-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dit//HfF+nw2QCBl8hyjs5I3NOchrFAgEUQ+zteLHCWmlxYiVfrCEQ+J9IgWpyHg yz+2pSnnkVMhjK/Fh7cvyA== 0000889123-96-000006.txt : 19961002 0000889123-96-000006.hdr.sgml : 19961002 ACCESSION NUMBER: 0000889123-96-000006 CONFORMED SUBMISSION TYPE: S-11 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19960930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: REDWOOD MORTGAGE INVESTORS VIII CENTRAL INDEX KEY: 0000889123 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 943158788 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-11 SEC ACT: 1933 Act SEC FILE NUMBER: 333-13113 FILM NUMBER: 96637448 BUSINESS ADDRESS: STREET 1: 650 EL CAMINO REAL STE G CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 4153655341 MAIL ADDRESS: STREET 1: 650 EL CAMINO REAL STE K CITY: REDWOOD CITY STATE: CA ZIP: 94063 S-11 1 FORM S-11 As filed with the Securities and Exchange Commission on September 30, 1996 Registration No. 33-49946 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-11 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 REDWOOD MORTGAGE INVESTORS VIII (Exact name of registrant as specified in its charter) CALIFORNIA 6611 94-3158788 (State or other (Primary Standard Industrial (IRS Employer jurisdiction of Classification Code Number) Identification No.) incorporation or organization) 650 El Camino Real, Suite G, Redwood City, California 94063 (415) 365-5341 (Address and telephone number of principal executive offices) 650 El Camino Real, Suite G, Redwood City, California 94063 (415) 365-5341 (Address of principal place of business or intended principal place of business) D. Russell Burwell 650 El Camino Real, Suite G, Redwood City, California 94063 (415) 365-5341 (Name, address, including zip code and telephone number, including area code of agent for service) Copies to: Stephen C. Ryan, Esq. Anne R. Knowles, Esq. Wilson, Ryan & Campilongo 115 Sansome St. Suite 400 San Francisco, CA 94104 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: |X| CALCULATION OF REGISTRATION FEE ============================================================================= Proposed Proposed Title of Each Maximum Maximum Class of Securities Amount Offering Aggregate Amount of to be Registered Being Registered Per Unit(2) Offering Price Registration Fee Limited Partnership Interests (1) 300,000 $100 $30,000,000 $10,344.81 (1) This Registration Statement covers all Units which may be acquired by Limited Partners if the maximum aggregate subscription contemplated by this Offering are obtained. (2) Subscriptions will be accepted in the minimum amount of twenty (20) Units ($2,000) and for greater amounts in multiples of one (1) Unit ($100) each. The Registrant hereby amends this Registration Statement on such date of dates as may be necessary to delay it effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 9 (a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. PART I Registration Statement Item Number and Caption Prospectus Caption Forepart of the Registration Statement and Front Cover Page of Prospectus Outside Front Cover Page of Prospectus Inside Front and Outside Back Cover Inside Front and Outside Back Cover Pages of Prospectus Page Summary Information, Risk Factors Summary of the Offering; Inside Front and Ratio of Earnings to Fixed Charges Cover Page; Risks and Other Factors Determination of Offering Price Inapplicable Dilution Inapplicable Selling Security Holders Inapplicable Plan of Distribution Plan of Distribution Use of Proceeds Estimated Use of Proceeds Selected Financial Data Inapplicable Management's Discussion and Management's Discussion and Analysis Analysis of Financial Condition of Financial Condition of the and Results of Operations Partnership General Information as to Registrant Summary of the Offering Policy with Respect to Certain Activities Inapplicable Investment Policies of Registrant Investments in real estate or interests in Inapplicable real estate Investments in real estate mortgages Risk Factors; Investment Objectives and Criteria; Estimated Use of Proceeds Securities of or interests in persons Inapplicable primarily engaged in real estate activities Investments in other securities Inapplicable Description of Real Estate Inapplicable Operating Data Inapplicable Tax Treatment of Registrant and Federal Income Tax Consequences Its Security Holder Market Price of and Dividends on Inapplicable the Registrant's Common Equity and Related Stockholder Matters Description of Registrant's Securities Terms of the Offering; Description of Units; Summary of Limited Partnership Agreement Legal Proceedings Inapplicable Security Ownership of Certain Inapplicable Beneficial Owners and Management Directors and Executive Officers Management Executive Compensation Compensation of the General Partners and Affiliates Certain Relationships and Management; Compensation of the Related Transactions General Partners and Affiliates; Conflicts of Interest Selection, Management and Custody Conflicts of Interest; Investment of Registrant's Investment Objectives and Criteria Policies with Respect to Conflicts of Interest; Investment Certain Transactions Objectives and Criteria Limitations of Liability Fiduciary Duty of General Partners Financial Statements and Information Financial Statements Interests of Named Experts and Counsel Legal Opinion; Experts Disclosure of Commission Position on Fiduciary Duty of General Partners Indemnification for Securities Act Liabilities OFFERING OF LIMITED PARTNERSHIP INTERESTS REDWOOD MORTGAGE INVESTORS VIII $30,000,000 $100 per Unit - Minimum Purchase Twenty (20) Units ($2,000) Redwood Mortgage Investors VIII, a California limited partnership (the "Partnership"), is engaged in business as a mortgage lender, for the primary purpose of making mortgage investments secured primarily by first and second deeds of trust on California real estate ("Mortgage Investments"). Approximately ninety-eight percent (98%) of the Partnership's Mortgage Investments are secured by first and second deeds of trust. Mortgage Investments are arranged and serviced by Redwood Home Loan Company doing business as Redwood Mortgage ("Redwood Mortgage"), an affiliate of the General Partners. The Partnership's objectives are to make investments that will: (i) yield a high rate of return from mortgage lending; and (ii) preserve and protect the Partnership's capital. Investors should not expect the Partnership to provide tax benefits of the type commonly associated with limited partnership tax shelter investments. The Partnership is intended to serve as an investment alternative for investors seeking current income. However, unlike other investments which are intended to provide current income, an investment in the Partnership will be less liquid, not readily transferable, and not provide a guaranteed return over its investment life. A maximum of 300,000 Units ($30,000,000) are being offered on a "best efforts" basis, which means that no one is guaranteeing that any minimum number of Units will be sold, through broker dealer member firms of the National Association of Securities Dealers, Inc. (See "TERMS OF THE OFFERING" and "PLAN OF DISTRIBUTION"). As this is not the Partnership's first offering of units, all proceeds from the sale of Units will be immediately available to the Partnership for investment. The offering of Units will terminate one year from the effective date of this Prospectus unless fully subscribed at an earlier date or terminated on an earlier date by the General Partners, or extended for additional one-year periods at the General Partners' election. Of the proceeds from the sales of Units of the Partnership, approximately 86.7% (in the event the maximum proceeds of 300,000 Units ($30,000,000) is raised) will be invested in, or reserved for, the Partnership's activities. The balance of 13.3% (if 300,000 Units ($30,000,000) is raised) will be used for public offering expenses, the formation loan to Redwood Mortgage and working capital reserves. Upon the repayment of the formation loan, approximately ninety-seven percent (97%) (if the maximum of 300,000 Units ($30,000,000) is raised) will be invested in, or reserved for Partnership activities. There are risks associated with an investment in the Partnership (See "RISK FACTORS") including the following: The Partnership will be subject to various conflicts of interest arising out of its relationship to the General Partners and their affiliates. Due to the speculative nature of the investment, there is a risk that an investor could lose his entire investment. The Formation Loan to be made to Redwood Mortgage will be unsecured and non-interest bearing, and repayment is not guaranteed. An investment in Units involves material tax risks. There are substantial restrictions on the transferability of Units and it is not anticipated that a public market for the Units will develop. Purchasers of Units will have a limited ability to liquidate their investment and will be subject to early withdrawal penalties and other restrictions and may be required to accept less than they paid for their Units. The Partnership's use of leverage, if any, may reduce the Partnership's profitability or cause losses through liquidation. The Partnership will rely on appraisals which may not be accurate to determine the fair market value of the real property used to secure loans made by the Partnership. Loan defaults and foreclosures may adversely affect the Partnership. Limited Partners have no right to participate in the management of the Partnership and may only vote on those matters which are set forth in the Limited Partnership Agreement; all decisions with respect to the management of the Partnership will be made exclusively by the General Partners. The Date of This Prospectus is ___________, 1996 Upon admission to the Partnership, each Limited Partner will be required to make a one-time, irrevocable election, except as described below, either (i) to receive monthly, quarterly or annual distributions of Earnings in cash, or (ii) to receive distributions of Earnings in the form of additional Units valued at $100 per Unit. This election, once made is irrevocable for investors who elect to receive monthly, quarterly or annual distributions of earnings. However, investors may change whether such distributions are