||||||||||||||
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
||||||
Single family(2) |
|
|
53 |
|
|
$ |
32,361,343 |
|
|
|
46 |
% |
|
|
60 |
|
|
$ |
42,967,253 |
|
|
|
69 |
% |
Multi-family |
|
|
9 |
|
|
|
9,219,497 |
|
|
|
13 |
|
|
|
8 |
|
|
|
8,210,970 |
|
|
|
13 |
|
Commercial |
|
|
15 |
|
|
|
29,079,444 |
|
|
|
41 |
|
|
|
15 |
|
|
|
10,937,490 |
|
|
|
18 |
|
Total principal, secured loans |
|
|
77 |
|
|
$ |
70,660,284 |
|
|
|
100 |
% |
|
|
83 |
|
|
$ |
62,115,713 |
|
|
|
100 |
% |
|
(2) |
single family property type as of December 31, 2019 consists of 11 loans with principal of $6,236,571 that are owner occupied and 42 loans with principal of $26,124,772 that are non-owner occupied. At December 31, 2018, single family property consisted of 14 loans with principal of $11,398,869 that are owner occupied and 46 loans with principal $31,568,384 that are non-owner occupied. |
63
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
Distribution of loans in California
The distribution of secured loans by counties is presented in the following table as of December 31, 2019 and 2018.
|
|
December 31, 2019 |
|
|
December 31, 2018 |
|
||||||||||
|
|
Principal |
|
|
Percent |
|
|
Principal |
|
|
Percent |
|
||||
San Francisco Bay Area(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santa Clara |
|
$ |
19,064,638 |
|
|
|
27.0 |
% |
|
$ |
11,756,695 |
|
|
|
18.9 |
% |
San Mateo |
|
|
10,837,195 |
|
|
|
15.3 |
|
|
|
9,619,609 |
|
|
|
15.5 |
|
San Francisco |
|
|
7,735,173 |
|
|
|
10.9 |
|
|
|
5,238,008 |
|
|
|
8.4 |
|
Alameda |
|
|
2,930,219 |
|
|
|
4.2 |
|
|
|
7,306,779 |
|
|
|
11.8 |
|
Contra Costa |
|
|
400,000 |
|
|
|
0.6 |
|
|
|
725,771 |
|
|
|
1.2 |
|
Santa Cruz |
|
|
264,515 |
|
|
|
0.4 |
|
|
|
— |
|
|
|
— |
|
Marin |
|
|
249,628 |
|
|
|
0.4 |
|
|
|
575,000 |
|
|
|
0.9 |
|
Sonoma |
|
|
— |
|
|
|
— |
|
|
|
1,300,000 |
|
|
|
2.1 |
|
|
|
|
41,481,368 |
|
|
|
58.8 |
|
|
|
36,521,862 |
|
|
|
58.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Northern California |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sutter |
|
|
3,815,000 |
|
|
|
5.4 |
|
|
|
— |
|
|
|
— |
|
Monterey |
|
|
1,110,000 |
|
|
|
1.6 |
|
|
|
322,716 |
|
|
|
0.5 |
|
Sacramento |
|
|
492,216 |
|
|
|
0.6 |
|
|
|
822,500 |
|
|
|
1.3 |
|
Tehama |
|
|
405,000 |
|
|
|
0.6 |
|
|
|
— |
|
|
|
— |
|
Placer |
|
|
— |
|
|
|
— |
|
|
|
637,354 |
|
|
|
1.0 |
|
|
|
|
5,822,216 |
|
|
|
8.2 |
|
|
|
1,782,570 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California Total |
|
|
47,303,584 |
|
|
|
67.0 |
|
|
|
38,304,432 |
|
|
|
61.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles & Coastal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles |
|
|
12,531,312 |
|
|
|
17.7 |
|
|
|
15,514,789 |
|
|
|
25.0 |
|
San Diego |
|
|
4,983,331 |
|
|
|
7.1 |
|
|
|
5,563,635 |
|
|
|
9.0 |
|
Orange |
|
|
3,067,396 |
|
|
|
4.3 |
|
|
|
1,177,446 |
|
|
|
1.9 |
|
Santa Barbara |
|
|
497,977 |
|
|
|
0.7 |
|
|
|
— |
|
|
|
— |
|
|
|
|
21,080,016 |
|
|
|
29.8 |
|
|
|
22,255,870 |
|
|
|
35.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Southern California |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Bernardino |
|
|
1,200,000 |
|
|
|
1.7 |
|
|
|
1,200,000 |
|
|
|
1.9 |
|
Riverside |
|
|
1,076,684 |
|
|
|
1.5 |
|
|
|
355,411 |
|
|
|
0.6 |
|
|
|
|
2,276,684 |
|
|
|
3.2 |
|
|
|
1,555,411 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern California Total |
|
|
23,356,700 |
|
|
|
33.0 |
|
|
|
23,811,281 |
|
|
|
38.4 |
|
Total principal, secured loans |
|
$ |
70,660,284 |
|
|
|
100.0 |
% |
|
$ |
62,115,713 |
|
|
|
100.0 |
% |
|
(3) |
Includes Silicon Valley |
64
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
Secured loans are scheduled to mature as presented in the following table as of December 31, 2019.
