Note 11 - Fair Value

9 Months Ended

Sep. 30, 2011

NOTE 11 – FAIR VALUE

The Partnership measures its financial and nonfinancial assets and liabilities pursuant to ASC 820 – Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

Fair value is defined in ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

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

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

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

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

The following is a description of the Partnership’s valuation methodologies used to measure and disclose the fair values of its financial and nonfinancial assets and liabilities on a recurring and nonrecurring basis.

Impaired Loans

The Partnership does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. A loan is considered impaired when, based on current information and events, it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement or when monthly payments are delinquent greater than ninety days. Once a loan is identified as impaired, management measures impairment in accordance with ASC 310-10-35. The fair value of impaired loans is estimated by either an observable market price (if available) or the fair value of the underlying collateral, if collateral dependent. The fair value of the loan’s collateral is determined periodically by third party appraisals (by licensed appraisers), broker price opinions, comparable properties or other indications of value. Those impaired loans not requiring an allowance represent loans for which the fair value of the collateral exceed the recorded investments in such loans. At September 30, 2011, the majority of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data, the Partnership records the impaired loan as nonrecurring Level 2. When an appraised value is not available, management determines the fair value of the collateral is further impaired below the appraised value or there is no observable market data included in a current appraisal, the Partnership records the impaired loan as nonrecurring Level 3.

Real Estate Held for Sale and Investment

Real estate held for sale and investment includes real estate acquired in full or partial settlement of loan obligations generally through foreclosure and is recorded at acquisition at the lower of the recorded investment in the loan, plus any senior indebtedness (if any), or at the property’s net realizable value, which is the fair value less estimated costs to sell, as applicable. The fair value estimates are derived from information available in the real estate markets including similar property, and often require the experience and judgment of third parties such as commercial real estate appraisers and brokers. Subsequent to acquisition, real estate held for sale is analyzed periodically for changes in fair values. In addition, management periodically compares the carrying value of real estate held for investment to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds the estimate of future undiscounted cash flows, the assets are reduced to estimated fair value. As fair value of real estate held for investment is generally based upon the future undiscounted cash flows, the Partnership records the impairment on these properties as nonrecurring Level 3.

The following tables present information about the Partnership’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2011 and December 31, 2010:

	Fair Value Measurements Using
	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
2011
Nonrecurring:
Impaired loans:
Commercial	$	529,200		—		—	$	529,200
Condominiums		3,552,000		—		—		3,552,000
Improved and unimproved land		25,862,007		—		—		25,862,007
Total	$	29,943,207		—		—	$	29,943,207

Real estate properties:
Commercial	$	11,990,976		—		—	$	11,990,976
Condominiums		12,480,000		—		—		12,480,000
Single family homes		2,448,660		—		—		2,448,660
Improved and unimproved land		20,421,478		—		—		20,421,478
Total	$	47,341,114		—		—	$	47,341,114

2010
Nonrecurring:
Impaired loans:
Commercial	$	1,766,400		—		—	$	1,766,400
Condominiums		24,046,874		—		—		24,046,874
Improved and unimproved land		14,579,177		—		—		14,579,177
Total	$	40,392,451		—		—	$	40,392,451

Real estate properties:
Commercial	$	16,628,315		—		—	$	16,628,315
Single family homes		347,730		—		—		347,730
Improved and unimproved land		10,550,400		—		—		10,550,400
Total	$	27,526,445		—		—	$	27,526,445

During the nine months ended September 30, 2011 and 2010, there were no transfers in or out of Levels 1 and 2.

The following is a reconciliation of the beginning and ending balances of nonrecurring fair value measurements recognized in the accompanying consolidated balance sheet using significant unobservable (Level 3) inputs:

	Impaired Loans			Real Estate Properties
Balance, January 1, 2011	$	40,392,451		$	27,526,445
Total realized and unrealized gains and losses:
Included in net loss		(2,085,969	)		(5,484,923	)
Foreclosures		(21,917,339	)		55,407,119
Loan payoffs		(1,408,514	)		—
Real estate sales		—			—
Transfers in and/or out of Level 3		14,962,578			(30,107,527	)
Balance, September 30, 2011	$	29,943,207		$	47,341,114

Balance, January 1, 2010	$	38,581,158		$	27,733,449
Total realized and unrealized gains and losses:
Included in net loss		(1,920,012	)		(465,294	)
Foreclosures		(11,656,881	)		15,547,849
Loan payoffs		(3,353,374	)		—
Real estate sales		—			(93,953	)
Transfers in and/or out of Level 3		26,380,302			(19,907,899	)
Balance, September 30, 2010	$	48,031,193		$	22,814,152

The following methods and assumptions were used to estimate the fair value of financial instruments not recognized at fair value in the accompanying consolidated balance sheets pursuant to ASC 825-10.

Cash and Cash Equivalents

The carrying value of cash and cash equivalents of approximately $11,282,000 and $5,375,000 as of September 30, 2011 and December 31, 2010, respectively, approximates the fair value because of the relatively short maturity of these instruments.

Certificates of Deposit

Certificates of deposit are held in several federally insured depository institutions and have original maturities greater than three months. These investments are held to maturity. The carrying value of the Partnership’s certificates of deposit of approximately $1,992,000 and $2,004,000 as of September 30, 2011 and December 31, 2010, respectively, approximates the fair value. Fair value measurements are estimated using a matrix based on interest rates.

Loans Secured by Trust Deeds

The carrying value of loans secured by trust deeds (net of allowance for loan losses) of approximately $70,389,000 and $121,597,000 as of September 30, 2011 and December 31, 2010, respectively, other than those analyzed under ASC 310-10-35 and ASC 820 above, approximates the fair value. The fair value is estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made by the Partnership. The applicable amount of accrued interest and advances related thereto has also been considered in evaluating the fair value versus the carrying value.

Investment in Limited Liability Company

The carrying value of the Partnership’s investment in limited liability company of approximately $2,191,000 and $2,142,000 as of September 30, 2011 and December 31, 2010, respectively, approximates fair value.

Note Payable

The fair value of the Partnership’s note payable with a carrying value of approximately $10,281,000 and $10,394,000 as of September 30, 2011 and December 31, 2010, respectively, is estimated to be approximately $10,324,000 and $10,446,000 as of September 30, 2011 and December 31, 2010, respectively. The fair value is estimated based upon comparable market indicators of current pricing for the same or similar issue or on the current rate offered to the Partnership for debt of the same remaining maturity.

Other Financial Instruments

The carrying values of the following financial instruments as of September 30, 2011 and December 31, 2010 are estimated to approximate fair values due to the short term nature of these instruments.

	2011		2010

Interest and other receivables	$	2,100,516	$	4,493,614
Due to general partner	$	419,536	$	682,231
Accrued interest payable (included in accounts payable and accrued liabilities)	$	43,438	$	45,376

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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Reference 3: http://www.xbrl.org/2003/role/presentationRef

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Reference 13: http://www.xbrl.org/2003/role/presentationRef

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