received on a monthly, quarterly or annual basis. If a Limited Partner initially elected to receive additional Units, he may, after three (3) years, change his election and receive monthly, quarterly or annual cash distributions. Earnings from investors who elect to receive additional Units will be retained by the Partnership for making further Mortgage Investments or other proper Partnership purposes. The earnings from these further Mortgage Investments, will be allocated among all investors, but investors who receive distributions in the form of Units will receive more Units than investors who receive cash distributions. (See "PLAN OF DISTRIBUTION - - Election to Receive Periodic Cash Distributions"). ------------------------------------------- - ------------------------------------------------------------------------------- Price to Public Underwriting Proceeds to commission Partnership (4) (1)(2)(3) - ------------------------------------------------------------------------------- Per Unit (Minimum Investment 20 (units) $100 $0 $100 Total Maximum (5) $30,000,000 $0 $30,000,000 =============================================================================== (1) The Units are being offered to the public by selected broker dealers who are members of the National Association of Securities Dealers ("Participating Broker Dealers"). Neither the General Partners, the Partnership or the Participating Broker Dealers are guaranteeing that any minimum number of Units will be sold. The Participating Broker Dealers may elect to receive sales commissions under one of two options. A Participating Broker Dealer may receive sales commission based upon a percentage of the sales price of the Units as set forth below or he may elect to receive sales commissions at a reduced rate and receive 0.25 percent of the Limited Partner's capital account annually to be paid quarterly. The 0.25 percent of the Limited Partner's capital account shall be referred to as "Continuing Servicing Fee." Sales commissions will also be higher if investors elect to receive distributions of Earnings in the form of additional Units rather than electing to receive cash distributions. Participating Broker Dealers may elect to receive sales commissions under one of two options, again, depending upon whether they elect to receive the Continuing Servicing Fee: (i) at a rate of five (5%) if an investor elects to receive cash distributions or at a rate of nine (9%) if the investor elects to receive additional Units in lieu of cash distributions; or (ii) if the Participating Broker Dealer elects to receive the Continuing Servicing Fee, at a rate of four (4%) if the investor elects to receive cash distributions or at a rate seven percent (7%) of if the investor elects to receive additional Units in lieu of cash distributions. An investor's initial election to receive cash distributions is irrevocable; an investor's election to receive additional Units may not be changed for a period of three (3) years. The Partnership anticipates that the total sales commissions payable will not exceed nine percent (9%). This number is based upon the General Partners' assumption, that sixty-five percent (65%) of investors will elect to receive additional Units in lieu of cash distributions and thirty-five percent (35%) of investors will elect to receive cash distributions, and twenty percent (20%) of the Participating Broker Dealers will elect to receive the Continuing Servicing Fee. However, in no event will the total compensation payable to Participating Broker Dealers exceed the ten percent (10%) limitation on underwriting compensation, or, in the event the Participating Broker Dealer elects to receive the Continuing Servicing Fee, three percent (3%) for each one (1) percentage point that the sales commissions fall below nine percent (9%) (collectively, "Compensation Limitation"). (2) Sales commissions will not be paid directly by the Partnership out of the offering proceeds. Instead, the Partnership will loan to Redwood Mortgage, an affiliate of the General Partners, funds from the offering proceeds equal to the amount of the sales commissions and all amounts payable in connection with unsolicited orders received by the General Partners. For ease of reference, this loan shall be referred to as the "Formation Loan." Thus, all sales commissions and all amounts payable in connection with unsolicited orders received by the General Partners will be paid by Redwood Mortgage. Redwood Mortgage will also act as the mortgage loan broker for all Mortgage Investments. (See "RISK - -Formation Loan" and PLAN OF DISTRIBUTION - Formation Loan"). The Formation Loan will be unsecured, will not bear interest and will be repaid in annual installments. Upon the commencement of this offering, Redwood Mortgage shall make annual installments of one-tenth of the principal balance of the Formation Loan as of December 31 of each year. Such payment shall be due and payable by December 31 of the following year with the first payment due by December 31, 1997 assuming this Offering commences in 1996. The principal balance of the Formation Loan will increase as additional sales of Units are made each year. The amount of the annual installment payment to be made by Redwood Mortgage, during the offering stage, will be determined by the principal balance of the Formation Loan on December 31 of each year. Upon the completion of this oOffering the balance of the Formation Loan will be repaid in ten (10) equal annual installments of principal, without interest, commencing on December 31 of the year following the year the offering terminates. Redwood Mortgage at its option may prepay all or any part of Formation Loan. The Formation Loan is being made to Redwood Mortgage in order to permit an increased percentage of the offering proceeds, to be used for Mortgage Investments. Initially, the Formation Loan will not allow an increased percentage of the offering proceeds to be used for Mortgage Investments, but as the Formation Loan is repaid, such amounts will be available for making Mortgage Investments. The Continuing Servicing Fee will be paid by Redwood Mortgage, but will not be included in the Formation Loan. (3) In the event that the Partnership receives any unsolicited orders directly from an investor who did not utilize the services of a Participating Broker Dealer, Redwood Mortgage through the Formation Loan will pay to the Partnership an amount equal to the amount of the sales commissions otherwise attributable to a sale of a Unit through a Participating Broker Dealer assuming no Continuing Servicing Fee is paid. The Partnership will in turn credit such amounts received from Redwood Mortgage to the account of the Investor who placed the unsolicited order. (4) The Partnership shall reimburse Participating Broker Dealers for bona-fide due diligence expenses in an amount up to one-half of one percent (.5%) of the gross proceeds. Units may also be offered or sold directly by the General Partners. No sales commissions will be paid on any such solicited Units sold directly by the General Partner. (See "PLAN OF DISTRIBUTION" and "TERMS OF THE OFFERING"). (5) Such proceeds are calculated before deducting Organizational and Offering Expenses (including, without limitation, printing costs, attorneys' and accountants' fees, registration and filing fees and other expenses) payable by the Partnership in connection with this Offering. The aggregate Organizational and Offering Expenses payable by the Partnership are estimated to be $900,000 if the maximum is sold. The General Partners may prepay these items and may be reimbursed by the Partnership in an amount not to exceed the lesser of ten percent (10.0%) of the Gross Proceeds or $1,200,000. The General Partners will pay any offering expenses (excluding selling commissions) in excess of ten percent (10.0%) of the Gross Proceeds or $1,200,000. (See "TERMS OF THE OFFERING"). ------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. INVESTORS ARE REQUIRED TO GIVE CERTAIN WARRANTIES IN THEIR SUBSCRIPTION AGREEMENTS (SEE "PLAN OF DISTRIBUTION - SUBSCRIPTION AGREEMENT WARRANTIES"). THE USE OF PROJECTIONS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATION TO THE CONTRARY AND PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN INVESTMENT IN THE PARTNERSHIP ARE NOT PERMITTED. TABLE OF CONTENTS Page SUMMARY OF THE OFFERING..................................................1 The Partnership..........................................................1 General Partners.........................................................1 Risk Factors. ...........................................................1 Investor Suitability Standards...........................................3 Terms Of The Offering....................................................3 Estimated Use Of Proceeds................................................3 Compensation Of The General Partners And Affiliates .....................4 Conflicts Of Interest....................................................5 Fiduciary Responsibility Of The General Partners.........................6 Prior Performance Summary................................................6 Management...............................................................6 Investment Objectives And Criteria.......................................6 Certain Legal Aspects Of Mortgage Investments............................7 Management's Discussion And Analysis Of Financial Condition Of The Partnership..............................................................7 Business.................................................................7 Federal Income Tax Consequences..........................................7 ERISA Considerations.....................................................8 Description Of Units.....................................................8 Summary Of Limited Partnership Agreement ................................8 Transfer Of Units........................................................9 Distribution Policies....................................................9 Reports To Limited Partners..............................................10 Plan Of Distribution.....................................................10 Supplemental Sales Material..............................................11 Legal Opinion............................................................11 