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
|||
|
|
35 |
|
|
$ |
25,361,762 |
|
|
|
36 |
% |
|
2021 |
|
|
26 |
|
|
|
38,598,944 |
|
|
|
55 |
|
2022 |
|
|
8 |
|
|
|
3,642,402 |
|
|
|
5 |
|
2023 |
|
|
2 |
|
|
|
345,101 |
|
|
|
— |
|
2024 |
|
|
1 |
|
|
|
246,684 |
|
|
|
— |
|
Thereafter |
|
|
2 |
|
|
|
1,390,000 |
|
|
|
2 |
|
Total future maturities |
|
|
74 |
|
|
|
69,584,893 |
|
|
|
98 |
|
Matured as of December 31, 2019 |
|
|
3 |
|
|
|
1,075,391 |
|
|
|
2 |
|
Total principal, secured loans |
|
|
77 |
|
|
$ |
70,660,284 |
|
|
|
100 |
% |
Loans may be repaid or refinanced before, at or after the contractual maturity date. For matured loans, the company may continue to accept payments while pursuing collection of amounts owed from borrowers.
Secured loans, principal past maturity are summarized in the following table as of December 31, 2019.
|
|
December 31, 2019 |
|
|
Number of loans |
|
|
3 |
|
Principal |
|
$ |
1,075,391 |
|
Advances |
|
|
1,653 |
|
Accrued interest |
|
|
21,013 |
|
Total recorded investment |
|
$ |
1,098,057 |
|
Principal past maturity as percent of total principal |
|
|
2 |
% |
Non-performing loans
Secured loans, principal summarized by payment delinquency is presented in the following table as of December 31, 2019 and 2018.
|
|
December 31, 2019 |
|
|
December 31, 2018 |
|
||||||||||
|
Loans |
|
|
Principal |
|
|
Loans |
|
|
Principal |
|
|||||
Past Due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days |
|
|
8 |
|
|
$ |
3,952,306 |
|
|
|
5 |
|
|
$ |
3,828,975 |
|
90-179 days |
|
|
2 |
|
|
|
3,520,112 |
|
|
|
— |
|
|
|
— |
|
180 or more days |
|
|
2 |
|
|
|
1,013,726 |
|
|
|
2 |
|
|
|
565,685 |
|
Total past due |
|
|
12 |
|
|
|
8,486,144 |
|
|
|
7 |
|
|
|
4,394,660 |
|
Current |
|
|
65 |
|
|
|
62,174,140 |
|
|
|
76 |
|
|
|
57,721,053 |
|
Total principal, secured loans |
|
|
77 |
|
|
$ |
70,660,284 |
|
|
|
83 |
|
|
$ |
62,115,713 |
|
No loan payment modifications were made during 2019 or 2018.
In 2019 the company entered into two forbearance agreements with borrowers.
|
• |
One loan with principal of approximately $764,100 matured on April 1, 2019 and was 274 days delinquent and was designated impaired and in non-accrual status at December 31, 2019. The company entered into a forbearance agreement with the borrower in August 2019, whereby the borrower agreed to resume monthly payments and the company agreed to forbear collection activity until April 1, 2020. |
|
• |
One loan with a principal balance of approximately $3,329,000 was 121 days delinquent and was designated impaired at December 31, 2019. The company entered into a forbearance agreement with the borrower in August 2019, whereby the company agreed to defer the interest payments due August 1, 2019, September 1, 2019 and October 1, 2019 and the company agreed to forbear collection activity until August 1, 2020. |
65
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
At December 31, 2019 and 2018, the company had one workout agreement with a borrower. The loan, with principal of approximately $191,000 matured on June 1, 2016, and the company entered into a workout agreement in September 2016, whereby the borrower agreed to resume monthly payments to the company. This agreement extended the maturity date through October 1, 2021. The 2016 agreement was the successor to three prior agreements with the borrower, the first of which was dated August 5, 2011. The borrower was 91 days delinquent and was designated as impaired and in non-accrual status at December 31, 2019.
A loan with principal of approximately $250,000 was 213 days delinquent, and designated as impaired and in nonaccrual status at December 31, 2019.
The remaining eight loans, with principal of approximately $3,952,000, were all 60 or fewer days delinquent and not in non-accrual status or designated as impaired at December 31, 2019.
Payments in arrears for non-performing secured loans (i.e., principal and interest payments past due 30 or more days), principal and accrued interest receivable are presented in the following table as of December 31, 2019.
|
|
Loans |
|
|
Principal |
|
|
Accrued interest receivable |
|
|
Total past due |
|
||||
Payments past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days |
|
|
8 |
|
|
$ |
312,965 |
|
|
$ |
60,041 |
|
|
$ |
373,006 |
|
90-179 days |
|
|
2 |
|
|
|
8,175 |
|
|
|
136,715 |
|
|
|
144,890 |
|
180 or more days |
|
|
2 |
|
|
|
765,000 |
|
|
|
32,870 |
|
|
|
797,870 |
|
Total payments past due |
|
|
12 |
|
|
$ |
1,086,140 |
|
|
$ |
229,626 |
|
|
$ |
1,315,766 |
|
Secured loans in non-accrual status are summarized in the following table.
|
|
December 31, 2019 |
|
|
December 31, 2018 |
|
||
|
|
3 |
|
|
|
2 |
|
|
Principal |
|
$ |
1,204,495 |
|
|
$ |
565,685 |
|
Advances |
|
|
10,677 |
|
|
|
10,688 |
|
Accrued interest |
|
|
37,799 |
|
|
|
19,831 |
|
Total recorded investment |
|
$ |
1,252,971 |
|
|
$ |
596,204 |
|
Foregone interest |
|
$ |
3,952 |
|
|
$ |
33,410 |
|
A loan with principal of approximately $3,329,000 was 90 or more days delinquent as to principal or interest and not in non-accrual status at December 31, 2019. No loans were 90 or more days delinquent as to principal or interest and not in non-accrual status at December 31, 2018.