Experts..................................................................11 Additional Information...................................................11 Tabular Information Concerning Prior Programs............................11 Glossary.................................................................11 Subscription Procedures..................................................11 RISK FACTORS.............................................................11 REAL ESTATE AND OPERATING RISKS..........................................11 Unspecified Investments Increase Uncertainty To Investors And Investors Must.....................................................................11 Rely On Judgments Of General Partners In Investing Proceeds of The Offering................................................................11 Loan Defaults And Foreclosures By Borrowers May Adversely Affect Partnership.............................................................12 Risks Associated With Reliance on Appraisals Which May Be Affected By Subsequent Events..................................................................12 Risks Associated with Junior Encumbrances And Construction Loans..................................................................12 Bankruptcy And Limitations On Personal Judgments May Prevent Recovery Of Loan Thereby Resulting In A Loss To The Partnership.........................12 Risks Associated With Unintended Violations Of The Usury Statute.......12 Loan-To-Value Ratio Are Determined By Appraisals Which May Be In Excess Of The Ultimate Purchase Price Of The Underlying Property.....................13 Use Of Leverage May Reduce The Partnership's Profitability Or Cause Losses Through Liquidation....................................................13 Fluctuations In Interest Rates May Effect Return On Investment.........14 Marshalling Of Assets Could Delay Or Reduce Recovery Of Mortgage Investment....................................................14 Potential Liability For Toxic Or Hazardous Substances If Partnership Is Considered Owner Of Real Property......................................14 Potential Conflicts And Risks If Partnership Invests In Mortgage Investments With General Partners Or Affiliates........................15 INVESTMENT RISKS.......................................................15 No Assurance Of Cash Distributions To Partners.........................15 Partner's Ability To Recover Investment On Dissolution And Termination Will Be Limited........................................................15 Risk Of Losses As A Result Of Losses Not Insurable Or Not Economically Insurable.................................................15 Investors Must Rely On Management For Decisions With Respect To Management Of The Partnership..........................................16 Investors Will Be Bound By Decision Of Majority Vote...................16 Net Worth Of The General Partners May Effect Ability Of General Partners To Fulfil Their Obligations To The Partnership ...............16 Operating History Of The Partnership...................................16 Risks Regarding Formation Loan And Repayment Thereof...................16 Delays In Investment Could Adversely Affect Return To Investor.........17 Subscriptions For Less Than The Maximum Number of Units Could Effect. Potential Profitability Of Partnership.................................17 No Assurance Of Guaranteed Payment For Offering Period.................17 Possible Extension Of Offering Will Allow Subsequent Investors To Review Partnership's Mortgage Investment Portfolio............................17 No Assurance Of Limitation Of Liability Of Limited Partners............17 Compensation To General Partners And Affiliates Cannot Be Estimated....18 No Assurance That Reserves Will Be Adequate............................18 Limited Transferability Of Units Requires That Investment Be Considered Long Term...................................................18 Partnership May Be Required To Forego More Favorable Investment To Avoid Regulation Under Investment Company Act of 1940........................18 TAX RISKS..............................................................18 Material Tax Risks Associated With Investment In Units.................18 Risks Associated With Partnership Status For Federal Income Tax Purposes...............................................................19 Risks Associated With Characterization Of Partnership Income As Portfolio Income.......................................................19 Risks Of Partnership Characterization As A Publicly Traded Partnership.19 Risks Relating To Taxation Of Undistributed Revenues...................19 Risks Relating To Creation Of Unrelated Business Taxable Income........20 Risks Of Applicability Of Alternative Minimum Tax......................20 Risks Of Audit And Adjustment..........................................20 Risks Of Effects Of State And Local Taxation...........................20 ERISA RISKS............................................................20 Risks Of Investment By Tax-Exempt Investors............................20 INVESTOR SUITABILITY STANDARDS.........................................21 Subscription Agreement Warranties......................................22 Subscription Procedure.................................................22 NOTICE TO CALIFORNIA RESIDENTS.........................................22 TERMS OF THE OFFERING..................................................22 Guaranteed Payment For Offering Period.................................23 Election To Receive Periodic Cash Distributions........................23 ESTIMATED USE OF PROCEEDS..............................................23 CAPITALIZATION OF THE PARTNERSHIP......................................25 COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES....................25 CONFLICTS OF INTEREST..................................................28 Conflicts Arising As A Result Of The General Partners' Legal and Financial Obligations to Other Partnerships......................................29 Conflicts Arising From the General Partners' Allocation Of Time Between The Partnership and Other Activities...................................29 Amount Of Loan Brokerage Commissions Effects Rate Of Return To Limited Partners...............................................................29 Terms Of Formation Loan Are Not Result Of Arms Length Negotiations.....30 Potential Conflicts If Partnership Invests In Mortgage Investments With General Partners Or Affiliates.........................................30 General Partners Will Represent Both Parties In Sales Of Real Estate Owned to Affiliates.............................................................31 Professionals Hired By General Partners Do Not Represent Limited Partners...............................................................31 FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNERS.......................31 PRIOR PERFORMANCE SUMMARY..............................................32 Experience And Background Of General Partners And Affiliates...........32 Additional Information.................................................34 No Major Adverse Developments..........................................34 Prior Public Partnerships..............................................34 Three Year Summary Of Mortgage Investments Originated By Prior Limited Partnership...................................................34 MANAGEMENT............................................................36 General ..............................................................36 D. Russell Burwell....................................................36 Michael R.Burwell.....................................................36 Gymno Corporation.....................................................36 Redwood Mortgage......................................................36 The Redwood Group, Ltd................................................36 Theodore J. Fischer...................................................36 SELECTED OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SELECTED FINANCIAL DATA...............................................36 ORGANIZATIONAL CHART..................................................38 INVESTMENT OBJECTIVES AND CRITERIA....................................39 Principal Objectives..................................................39 General Standards For Mortgage Investments............................39 Priority Of Mortgages.................................................39 Geographic Area Of Lending Activity...................................39 Construction Mortgage Investments.....................................39 Loan-To-Value Ratios..................................................39 Terms Of Mortgage Investments.........................................41 Equity Interests In Real Property.....................................41 Escrow Conditions.....................................................41 Loans To General Partners And Affiliates..............................41 Purchase Of Mortgage Investments From Affiliates And Other Third Parties...............................................................41 Note Hypothecation....................................................41 Joint Venturers.......................................................42 Diversification.......................................................42 Reserve Fund..........................................................42 Credit Evaluations....................................................42 Loan Brokerage Commissions............................................42 Loan Servicing........................................................42 Sale Of Mortgage Investments..........................................42 Borrowing.............................................................42 Other Policies........................................................43 CERTAIN LEGAL ASPECTS OF Mortgage Investments.........................43 Foreclosure...........................................................43 Tax Liens.............................................................43 Anti-Deficiency Legislation...........................................43 Special Considerations In Connection With Junior Encumbrances.........44 "Due-On-Sale" Clauses.................................................45 Due-On-Sale...........................................................45 Due-On-Encumbrance....................................................45 Prepayment Charges....................................................45 Real Property Mortgage Investments....................................45 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP...........................................................46 BUSINESS..............................................................49 FEDERAL INCOME TAX CONSEQUENCES.......................................50 Summary Of Material Tax Aspects.......................................51 Opinion Of Counsel....................................................51 Partnership Tax Status..............................................51 Publicly Traded Partnerships........................................51 Portfolio Income And Unrelated Business Taxable Income..............52 Basis................................................................52 Allocations To The Limited Partners.................................52 Tax Status Of The Partnership.........................................53 Revenue Procedure 89-12...............................................53 Publicly Traded Partnerships..........................................54 Result If Partnership Is Taxable As Association.......................55 Taxation Of Partners -General.........................................55 Partnership Basis.....................................................56 Allocations Of Profits And Losses.....................................56 Sale Of Partnership Interest..........................................56 Character Of Income Or Loss...........................................57 Treatment Of Mortgage Investments Containing Participation Features...58 Repayment or Sale Mortgage Investments................................58 Property Held Primarily For Sale; Potential Dealer Status.............59 Tax Consequences Of Reinvestment In Mortgage Investments..............59 Partnership Organization, Syndication Fees And Acquisition Fees.......59 Original Issue Discount...............................................59 Deduction Of Investment Interest......................................59 Section 754 Election..................................................60 Termination Of The Partnership........................................60 Tax Returns...........................................................61 Audit Of Tax Returns..................................................61 Investment By Tax-Exempt Investors....................................61 State And Local Taxes.................................................62 ERISA CONSIDERATIONS..................................................63 General...............................................................63 Fiduciaries Under ERISA...............................................63 Prohibited Transactions Under ERISA And The Code......................63 Plan Assets...........................................................64 Potential Consequences Of Treatment As Plan Assets....................65 DESCRIPTION OF UNITS..................................................65 SUMMARY OF LIMITED PARTNERSHIP AGREEMENT..............................66 Rights And Liabilities Of Limited Partners............................66 Capital Contributions.................................................66 Rights, Powers And Duties Of General Partners.........................66 Profits And Losses....................................................66 Cash Distributions....................................................66 Meeting...............................................................67 Accounting And Reports................................................67 Restrictions On Transfer..............................................67 General Partners' Interest............................................67 Term Of Partnership...................................................68 Winding Up............................................................68 Dissenting Limited Partners' Rights...................................68 TRANSFER OF UNITS.....................................................68 Restrictions On The Transfer Of Units.................................68 Withdrawal From Partnership...........................................69 DISTRIBUTION POLICIES.................................................70 Distributions To The Limited Partners.................................70 Cash Distributions....................................................71 Allocation Of Net Income And Net Losses...............................71 REPORTS TO LIMITED PARTNERS...........................................71 PLAN OF DISTRIBUTION..................................................71 Formation Loan........................................................73 Escrow Arrangements...................................................73 Subscription Account..................................................74 SUPPLEMENTAL SALES MATERIAL...........................................74 LEGAL PRORCEEDINGS....................................................75 LEGAL OPINION.........................................................75 EXPERTS...............................................................75 ADDITIONAL INFORMATION................................................75 TABULAR INFORMATION CONCERNING PRIOR PROGRAMS.........................75 GLOSSARY..............................................................76 INDEX TO THE FINANCIAL STATEMENTS.....................................78 APPENDIX I - PRIOR PERFORMANCE TABLES EXHIBIT A - LIMITED PARTNERSHIP AGREEMENT EXHIBIT B - SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY ============================================================================ SUMMARY OF THE OFFERING ============================================================================ The following summarizes the material contained in this Prospectus. It is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus. The Partnership. Redwood Mortgage Investors VIII (the "Partnership") is a limited partnership formed on May 27, 1992 pursuant to the California Revised Limited Partnership Act. The Partnership commenced operations on or about April 12, 1993. The Partnership's principal business office is located at 650 El Camino Real, Suite G, Redwood City, California 94063 and its telephone number is (415) 365-5341. The Partnership is engaged in business as a mortgage lender for the primary purpose of making Mortgage Investments secured by deeds of trust (the "Mortgage Investment" or "Mortgage Investments") on California real estate (See "INVESTMENT OBJECTIVES AND CRITERIA"). As of June 30, 1996 approximately forty-two percent (42%) of the Partnership's Mortgage Investments are secured by first deeds of trust ($5,917,837), fifty-six percent (56%) are secured by second deeds of trust ($7,979,116) and two percent (2%) by the third deeds of trust ($300,000). The aggregate principal amount of these Mortgage Investments total $14,196,953. Of these loans approximately eighty percent (80%) are loans secured by properties located in the San Francisco Bay Area. General Partners. The General Partners of the Partnership are D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation. The principal offices of the General Partners are located at 650 El Camino Real, Suite G, Redwood City, California 94063, and the telephone number is (415) 365-5341. The General Partners may maintain additional offices in the areas where the properties securing the Mortgage Investments are located. The General Partners will manage and control the Partnership affairs and have general responsibility and ultimate authority in all matters affecting its business. The Mortgage Investments are arranged and serviced by an Affiliate of the General Partners, Redwood Home Loan Company doing business as Redwood Mortgage ("Redwood Mortgage") (See "MANAGEMENT"). Risk Factors. An investment in the Partnership involves certain risks. The "RISK FACTORS" section of the Prospectus discusses in more detail the most important risks associated with an investment in the Units, including risks associated with mortgage lending on real estate, risks associated with investments in limited partnerships such as the Partnership, and tax risks. These risks include: Although prospective investors will have an opportunity to review the Partnership's existing portfolio, initial investors will not have an opportunity to review Mortgage Investments to be acquired by the Partnership from the proceeds of this Offering nor will they have the opportunity to evaluate whether the Partnership should make an investment, or to provide input of any kind into such decisions which will be made exclusively by the General Partners. (See INVESTMENT OBJECTIVES AND CRITERIA"). As this is not the Partnership's first offering of Units, no escrow will be established and all proceeds from the sale of Units will be immediately available to the Partnership for investment. In the event less than $30,000,000 is raised, the Partnership will make fewer Mortgage Investments and the Partnership will achieve less diversification in the types and amounts of Mortgage Investments. (See "TERMS OF THE OFFERING"). The Partnership will pay certain fees to the General Partners and their Affiliates some of which may be paid regardless of the economic return to the Limited Partners. The compensation to be received by the General Partners and their Affiliates is based, in large part, upon the principal balances of the Mortgage Investments which during the term of the Partnership will be continually maturing and "turning over" and cannot be precisely determined. (See "COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES"). The transferability of Units is restricted and the marketability of Units is extremely limited. Accordingly, investors may not be able to sell their Units quickly or profitably if the need arises (See "INVESTOR SUITABILITY STANDARDS," "SUMMARY OF LIMITED PARTNERSHIP AGREEMENT" and "TRANSFER OF UNITS"). An investment in the Partnership involves certain income tax risks discussed in the Section entitled "FEDERAL INCOME TAX CONSEQUENCES." Certain income tax benefits will not be available to investors unless the Partnership