Allowance for Loan Losses
At December 31, 2019, RMI IX recorded a $87,000 provision for loan losses, primarily for secured loans in a second lien position, as the manager may – from time to time – agree to concessions to borrowers to facilitate a sale of collateral or refinance transactions. Included in the provision for loan losses at December 31, 2019 is a $37,000 specific provision on a secured loan in second lien position, to facilitate the sale of the underlying collateral, which was sold in February 2020. At December 31, 2018, the company had no allowance for loan losses.
66
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
Loans designated impaired and the associated allowance for loan losses is presented in the following table.
|
|
December 31, 2019 |
|
|
December 31, 2018 |
|
||
Principal |
|
$ |
4,533,838 |
|
|
$ |
3,841,148 |
|
Recorded investment(4) |
|
|
4,719,705 |
|
|
|
3,950,157 |
|
Impaired loans without allowance |
|
|
4,451,368 |
|
|
|
3,950,157 |
|
Impaired loans with allowance |
|
|
268,337 |
|
|
|
— |
|
Allowance for loan losses, impaired loans |
|
|
37,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Number of loans |
|
|
4 |
|
|
|
6 |
|
LTV at origination(5) |
|
|
66.0 |
% |
|
|
54.7 |
% |
|
(4) |
Recorded investment is the sum of the principal, advances, and recorded accrued interest. |
Impaired loans had average balances and interest income recognized and received in cash as presented in the following tables as of and for the years ended December 31, 2019 and 2018.
|
December 31, 2019 |
|
|
December 31, 2018 |
|
|||
Average recorded investment |
|
$ |
4,334,931 |
|
|
$ |
2,050,897 |
|
Interest income recognized |
|
|
169,585 |
|
|
|
23,848 |
|
Interest income received in cash |
|
|
67,990 |
|
|
|
21,670 |
|
The following methods and assumptions are used when estimating fair value:
Secured loans, performing (i.e., not designated as impaired) (Level 3) - 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. Due to the nature of the company’s loans and borrowers, the fair value of loan balances secured by deeds of trust approximates the recorded amount (per the financial statements) due to the following:
|
• |
are of shorter terms at origination than commercial real estate loans by institutional lenders and conventional single-family home mortgage lenders; |
|
• |
are written without a prepayment penalty causing uncertainty/a lack of predictability as to the expected duration of the loan; and |
|
• |
have limited marketability and are not yet sellable into an established secondary market. |
Secured loans, designated impaired (Level 3) - The fair value of secured loans designated impaired is the lesser of the fair value of the collateral or the enforceable amount of the note. Secured loans designated impaired are collateral dependent because it is expected that the primary source of repayment will not be from the borrower but rather from the collateral. The fair value of the collateral is determined on a nonrecurring basis 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 3 inputs). When the fair value of the collateral exceeds the enforceable amount of the note, the borrower is likely to redeem the note. Accordingly, third party market participants would generally pay the fair value of the collateral, but no more than the enforceable amount of the note.
67
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
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 its single-family residential assets is the sale comparison method. Management primarily obtains sale comps via 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 and adjusted 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.
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 its 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.
Management’s secondary method for valuing its 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 adequate sale comps are not available or 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 and/or management will seek additional information in the form of brokers’ opinion of value or appraisals.
Commercial buildings – Where commercial rental income information is available, management’s preferred method for determining the fair value of its 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. 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. When adequate sale comps are not available or 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 and/or management will seek additional information in the form of brokers’ opinion of value or appraisals.
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, including a determination of its highest and best use. 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
Commitments
At December 31, 2019, scheduled future redemptions of members’ capital was $447,417, all of which is scheduled for payment in 2020.
The company has contractual obligations to RMC per the Operating Agreement. See Note 3 (Manager and Other Related Parties) for a more detailed discussion on the company’s contractual obligations to RMC.
68
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2019 and 2018
In the normal course of its business, the company may become involved in legal proceedings (such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc.) to collect the debt owed under the promissory notes, to enforce the provisions of the deeds of trust, to protect its interest in the real property subject to the deeds of trust and to resolve disputes with borrowers, lenders, lien holders and mechanics. None of these actions, in and of themselves, typically would be of any material financial impact to the net income or balance sheet of the company. As of the date hereof, the company is not involved in any legal proceedings other than those that would be considered part of the normal course of business.