is classified as a partnership for federal income tax purposes. In addition, investors may be required to report taxable income in an amount which exceeds cash distributed to them. Potential investors should consult with their own tax advisers concerning the federal, state and local tax consequences associated with an investment in the Units in light of their own unique tax situations. The Partnership is subject to various conflicts of interest arising out of its relationship to the General Partners and their affiliates including conflicts relating to compensation arrangements, the Formation Loan, allocation of time between the Partnership and other activities and the legal and financial obligations of the General Partners to the Partnership and to other partnerships in which they serve as general partners. (See "CONFLICTS OF INTEREST"). The Partnership relies on appraisals, prepared by non-affiliated third persons, to determine the fair market value of real property used to secure Mortgage Investments made by the Partnership. No assurance can be given that such appraisals will, in any or all cases, be accurate. Moreover, since an appraisal fixes the value of real property at a given point in time, subsequent events could adversely affect the value of real property used to secure a loan. The Partnership may borrow funds for the purpose of making Mortgage Investments on any terms commercially available and may assign all or a portion of its Mortgage Investment portfolio as security for such loans. The Partnership has established a line of credit with a commercial bank secured by its Mortgage Investments to a limit of $3,000,000. As of June 30, 1996, the Partnership has borrowed $2,892,000 at an interest rate of nine percent (9%). Such borrowed money bears interest at a variable rate, whereas the Partnership's Mortgage Investments bear interest at a fixed rate. Thus, if prevailing interest rates rise, the Partnership's cost of money could exceed the income earned from that money, thus reducing the Partnership's profitability or causing losses through liquidation of loans in order to repay the debt on the borrowed money or default if the Partnership cannot cover the debt on the borrowed money. Approximately fifty-six percent (56%) of the Partnership's Mortgage Investments are secured by second deeds of trust and two percent (2%) by third deeds of trust both of which are subject to greater risks than first deeds of trust. The General Partners anticipate that the Partnership will continue to make approximately the same percentage amount of loans secured by second and third deeds of trust. In the event that real estate is acquired through foreclosure under a junior deed of trust the debt secured by the senior deed(s) of trust must be satisfied before any proceeds from the sale of the property can be applied toward the amounts owed to the Partnership. Furthermore, to protect its junior security interest, the Partnership may be required to make substantial cash outlays for such items as loan payments to senior lienholders to prevent their foreclosure, property taxes, insurance, repairs, etc. Many Mortgage Investments will be interest only loans or partially amortizing loans providing for relatively small monthly payments with a large "balloon" payment of principal due at the end of the term. As of June 30, 1996, ninety-eight percent (98%) ($13,934,817) of the Mortgage Investments were interest only loans or partially amortizing loans. Borrowers may be unable to repay such loans out of their own funds and may be compelled to refinance or sell their property. Fluctuations in interest rates and the unavailability of mortgage funds could adversely affect the ability of borrowers to refinance their loans at maturity or sell their property, thereby adversely affecting the Partnership's profitability. If a borrower defaults on a loan, the Partnership may be forced to purchase the property at a foreclosure sale. If the Partnership cannot quickly sell such property, and the property does not produce any significant income, the Partnership's profitability will be adversely affected. As of June 30, 1996 the Partnership has been forced to purchase only one property which was sold at a price that exceeded the Partnership's net basis in the property. The Partnership will loan to Redwood Mortgage funds in an amount equal to the sales commissions payable to the Participating Broker Dealers or in the case of unsolicited sales by The General Partners an amount equal to the amount of the sales commissions otherwise attributable to a sale of a Unit assuming no Continuing Service Fee is paid. The Formation Loan will be unsecured, and will be paid in annual installments of principal, without interest. Upon the commencement of this Offering, Redwood Mortgage shall make annual installments of one-tenth of the principal balance of the Formation Loan as of December 31 of each year. Such payment shall be due and payable by December 31 of the following year. Prior to the termination of the offering, the principal balance of the Formation Loan will increase as additional sales of Units are made each year. The amount of the annual installment payment to be made by Redwood Mortgage, during the offering stage, will be determined by the principal balance of the Formation Loan on December 31 of each year with the first payment due by December 31, 1997, assuming the Offering commences in 1996. Upon the completion of this Offering, the balance of the Formation Loan will be repaid in ten (10) equal annual installments of principal, without interest, commencing on December 31 of the year following the year the offering terminates. Redwood Mortgage at its option may prepay all or any part of the Formation Loan. Redwood Mortgage intends to repay the Formation Loan principally from loan brokerage commissions earned on Mortgage Investments and other fees paid by the Partnership. Investor Suitability Standards. Investment in the Partnership involves some degree of risk. The Partnership has established a minimum suitability standard for an investor contemplating investing in Units. This minimum suitability standard requires that an investor have either: (i) a net worth (exclusive of home, furnishings and automobiles) of at least $30,000 plus an annual gross income of at least $30,000; or (ii) irrespective of annual gross income, a net worth of $75,000 (determined with the same exclusions). Alternatively, the standard requires that the investor is purchasing in a fiduciary capacity for a person who (or for an entity which) meets such conditions. (See "INVESTOR SUITABILITY STANDARDS"). Terms of the Offering. Up to 300,000 Units ($30,000,000) of limited partnership interest in the Partnership will be offered in Units of $100 each. The Units are being offered by selected registered broker dealers who are members of the National Association of Securities Dealers, Inc. (the "Participating Broker Dealers") on a "best efforts" basis, which means that no one is guaranteeing that any minimum number of Units will be sold (See "PLAN OF DISTRIBUTION"). As the Partnership has commenced operations, no escrow will be established and all proceeds from sale of Units will be immediately available to the Partnership. A minimum investment of 20 Units ($2,000 by each investor) is required (See "INVESTOR SUITABILITY STANDARDS"). The Limited Partners shall receive a guaranteed payment from the Earnings of the Partnership during the Guaranteed Payment Period. The guaranteed payment period is the period commencing on the day an investor is admitted to the Partnership and ending three (3) months after the offering terminates, which will be no later than two (2) years from the effective date of this Prospectus. The guaranteed payment shall not be made over the life of the Partnership. The guaranteed payment, calculated on a monthly basis, shall be equal to the greater of (i) the Partnership's Earnings, which equals all revenues earned by the Partnership less all expenses incurred by the Partnership; or (ii) the interest rate established by the Monthly Weighted Average Cost of Funds for the 11th District Savings Institutions, as announced by the Federal Home Loan Bank of San Francisco during the last week of the preceding month, plus two points, up to a maximum interest rate of twelve percent (12%). The Weighted Average Cost of Funds is derived from interest paid on savings accounts, Federal Home Loan Bank advances, and other borrowed money adjusted for variation in the number of days in each month. The adjustment factors are 1.086 for February, 1.014 for the 30 day months and 0.981 for 31 day months. As of the date of this Prospectus, the Monthly Weighed Average Cost of Funds for the 11th District as announced August 30, 1996, for the period ended July 30, 1996 and in effect until September 30, 1996 is 4.819%. To the extent the payment to be paid is in excess of the Partnership's Earnings, the General Partners shall contribute sufficient capital to the Partnership so that the guaranteed payment can be made (See "RISK FACTORS - - Guaranteed Payment for Offering Period"). Since the offering period may be for a period of one year, with one (1) additional one year periods, or such shorter period as when all the Units are sold, there is uncertainty regarding the exact length of the guaranteed payment. Estimated Use of Proceeds. The Partnership will use the proceeds from the sale of its Units to make Mortgage Investments and pay expenses relating to the organization and operation of the Partnership. Initially, upon the formation of the Partnership, approximately 86.7% of each dollar invested will be available for investment in Mortgage Investments, if 300,000 Units ($30,000,000) are sold. If the offering is not fully funded the amount available for investment will be less. As Redwood Mortgage repays the Formation Loan, approximately ninety-seven percent (97%), if 300,000 Units ($30,000,000) are sold, will be available for investment in Mortgage Investments. However, because of the time value of money, the amount of proceeds available for Mortgage Investments (ninety-seven percent 97%) if 300,000 Units ($30,000,000) are sold) upon repayment of the Formation Loan, are not indicative of the actual amount of proceeds that will be available for investment over the life of the Partnership. Additionally, as the Formation Loan is unsecured, there can be no assurance, other than the fiduciary obligations of the General Partners, that the Formation Loan will be repaid on a timely basis, if ever. To date, the average size of the Mortgage Investments is approximately $50,000 to $250,000 on single family homes and $300,000 to $750,000 on commercial property. The General Partners anticipate that the average size of the Mortgage Investments will continue to remain approximately the same. No Mortgage Investments, whether residential or commercial, shall exceed the greater of $50,000 or ten percent (10%) of the Partnership's assets at the time the Mortgage Investment is made. The foregoing amounts are based upon historical experience and are subject to change. (See "ESTIMATED USE OF PROCEEDS" and "INVESTMENT OBJECTIVES AND CRITERIA"). Compensation of the General Partners and Affiliates. The General Partners and their Affiliates have received and will continue to receive substantial compensation in connection with the Offering and the investment and management of the Partnership's assets which is not the result of arms length negotiations (See "COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES"). The amount of compensation to be paid to the General Partners and their Affiliates, as set forth below, are estimates and actual amounts paid may vary. Except as noted, there is no limit on the dollar amount of compensation and fees to be paid to the General Partners and their Affiliates. The most significant items of compensation assuming the Maximum Offering is raised, are as follows: In connection with the selection and arrangement of the Mortgage Investments, Redwood Mortgage will receive Loan Brokerage Commissions which amounts are negotiated with prospective borrowers on a case by case basis. Based upon the historical experience of the General Partners, it is estimated that such commissions will be approximately three percent (3%) to six percent (6%) of the principal amount of each Mortgage Investment made during that year (approximately $285,000 per year). Redwood Mortgage will receive processing and escrow fees for services in connection with notary, document preparation, credit investigation and escrow fees in an amount equal to the fees customarily charged by Redwood Mortgage for comparable services in the geographical area where the property securing the Mortgage Investments are located, which amounts are paid by the borrower and estimated to be approximately $19,200 per year. Redwood Mortgage is entitled receive a monthly servicing fee of up to one-eighth of one percent (.125%) or one and one-half percent (1and1/2%) per year of the total unpaid principal balance of each Mortgage Investment, except for the Formation Loan, serviced in connection with their collection efforts. However, Redwood Mortgage has elected at this time only to receive Monthly Servicing Fees equal to one percent (1%) per year estimated to be approximately $310,000 per year. The General Partners will receive a monthly fee for managing the Partnership's Loan portfolio and general business operations in an amount up to 1/32 of one percent (.03125%) of the "net asset value" of the Partnership which equals the Partnership's assets less its liabilities, estimated to be approximately $119,000 per year. The General Partners will receive one percent (1%) of the Cash Available for Distribution, estimated to be approximately $28,000 per year. There are a number of other, lesser items of compensation and expense reimbursements that the General Partners and their Affiliates may receive during the operation of the Partnership, including reimbursement of the actual costs to General Partners or their Affiliates of goods and materials, provided such reimbursement will be lesser of (i) the actual costs to the General Partners or their Affiliates of providing such services; or (ii) ninety percent (90%) of the amount the Partnership would be required to pay to non-affiliated persons rendering similar services in the same or comparable geographical location (as determined by the General Partners based on an analysis of the costs incurred by similar lenders, data collected from trade association meetings, relevant periodicals and conversations with other professionals in the industry), a reconveyance fee to be paid to Gymno Corporation in an amount equal to approximately $65 per deed of trust, and an assumption fee and/or extension fee all payable by the borrower as a percentage of the Loan balance, which amounts are not determinable, and any interest earned, if any, between the date of deposit of the borrowers's funds into Redwood Mortgage's trust account and the date of payment of such funds by Redwood Mortgage, which amount is not determinable at this time. The following table summarizes compensation and reimbursements paid to the General Partners for the year ended December 31, 1995, and the period of January 1, 1996 to June 30, 1996 showing approximate actual amounts and the maximum allowable amounts for management and servicing fees: Year Ended Period End December 31, 1995 January 1, 1996 to June 30, 1996
Amount Amount Form Actual Allowable Actual for Year - ----------------------------------------------------------------------------------------------------------------------------------- PAID BY PARTNERSHIP Servcing Fee ........................................... $ 85,457 $128,186 $ 67,389 $101,084 Management Fee ......................................... $ 11,587 $ 34,773 $ 7,760 $ 23,280 Reimbursement of Operating Expenses .................... $ 22,769 $ 22,769 $ 17,647 $ 17,647 1% interest in profits, losses and ..................... $ 8,368 $ 8,368 $ 5,606 $ 5,606 distributions PAID BY BORROWERS Loan Brokerage Fees .................................... $265,890 $265,890 $236,435 $236,435 Processing and Servicing Fees .......................... $ 7,957 $ 7,957 $ 6,950 $ 6,950 _______________________ (footnotes to table) (1) Redwood Mortgage is entitled to receive a monthly servicing fee of one-eighth of one percent (.125%) or 1-1/2% per year of the total unpaid principal balance of each loan, except for the Formation Loan. However, Redwood Mortgage elected only to receive Monthly Servicing Fees equal to one percent (1%) per year. (2) The General Partners are entitled to receive a monthly fee for managing the Partnership's Mortgage Investment Portfolio in an amount up to 1/32 of one percent (1%) (.03125%) or 3/8 of one percent (1%) per year of the "net asset value" of the Partnership which equals the Partnership's assets less its liabilities. However, the General Partners elected only to receive Asset Management Fees in an amount equal to 1/8 of one percent (1%) per year. (3) Although Redwood Mortgage can receive loan brokerage fees of up to six percent (6%) or higher, if such fees could have been negotiated with borrowes, the figures reflect actual loan brokerage fees charged on the Mortgage Investments.. Conflicts of Interest.
The Partnership is subject to various conflicts of interest arising out of its relationships with the General Partners and their Affiliates including conflicts related to the arrangements pursuant to which the General Partners will be compensated by the Partnership. The conflicts include:` The General Partners and their Affiliates serve as general partners of other limited partnerships and accordingly have legal and financial obligations with respect to those partnerships which are similar to their obligations with respect to the Partnership. As a result of their possible future interests in other partnerships and other business activities, the General Partners and their Affiliates will have conflicts of interest in allocating their time between the Partnership and other activities in which they are involved. The amount of the loan brokerage commission payable to Affiliates of the General Partners will effect the overall rate of return to the Limited Partners. The terms of the Formation Loan are not the result of arms-length negotiations and accordingly, in the event of default, a conflict of interest would arise on the General Partners part in connection with the enforcement of the Formation Loan and continued payment of other fees and compensation to Redwood Mortgage, including, but not limited to, the Loan Servicing Fee and the Loan Brokerage Fee. In the event the Partnership becomes the owner of real property by reason of foreclosure, conflicts of interest could arise in connection with the General Partners sale of the Property by their Affiliates. The professionals retained by the General Partners do not represent the Limited Partners. Fiduciary Responsibility of the General Partners. The General Partners are accountable to the Partnership as fiduciaries, and consequently are under a fiduciary duty to exercise good faith and integrity in conducting Partnership affairs and to conduct such affairs in the best interest of the Partnership, subject to certain limitations set forth in the Partnership Agreement. Prior Performance Summary. The Partnership commenced operations in April, 1993. The General Partners and their Affiliates have also sponsored eight prior partnerships with investment objectives similar to the Partnership. The General Partners and their Affiliates have been engaged in mortgage lending in the San Francisco Bay Area since 1977 (See "MANAGEMENT" and "PRIOR PERFORMANCE SUMMARY"). For a description of operations of the Partnership and prior programs of the General Partners and their Affiliates, see "PRIOR PERFORMANCE SUMMARY." Management. The General Partners are responsible for the management of the proceeds of the Offering and the investments of the Partnership. Services performed by the General Partners include, but are limited to: implementation of the Partnership investment policies; identification, selection and extension of Mortgage Investments, preparation and review of budgets, cash flow and taxable income or loss projections and working capital requirements; periodic physical inspections and market surveys, supervision and review of Partnership state and federal tax returns; and supervision and review of professionals employed by the Partnership in connection with any of the foregoing, including attorneys and accountants. Investment Objectives and Criteria. The