NOTE 6 – SUBSEQUENT EVENTS
COVID-19 (Coronavirus)
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) and in March 2020 classified the outbreak as a pandemic. In March 2020, the President of the United States and the Governor of California declared a state of emergency, based on the rapid increase in COVID-19 cases including in California where the real estate collateralizing the company’s loans are located.
Recently, COVID-19 has caused significant disruptions to the global, national and local economy. The overall impact of COVID-19 on the California economy and the California real estate markets is not known and cannot be predicted at this time. The company’s revenue and operating results depend significantly on the strength of the California real estate market, interest rates charged on loans and the ability of borrowers to make principal and interest payments. If the outbreak causes weakness in national, regional and local economies including but not limited to increases in unemployment rates and disruptions to businesses, it may negatively impact the values of California real estate, the ability of borrowers to make principal and interest payments and the volume of loan originations. If these factors persist, it would likely result in declines in California real estate values which would cause the protective equity in the loan to be eroded and any continued decreases in values would also lead to increases in the allowance for loan losses in future periods.
Taken together, these factors if severe and prolonged would have a short or long term adverse impact, possibly material, on the company’s future financial condition, liquidity, and results of operations.
On March 27, 2020, the company acquired through executed transfer, one performing loan with principal of approximately $2.3 million from an affiliated mortgage fund at par plus accrued interest which approximates fair value.
The manager evaluated subsequent events that have occurred after December 31, 2019 and determined that there were no other events or transactions occurring during this reporting period that require recognition or disclosure in the financial statements.
69
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The company is externally managed by RMC. 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. RMC provides the personnel and services necessary for us to conduct our business, as we have no employees of our own.
As a limited liability company, we do not have a board of directors, nor, therefore, do we have an audit committee of the board of directors. The manager, however, provides the equivalent functions of a board of directors and of an audit committee for, among other things, the following purposes:
|
• |
Appointment; compensation, and review and oversight of the work of our independent public accountants; and |
|
• |
establishing and maintaining internal controls over our financial reporting. |
RMC, as the manager, carried out an evaluation, with the participation of RMC's President (acting as principal executive officer/principal financial officer) of the effectiveness of the design and operation of the manager's controls and procedures over financial reporting and disclosure (as defined in Rule 13a-15 of the Exchange Act) as of and for the period covered by this report. Based upon that evaluation, RMC's principal executive officer/principal financial officer concluded, as of the end of such period, that the manager's disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in our reports that we file or submit under the Exchange Act.
Manager’s Report on Internal Control over Financial Reporting
RMC, as the manager, is responsible for establishing and maintaining adequate internal control over financial reporting; as such term is defined in the Exchange Act Rule 13a-15(f). The internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
RMC, with the participation of RMC's principal executive officer/principal financial officer, conducted an evaluation of the effectiveness of the manager's internal control over financial reporting based on the Internal Control - Integrated Framework (1992 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this evaluation, management concluded that its internal control over financial reporting was effective as of December 31, 2019.
Changes to Internal Control Over Financial Reporting
There have not been any changes to internal control over financial reporting (as such term is defined in Rule 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.
None.
70
Item 10 – Directors, Executive Officers and Corporate Governance
The company is externally managed by Redwood Mortgage Corp. (RMC or the manager). 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. RMC provides the personnel and services necessary for us to conduct our business as we have no employees of our own.
The mortgage loans the company funds and/or invests in are arranged and generally are serviced by RMC. The manager is required to contribute to capital one tenth of one percent (0.1%) of the aggregate capital accounts of the members.
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. Members representing a majority of the outstanding units may, without the concurrence of the manager, vote to:
|
• |
dissolve the company; |
|
• |
amend the Operating Agreement, subject to certain limitations; |
|
• |
approve or disapprove the sale of all or substantially all of the assets of the company; or |
|
• |
remove or replace the manager. |
Where there is only one manager, a majority in interest of the members is required to elect a new manager to continue the company business after a manager ceases to be a manager due to its withdrawal.
The company does not have a board of directors or an audit committee. Accordingly, the manager serves the equivalent function of an audit committee for, among other things, the following purposes: appointment, compensation, review and oversight of the work of our independent public accountants, and establishing and enforcing of the Code of Ethics. Since the company does not have an audit committee and the manager is not independent of the company, the company does not have an “audit committee financial expert.”
The Manager
Redwood Mortgage Corp. Redwood Mortgage Corp. is a licensed real estate broker incorporated in 1978 under the laws of the State of California, and is engaged primarily in the business of arranging and servicing mortgage loans. Redwood Mortgage Corp. will act as the loan broker and servicing agent in connection with loans, as it has done on behalf of several other affiliate mortgage funds formed by the manager.
Officers and Directors of RMC
Michael R. Burwell. Michael R. Burwell, age 63, President, Secretary/Treasurer and, Director, Redwood Mortgage Corp. (1979-present); Director, Secretary and Treasurer A & B Financial Services, Inc. (1980-2009); President, Director, Chief Financial Officer and Secretary of Gymno Corporation (1986-September 2011) and, the manager of Gymno LLC, the entity into which Gymno Corporation was converted (September 2011- June 30, 2015); President, Director, Secretary and Treasurer of The Redwood Group, Ltd. (1979-September 2011); past member of Board of Trustees and Treasurer, Mortgage Brokers Institute (1984-1986). Mr. Burwell is licensed as a real estate sales person. Mr. Burwell was a general partner of each of the RMI, RMI II, RMI III, RMI IV, RMI V, RMI VI, and RMI VII limited partnerships. Mr. Burwell is a general partner of RMI VIII limited partnership. Mr. Burwell attended the University of California, at Davis from 1975-1979, playing NCAA soccer for three seasons.
Lorene A. Randich. Lorene A. Randich, age 62, Executive Vice President of Lending Operations, joined Redwood Mortgage Corp. in 1991, and has served as a Director since November 2011. Ms. Randich has held the real estate broker’s license of record for Redwood Mortgage Corp. since November 2011. Ms. Randich has been a licensed real estate broker since 1996. She is a member of the National Association of Realtors, the California
71
Mortgage Bankers Association, the California Association of Mortgage Professionals (Board Member–San Francisco/Peninsula Chapter) and the California Mortgage Association (Board Member and Education Committee Chairperson). Ms. Randich received a BA from UC Berkeley in 1980.
Thomas R. Burwell. Thomas R. Burwell, age 52, joined Redwood Mortgage Corp. in 2007 and has served as Marketing and Sales Director since 2012; Loan Officer-Builder Division Wells Fargo Bank, N.A (Westwood, CA 2005-2007); Loan Officer, Wells Fargo Bank, N.A. (Beverly Hills 2004-2005); Loan Officer Wells Fargo Bank, N.A. (New York, NY 2002-2004). Mr. Burwell is a member of the Financial Planning Association, San Francisco, CA. Mr. Burwell received a BA from the University of California at Davis in 1990. Mr. Burwell is a former ATP (Association of Tennis Professionals) world tour professional and was a NCAA Team and Individual Finalist, Team Captain, (Three-time) All-American, #1 Singles and #1 Doubles Player for University of California at Davis. Thomas R. Burwell is the brother of Michael R. Burwell.
Code of Ethics
The manager has adopted a Code of Ethics applicable to the manager and to any agents, employees or independent contractors engaged by the manager to perform the functions of a principal financial officer, principal accounting officer or controller of the company, if any. You may obtain a copy of this Code of Ethics, without charge, upon request by calling our Investor Services Department at (650) 365-5341, option 5.
Item 11 – Executive Compensation
The company does not pay any compensation to the officers and directors of our manager for the services they provide to RMC.
As indicated above in Item 10, the company is externally managed and has no officers or directors. 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.
RMC is the manager of the company. The mortgage loans the company invests in are arranged and are generally serviced by RMC. Michael R. Burwell is the president and majority shareholder (through his holdings and beneficial interests in certain trusts) of RMC.
Compensation of the Manager
The company’s Operating Agreement permits certain fees and cost reimbursements to be paid to the manager. See Note 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for a presentation of fees and cost reimbursements to the Manager, which presentation is incorporated herein by reference.
In addition to the fees and reimbursements paid by the company, RMC receives compensation directly from the borrowers, including brokerage commissions on loan originations. In 2019, RMC received brokerage commissions of approximately $1.3 million related to loan originations made by the company.
Item 12 – Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters
No person or entity owns beneficially more than five percent (5%) of the units. The manager does not own any units, but has, per the provisions of the company’s Operating Agreement, made capital contributions of one-tenth of one percent (0.1%) of the aggregate capital accounts of the members, and is allocated one percent (1%) of the net income and losses of the company.
72
Item 13 – Certain Relationships and Related Transactions, and Director Independence
See Note 1 (Organization and General) and Note 3 (Manager and Other Related Parties) to the Financial Statements in Part II item 8, which describes certain relationships and related transactions and related party fees.
The company is managed externally and does not have the equivalent of independent directors.
See Note 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for amounts received by the manager in fiscal years 2019 and 2018. The tables in Note 3 also include certain professional service fees that the manager paid on behalf of the company.
Item 14 – Principal Accountant Fees and Services
Fees for services performed for the company by the principal accountant for 2019 and 2018 are as follows:
Audit Fees. The aggregate fees during 2019 and 2018 for professional services rendered for the audit of the company’s annual financial statements included in the company’s Annual Report on Form 10-K, review of financial statements included in the company’s Quarterly Reports on Form 10-Q and for services provided in connection with regulatory filings were approximately $143,450 and $144,100, respectively.
Audit Related Fees. There were no fees during 2019 and 2018 for audit-related services.
Tax fees. There were no fees during 2019 and 2018 for tax related services
All Other Fees. There were no other fees during 2019 and 2018.
All audit and non-audit services are approved by the manager prior to the accountant being engaged by the company.
73
Item 15 – Exhibits and Financial Statement Schedules
A. |
Documents filed as part of this report are incorporated: |
|
1. |
In Part II, Item 8 under A – Financial Statements. |
|
2. |
None. |
|
3. |
Exhibits. |
Exhibit No. |
|
Description of Exhibits |
|
|
|
3.2 |
|
|
|
|
|
3.3 |
|
|
|
|
|
4.1 |
|
Subscription Agreement and Power of Attorney, including Special Notice for California Residents* |
|
|
|
10.1 |
|
|
|
|
|
10.2 |
|
|
|
|
|
10.3 |
|
|
|
|
|
10.4 |
|
|
|
|
|
10.5 |
|
|
|
|
|
10.6 |
|
|
|
|
|
10.7 |
|
|
|
|
|
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 |
|
|
|
99.1 |
|
|
|
|
|
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 |
* |
Incorporated by reference to the item under the corresponding exhibit number in the registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2015 (File no. 000-55601). |
** |
Incorporated by reference to Exhibit 10.7 in the registrant’s quarterly report on Form 10-Q for the nine months ended September 30, 2016 (File no. 000-55601). |
None.