Partnership has and intends to continue to make and seek Mortgage Investments with the objectives of: (1) yielding a high rate of return from mortgage lending, after the payment of certain fees and expenses to the General Partners and their Affiliates, which Limited Partners may elect to (a) receive as monthly, quarterly or annual cash distributions ("Periodic Cash Distributions") or (b) receive additional Units the proceeds of which will be applied to Partnership activities; and (2) preserving and protecting the Partnership's capital. It is anticipated that first distributions of cash or additional Units, depending upon the Investors elections, shall be made 60-90 days from the time the Investor is accepted as a limited partner. (See "PRIOR PERFORMANCE SUMMARY"). The Partnership is engaged in the business of making loans to the general public secured by real property deeds of trust (the "Mortgage Investments"). Such real property will include single family residences, multi-unit residential property, commercial property and unimproved land. As of June 30, 1996, the Partnership had made Mortgage Investments in the aggregate principal balance of $24,206,030 of which $7,722,200 is secured by single family residence, $4,482,280 is secured by multi-unit residential property, $11,251,550 is secured by commercial property and $750,000 by unimproved land. As of June 30, 1996, the Partnership had outstanding Mortgage Investments in the principal amount of $14,196,953 of which $4,091,433 is secured by single family residences, $2,389,966 is secured by multi-unit residential property, $7,415,554 is secured by commercial property and $300,000 by unimproved land. It is anticipated that the Partnership's deeds of trust will not generally be junior to more than two other encumbrances (a first, and in some instances, a second or third deed of trust) on the real property securing the Mortgage Investments. As of June 30, 1996 the Partnership had made in the aggregate eighty-eight (88) loans, including forty-four (44) secured by first deeds of trust, forty one (41) secured by second deeds of trust and three (3) secured by third deeds of trust. It is anticipated that such real property securing the Mortgage Investments will be located primarily in Northern California and that approximately eighty percent (80%) of the Partnership's loans will be secured by Deeds of Trust on properties located in six counties surrounding the San Francisco Bay. The Partnership may make construction loans up to a maximum of ten percent (10%) of the Partnership's Mortgage Investment portfolio. The average size of the Mortgage Investments has and is anticipated to continue to be approximately $50,000 to $250,000 on single family homes and approximately $300,000 to $750,000 on commercial loans. However, the actual size of Mortgage Investments will vary depending on a number of factors including among other things, the general economic conditions, the specific property securing the investment, the credit worthiness of the borrower, and the size of the Partnership's portfolio. However, no Mortgage Investments, whether residential or commercial, shall exceed the greater of $50,000 or ten percent (10%) of the Partnership's assets when the investment is made. Most Mortgage Investments will generally be for periods of between one and ten years. The amount of each Mortgage Investment by the Partnership combined with any outstanding debt secured by a senior deed of trust on the security property will generally not exceed a specified percentage of the appraised value of the security property according to the following table: Type of Security Property Loan-to-Value Ratio Residential 80% Commercial Property 70% Unimproved Property 50% In certain circumstances, based upon, among other factors, a positive change in the credit criteria of the borrower, previous experience with borrower, the availability of additional collateral, an expected inheritance an/or an increase in the credit rating of the borrower the above loan-to-value ratios may be increased. However, in no event shall the loan-to-value ratio on construction loans exceed eighty percent (80%) of the independently appraised completed value of the property. The target loan-to-value for Partnership Mortgage Investments as a whole is approximately seventy percent (70%). (See "INVESTMENT OBJECTIVES AND CRITERIA" and "PRIOR PERFORMANCE"). Certain Legal Aspects of Mortgage Investments. Each of the Partnership's investments (except the Formation Loan to Redwood Mortgage) will be secured by a deed of trust, the most commonly used real property security device in California. The parties to a deed of trust are: the debtor-trustor, a third party guarantor called the "trustee," the lender creditor called the "beneficiary." The trustor grants the property, irrevocably until the debt is paid, "in trust, with power of sale" to the trustee to secure payment of the obligation. The trustee has the authority granted by law, by the express provisions of the deed of trust and by the directors of the beneficiary. The Partnership will be a beneficiary under all deeds of trust securing the Mortgage Investments. Management's Discussions and Analysis of Financial Condition of the Partnership. The Partnership commenced operations in April, 1993. The proceeds received from this public offering of Units will enable the Partnership to continue to carry on its activities and further expand and diversify its portfolio. The Partnership intends to utilize the net proceeds of this Offering principally to make Mortgage Investments. To the extent that the net proceeds received by the Partnership are less than the maximum amount of the offering, the Partnership will have less diversification of investments. Although the Partnership has an existing portfolio of over $15,000,000 in Mortgage Investments, as of the date of this Prospectus, the Partnership has no outstanding commitments to make or acquire any investment with the proceeds of this Offering. Business. The Partnership, formed on May 27, 1992, is engaged in the business as a mortgage lender, for the primary purpose of making mortgaged investments secured primarily by first and second deeds of trust on California real estate ("Mortgage Investments"). Approximately ninety-eight percent (98%) of the Partnership's Mortgage Investments are secured by first and second deeds of trust. The Partnership commenced operations in April, 1993. The Partnership's address is 650 El Camino Real, Suite G, Redwood City, California 94063 and its telephone number is (415) 365-5341. Mortgage Investments are arranged and serviced by Redwood Mortgage, an affiliate of the General Partners. As of June 30, 1996 approximately forty-two percent (42%) of the Partnership's Mortgage Investments are secured by first deeds of trust ($5,917,837), fifty-six percent (56%) are secured by second deeds of trust ($7,979,116) and two percent (2%) by third deeds of trust ($300,000). The aggregate principal balance of these Mortgage Investments total $14,196,953. Of these loans approximately eighty percent (80%) are secured by properties located in the San Francisco Bay Area. As of June 30, 1996, of the Partnership's Mortgage Investment portfolio twenty-nine percent (29%) is secured by single family residences, fifty-two percent (52%) by commercial properties, seventeen percent (17%) by multi-unit properties and two percent (2%) by unimproved property. No Mortgage Investment may exceed the greater of $50,000 or ten percent (10%) of the Partnership's total assets at the time the investment is made. Federal Income Tax Consequences. The section of this Prospectus entitled "FEDERAL INCOME TAX CONSEQUENCES" contains a discussion of the most significant federal income tax issues pertinent to the Partnership. It also contains a description of Wilson, Ryan & Campilongo's, counsel to the Partnership legal opinion as to federal income tax issues which are expected to be of relevance to U.S. taxpayers who are individuals. Other tax issues of relevance to other taxpayers should be reviewed carefully by such investors to determine special tax consequences of an investment prior to their subscription. In general, the material federal income tax issues, as to which the Partnership has received an opinion from its tax counsel, Wilson, Ryan & Campilongo are: (i) the tax status of the Partnership; (ii) the likelihood that the Partnership will not be treated as a publicly traded partnership under the publicly traded partnership rules; (iii) the likelihood that income of the Partnership will not constitute, or will not constitute any significant amount of unrelated business taxable income to investing qualified pension, profit-sharing, and stock bonus plans and IRAs; (iv) the likelihood that allocations of tax items from the Partnership to a Limited Partner will be respected; and (v) whether, and to what extent, net income of the Partnership will constitute portfolio income. Subject to the conditions described in more detail in "FEDERAL INCOME TAX CONSEQUENCES Opinion of Counsel," the Partnership has received a favorable opinion from its tax counsel, Wilson, Ryan & Campilongo on each of these matters. ERISA Considerations. The Partnership's objectives and policies are designed to make an investment in Units appropriate for Tax-Exempt Investors. The Partnership and its policies have been structured to meet the standards for: (i) excluding the assets of the Partnership from the assets of the Limited Partners which are employee benefit plans for purposes of the Employee Retirement Income Security Act of 1974 ("ERISA") in accordance with the exemptions contained in regulations of the Department of Labor; and (ii) minimizing any allocation of "unrelated business taxable income" to tax-exempt entities. However, see "RISK FACTORS-Investment by Tax-Exempt Investors", "FEDERAL INCOME TAX CONSEQUENCES Investment by Tax-Exempt Investors" and "ERISA CONSIDERATIONS" herein. Description of Units. The Units will represent a Limited Partnership Interest in the Partnership. Units will be evidenced by a certificate of Limited Partnership Interest. Each Unit will represent a Limited Partnership Interest of $100. The Limited Partners representing a majority of the outstanding Limited Partnership Interests, may without the concurrence of the General