74
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: March 30, 2020 |
|
By: |
|
Redwood Mortgage Corp., Manager |
||
|
|
|
|
|
||
|
|
|
|
By: |
|
/s/ Michael R. Burwell |
|
|
|
|
Name: |
|
Michael R. Burwell |
|
|
|
|
Title: |
|
President, Secretary/Treasurer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity indicated on the 30th day of March, 2020.
|
|
|
|
|
Signature |
|
Title |
|
|
|
|
|
|
|
/s/ Michael R. Burwell |
|
President, Secretary/Treasurer Redwood Mortgage Corp. |
|
|
Michael R. Burwell |
|
(Principal Executive, Financial and Accounting Officer); Director of Redwood Mortgage Corp. |
|
|
|
|
|
|
|
/s/ Lorene A. Randich |
|
Director of Redwood Mortgage Corp. |
|
|
Lorene A. Randich |
|
|
|
|
|
|
|
|
|
/s/ Thomas R. Burwell |
|
Director of Redwood Mortgage Corp. |
|
|
Thomas R. Burwell |
|
|
|
|
75
Exhibit 31.1
PRESIDENT’S CERTIFICATION
I, Michael R. Burwell, certify that:
1. |
I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors IX, LLC, a Delaware Limited Liability Company (the “Registrant”); |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. |
The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15-d-15(f)) for the Registrant and have: |
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. |
The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
/s/ Michael R. Burwell |
Michael R. Burwell, President, |
(principal executive officer and principal financial officer) |
Redwood Mortgage Corp., |
Manager |
March 30, 2020 |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors IX, LLC (the “Company”) on Form 10-K for the period ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, certify that to the best of my knowledge:
|
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. |
A signed original of this written statement required by Section 906 has been provided to Redwood Mortgage Investors IX, LLC and will be retained by Redwood Mortgage Investors IX, LLC and furnished to the Securities and Exchange Commission or its staff upon request.
/s/ Michael R. Burwell |
Michael R. Burwell, President, |
(principal executive officer and principal financial officer) |
Redwood Mortgage Corp., |
Manager |
March 30, 2020 |
Exhibit 99.1
Redwood Mortgage Corp., Manager March 26, 2020
Redwood Mortgage Investors IX, a Delaware Limited Liability Company
Fair Value per Unit at December 31, 2019
Background
Redwood Mortgage Corp. (RMC or the manager) obtained information regarding the fair value of a unit of member’s interest and of net assets at December 31, 2019 (the valuation date) for Redwood Mortgage Investors IX, a Delaware Limited Liability Company (RMI IX or the company). An independent valuation firm that provides asset valuations to retirement plan sponsors, plan administrators, banking and trust companies, and ERISA plans performed the unit value analysis in accordance with scope criteria, objectives and an overall approach set by RMC. The purpose of their valuation was to provide an opinion of the fair value of a unit of membership interest, which is determined principally by the fair value of the commercial mortgage loans held in portfolio and the liquidity available to the members, inclusive of redemption price and distribution factors. The firm understood that the valuation report would be used by the manager for financial and regulatory reporting purposes, specifically FINRA Rule 2310 and NASD Rule 2340.
As of the valuation date, RMI IX had total assets with a book value of approximately $75.7 million, the primary components of which were $4.4 million in cash and $70.7 million in principal in 77 secured loans. members’ capital was $79.6 million and the formation loan balance of $3.9 million at December 31, 2019. The indicated value of the investment assets is approximately $83.6 million or $1.05 without the formation loan.
Fair Value of a Unit of Membership Interest for RMI IX
Based on the analysis summarized below, RMC concurred with the firm’s conclusion that the fair value of a unit of membership interest, as of the valuation date, is $1.00.
RMI IX membership units have restrictions on transferability and redemptions, including a minimum investment period of five years and a maximum total annual redemption of five percent (5%) of beginning members’ capital. The company’s operating agreement provides that members may withdraw all or a portion of their capital accounts in quarterly installments or longer, as determined by RMC in light of the company’s cash flow and subject to the 5% annual maximum for the company. There is also a limited right of liquidation for an investor’s heirs upon an investor’s death. The company has established a cash reserve but it is not specifically allocated to fund withdrawals and, accordingly, the company’s capacity to return capital is subject to the availability of cash. A members’ capital account continues to receive distributions equal to its pro-rata share of the company’s net income in the period during which the balance is being redeemed.
The asset value of the $1 per unit redemption price considering the redemption restrictions and the characteristics of the investment assets and the projected net income therefrom (including during the period the members’ capital is being redeemed) was determined to be $1.05. As redemptions are capped at $1.00 per unit, the determined fair value per unit is $1.00.
Redwood Mortgage Investors IX Per Unit Fair Value Page | 2
Valuation of the Commercial Mortgage Loan Portfolio
The fair value of the loan portfolio approximates the book value as evidenced by the nominal gain on sale net of the cost to sell for the loan sales in 2019 and 2018. In those sales the acquiring bank selected loans to be purchased from a list of loans offered for sale. It is noted that RMI VIII’s loans:
|
- |
Are of shorter terms at origination than commercial real estate loans by institutional lenders; |
|
- |
Are written without a prepayment penalty causing uncertainty/ lack of predictability as the expected duration of the loan; and |
|
- |
Have limited marketability and are not yet sellable into an established secondary market. |
RMC projects credit losses at the time of loan funding to be zero dollars due to the low LTV’s at origination and the location of the collateral in favorable real estate markets (San Francisco Bay Area and Los Angeles, coastal Southern California primarily). Management reviews the values of collateral periodically to validate the “protective equity.”
RMC projects credit losses at the time of loan funding to be zero dollars due to the low LTV’s at origination and the location of the collateral in favorable real estate markets. Management reviews the values of collateral periodically to validate the “protective equity.”
Sources of Information
RMC provided financial and other information to the firm and it accessed other information from various public, financial, and industry sources. The principal sources of information used in performing the valuation included the following:
|
° |
Draft Form 10-K for the years ended December 31, 2019 and 2018 |
|
° |
Historical capital contributions and redemptions |
|
° |
The Operating Agreement (ninth amended and restated) |
|
° |
Discussions with Management regarding the historical and expected future performance of RMI IX, as well as related information contained in management reports |
Procedures and Analytic Approaches
The firm performed the following customary procedures:
|
° |
Received a description of the subject items; |
|
° |
Reviewed the methodologies used to estimate the fair value of the loan portfolio; |
|
° |
Considered the commercial-mortgage-loan sales data. |
The valuation firm primarily utilized the cost or book value analysis to approximate fair value for the assets or liabilities, as there has been no material change (to December 31, 2019) in the underlying structure or credit quality since origination as there is limited available market data on RMI VIII’s mortgage loans.
Book value may also approximate fair value for assets or liabilities with a relatively short term to maturity, provided there is little or no risk of material changes before maturity and the disparity between the assets’ or liabilities’ current rate and that of the quoted market rate is minimal. Any mark-to-market adjustment for these short-term assets or liabilities would presumably be immaterial.
Loans - Secured Loan in Non-Accrual Status (Details) |
12 Months Ended | |||
---|---|---|---|---|
Dec. 31, 2019
USD ($)
MortgageLoan
|
Dec. 31, 2018
USD ($)
MortgageLoan
|
Jul. 29, 2019
USD ($)
|
Dec. 31, 2017
USD ($)
|
|
Loans Details Secured Loans In Nonaccrual Status [Line Items] | ||||
Loans | MortgageLoan | 77 | 83 | ||
Loans - principal (in Dollars) | $ 70,660,284 | $ 62,115,713 | $ 54,768,689 | |
Accrued interest | $ 680,146 | $ 473,966 | $ 31,830 | |
Non-Accrual Status [Member] | ||||
Loans Details Secured Loans In Nonaccrual Status [Line Items] | ||||
Loans | MortgageLoan | 3 | 2 | ||
Loans - principal (in Dollars) | $ 1,252,971 | $ 596,204 | ||
Accrued interest | 37,799 | 19,831 | ||
Foregone interest | 3,952 | 33,410 | ||
Principal [Member] | Non-Accrual Status [Member] | ||||
Loans Details Secured Loans In Nonaccrual Status [Line Items] | ||||
Loans - principal (in Dollars) | 1,204,495 | 565,685 | ||
Advances [Member] | Non-Accrual Status [Member] | ||||
Loans Details Secured Loans In Nonaccrual Status [Line Items] | ||||
Loans - principal (in Dollars) | $ 10,677 | $ 10,688 |
Summary of Significant Accounting Policies - Additional Information (Details) |
12 Months Ended |
---|---|
Dec. 31, 2019
USD ($)
Approach
| |
Summary of Significant Accounting Policies [Line Items] | |
Estimating Real Property Value, Number of Approaches | Approach | 3 |
Cash and Cash Equivalents, Maximum Initial Maturity | 3 months |
Impaired loans maximum days of delinquent | 180 days |
Interest Reserve Minimum Length | 1 year |
Interest Reserve Maximum Length | 2 years |
Maximum [Member] | |
Summary of Significant Accounting Policies [Line Items] | |
Federal Insurance Limit | $ | $ 250,000 |
Manager and Other Related Parties |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Related Party Transactions [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Manager and Other Related Parties |
NOTE 3 – MANAGER AND OTHER RELATED PARTIES The Operating Agreement provides for compensation to the manager, as detailed below. RMC is entitled to 1% of the net income or loss of the company. Loan administrative fees and operating expenses, including amounts for fees and cost reimbursements waived and/or expenses absorbed by RMC for the year ended December 31, 2019 is presented in the following table.
Loan administrative fees and operating expenses, including amounts for fees and cost reimbursements waived and/or expenses absorbed by RMC for the year ended December 31, 2018 is presented in the following table.
Loan administrative fees RMC is entitled to receive a loan administrative fee in an amount up to one percent (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 would be payable by the company upon the closing or acquisition of each loan. Since August 2015, RMC, at its sole discretion, waived and continues to waive, the loan administrative fees. Mortgage servicing fees The manager acting as servicing agent with respect to all loans is entitled to receive a servicing fee 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. Asset management fees The manager 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. In June 2019, the company began paying the manager asset management fees. Costs from RMC The manager is entitled to request reimbursement by the company for operations expense incurred on behalf of the company, including without limitation, accounting, tax and data processing, postage and preparation of reports to members and out-of-pocket general and administration expenses. Certain of these qualifying costs (e.g., postage) can be tracked by RMC as specifically attributable to the company. Other costs (e.g., RMC’s accounting and audit fees, legal fees and expenses, qualifying payroll expenses, occupancy, and insurance premium) 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 allocated first based on activity, and then to the company on a pro-rata basis based on percentage of capital to the total capital of all affiliated mortgage funds managed by RMC. RMC, at its sole discretion, has elected to waive reimbursement for operating expenses during the years ended December 31, 2019 and 2018. Professional Services
Professional services consist primarily of legal, audit and tax compliance, information technology related to recordkeeping and reporting for individual investor accounts, and regulatory (including SEC/FINRA compliance) expenses. Prior to April 2018, RMC, at its sole discretion, had elected to absorb some or all of RMI IX’s expenses for professional services (and other operating expenses directly incurred by the company). Commissions and fees are paid by the borrowers to RMC - 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 1.5% to 5% of the principal amount of each loan made during the year. Total loan brokerage commissions are limited to an amount not to exceed 4% of the total company assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the company. - 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. During the year ended December 31, 2018, Redwood Mortgage Investors VIII, LP, an affiliated mortgage fund, transferred to the company two performing loans in-full at par value, which approximates fair value, of approximately $5,890,000. The company paid cash for the loans and the affiliated mortgage fund has no continuing obligation or involvement on the loans. No loans were transferred during the year ended December 31, 2019. Formation loan Formation loan transactions are presented in the following table.
The future minimum payments on the formation loan of December 31, 2019 are presented in the following table.
RMC is required to make annual payments on the formation loan of one tenth of the principal balance outstanding at December 31 of the prior year. The formation loan is forgiven if the manager is removed and RMC is no longer receiving payments for services rendered.
Member capital withdrawals The table below presents the company’s unit redemptions for the years ended December 31, 2019 and 2018.
At December 31, 2019, scheduled redemptions of members’ capital was $447,417, all of which was scheduled for payment in 2020. Reimbursement and allocation of organization and offering expenses Per the Operating Agreement, the manager is reimbursed for, or the company may pay directly, 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 (40) 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 such subsequent cost allocations to) those members who have not yet received forty (40) quarterly allocations of O&O expenses, as determined in the good faith judgment of the manager. Unallocated O&O transactions are summarized in the following table.
|
%KM!4_;CY%50CD
MW$F:JA/)0 ';R6*T^^#MQT#;!*@O49O"J#Q=W98#"$ZHFA6.2@J: PGB\FU77BJ["
M1#:< >9])DE;)JW]#M-^.>HN![S'4'3%/Z\O@ES 5WUC/PP$'ASIJ/X(^'-ON<1EQ-=\.18\),'OD08F@'E)/EY^#XDS!@/U&%C
M,A/)E^&2/>"VV=SU%^A4 3P>O_9XQO- 8QBU(LD9:=%&RQ(!A[+2659UJPE8B^_-NW89%C37('A'>@%!(_4]WGL,P;
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M;!9E$*$[E@3).AVXK'"%&KA/R43ZNG&3.BQC* CS'L=?
M/,2STQ$+\_IC+PBV[9&,[_@CUW%'QQ[8=?+S/O?UL9VT2S9N]T2JV';K8L,+
M,@F9A$Q")E$#=$OFOZX!>F"K;#3"006(=CZG?H)Y=%T7[E$MWJC$ !PA @"RT)(VRL\4!O6&" WC3TYMC=8- 9
M;A9TMJ,7'UI".4_+62R%WSNU^'C]WI@]MJ]I$<1BF45)&"V#V!&Y#,M,SD6<
MTA7.O$[Y@9#AV:BUP]+.OHS\T9.#'^*)-2FL\>YY-O3I"+<]Q!F?^R"O72'.
M3B\+RSP_KB?K8MO-B@TO".5SX#VVT@_TT3;28]<9C5S'GQR[J!,ZV4F_B_R1
M-1[(8C?Q0A]//B5[[E-K((S/69^ 5!A=MWE>^ -+H:L+FJ_U>Y/AMET!QW"URH6^0%.L7U=?
MXHW_=N\GLZ[U<^JNU*_-_<4R2Y ]%%[0[G7
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M'9I4#WGX2M;G/8Z0Y>MN--%NS^F,R
$"LJLD0'? : Q_3$R<
MXA/
6\
MO834 >;
MBC!-\B@O]%\]SZP.I]Y<7*W7CJL_?3-R_/[(&8X]45P%A2!?)-*;A*Z4AF&Y
MC.1HTWS&NUXT?/ML+B28G[G938R
MTTV