Partners, vote to take the certain actions including terminating the Partnership, amending the Partnership Agreement, subject to certain limitations, and remove or replace one or all of the General Partners. (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT"). Summary of Limited Partnership Agreement. The Partnership's limited partnership agreement (the "Partnership Agreement") governs the relationship between the Limited Partners and the General Partners. Please refer to the "SUMMARY OF LIMITED PARTNERSHIP AGREEMENT" section for more detailed information concerning the terms of the Partnership Agreement, including: Meetings and Voting Rights. Limited Partners holding a majority of Units may vote to: (i) amend or terminate contracts for services or goods between the Partnership and the General Partners; (ii) remove the General Partners and elect substitute General Partners; (iii) approve or disapprove the sale of all or substantially all of the Partnership's assets; (iv) amend the Partnership Agreement (subject to the limitation that no amendment shall be permitted if the effect of such amendment would be to increase the duties or liabilities of any Partner or materially change any Partner's interest in the Partnership without the consent of such Partner); or (v) dissolve the Partnership. Limited Partners who do not vote with the majority in interest of the Limited Partners nonetheless will be bound by the majority vote. There are no regularly scheduled meetings of the Limited Partners. The General Partners shall have the right to increase the size of this Offering or conduct an additional Offering of securities without obtaining the consent of the Limited Partners. The General Partners or Limited Partners representing ten percent (10%) of the outstanding Limited Partnership Interest may call a meeting of the Partnership. The General Partners have the power, subject to the provisions of the Partnership Agreement, to change the Partnership's investment objectives. Restrictions on Transferability of Units. The Units will be transferable, but only with the consent of the General Partners, who may withhold their consent to any transfer that could cause or contribute to the characterization of the Partnership as a "publicly traded partnership" (in general, a partnership with frequent transfers of its Units), cause or contribute to the Partnership's violation of federal and state securities laws, otherwise adversely affect the Partnership's tax status, including cause a termination of the Partnership for federal or California tax purposes, or if the assignee and/or assignor failed to comply with certain procedural requirements of transfer, including the failure of the assignee to accept, adopt and approve in writing all the terms and conditions of the Partnership Agreement. It is not anticipated that a public market for the Units will develop. Indemnification. The Partnership will indemnify the General Partners and their Affiliates who perform services for the Partnership against all losses and expenses incurred by them as a result of actions the General Partners determined in good faith were in the best interests of the Partnership, except for any liability arising out of misconduct, negligence, or breach of fiduciary duty to the Limited Partners of the Partnership. Fiscal Year and Termination. The Partnership's fiscal year is the calendar year. The Partnership Agreement provides that the Partnership will terminate on December 31, 2032, unless sooner terminated pursuant to any provision of the Partnership Agreement. All statements made here or elsewhere in this Prospectus are qualified in their entirety by reference to the copy of the form of the Partnership Agreement attached hereto as Exhibit A. Transfer of Units. There are substantial restrictions upon transferability of Units and accordingly an investment in the Partnership is illiquid (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT - Restrictions on Transfer" and "TRANSFER OF UNITS"). Limited Partners will have no right to withdraw or obtain a return of any capital contributions (or reinvested earnings) for a period of one year from the date of purchase of Units. In order to provide a certain degree of liquidity to the Limited Partners after the one-year period, Limited Partners may withdraw all or part of their Capital Accounts from the Partnership in four (4) equal quarterly installments beginning the quarter following the quarter in which the notice of withdrawal was given, provided that such notice was received thirty (30) days prior to the end of the preceding quarter, subject to a ten percent (10%) early withdrawal penalty. The ten percent (10%) penalty is applicable to the amount withdrawn as stated in the Notice of Withdrawal. The entire ten percent (10%) penalty will be deducted, pro rata, from each of the four quarterly installments. Withdrawal after the one-year holding period and before the five-year holding period will be permitted only upon the terms set forth above. Limited Partners will also have the right after five years from the date of purchase of the Units to withdraw from the Partnership on an installment basis, generally over a five year period in twenty (20) equal installments or such longer period of time as the Limited Partner may desire or as may be required, as determined by the General Partners, if there is insufficient cash to make such installment payments. The Partnership will not establish a reserve from which to fund withdrawals, and accordingly the Partnership's capacity to return a Limited Partner's capital account is restricted to the availability of Partnership cash flow. For this purpose, cash flow is considered to be available only after all current Partnership expenses have been paid (including compensation to the General Partners and Affiliates) and adequate provision has been made for the payment of all monthly cash distributions on a pro rata basis which must be paid to Limited Partners who elected to receive distributions upon subscription for Units. No penalty will be imposed if withdrawal is made in twenty (20) installments or such longer period as requested by the Limited Partner or determined by the General Partners. Notwithstanding the five (5) year withdrawal period, the General Partners may liquidate all or a part of a Limited Partner's capital account in four quarterly installments beginning on the quarter following the quarter in which the notice of withdrawal is given, provided that such notice was received thirty (30) days prior to the end of the preceding quarter subject to a ten percent (10%) early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn pursuant to the five (5) year withdrawal period in the Notice of Withdrawal (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT - Withdrawal from Partnership"). Distribution Policies. Upon admission to the Partnership, each Limited Partner will be required to make a one-time, irrevocable election, except as described below, either: (i) to receive monthly, quarterly or annual cash distributions of Earnings ("Periodic Cash Distributions"); or (ii) to receive distributions of Earnings in the form of additional Units. The term "Earnings" means all revenues earned by the Partnership less all expenses incurred by the Partnership. This election, once made is irrevocable for investors who elect to receive Periodic Cash Distributions. However, an investor may change whether such distributions are received on a monthly, quarterly or annual basis. If a Limited Partner initially elected to receive additional Units in lieu of Periodic Cash Distributions, he may, after three (3) years, change his election and receive Periodic Cash Distributions. Earnings from investors who elect to acquire additional Units will be used by the Partnership for making further Mortgage Investments or other proper Partnership purposes. The Earnings from these further Mortgage Investments, will be allocated among all investors, but investors who do not elect to receive Periodic Cash Distributions will receive additional Units. (See "PLAN OF DISTRIBUTION - Election to Receive Periodic Cash Distributions"). All cash flow attributable to principal reductions of Mortgage Investments will be reinvested by the Partnership in Partnership activities by the extension of additional Mortgage Investments until December 31, 2032. By not later than such date, all cash flow attributable to principal reduction will be distributed to the Limited Partners as a return of capital contributions. Upon acceptance into the Partnership, each Partner who acquires his Units through a Participating Broker Dealer will receive a capital account in the Partnership which initially will be equal to the purchase price of the Units. A Partner who acquires a Unit directly from the Partnership in an unsolicited sale will receive a capital account in the Partnership which initially will be equal to the purchase price of Units plus an amount equal to the amount of sales commissions that would otherwise have been payable had the Partner acquired his Unit through a Participating Broker Dealer assuming no Continuing Servicing Fee is paid. Capital accounts can be described simply as the "net equity" of Partners in the Partnership. The capital account of the Limited Partner is, under the applicable tax code provisions and regulations, increased by any other capital contributions of the Limited Partners and net income allocated to the Limited Partners. The capital account balances of the Limited Partners are decreased by the cash distributions made to the Limited Partners and by net losses allocated to the Limited Partners. Those Limited Partners who elect to receive Periodic Cash Distributions will have their capital account decrease while those who elect to receive additional Units will not have their capital accounts decreased. Accordingly, over time, Limited Partners who elect to reinvest their Earnings by electing to receive additional Units will see their capital accounts increase relative to those Limited Partners who elect to receive Periodic Cash Distributions. Accordingly, upon liquidation a Limited Partner who elected to receive additional Units in lieu of Periodic Cash Distributions will receive a larger distribution at that time than a Limited Partner electing to receive Periodic Cash Distributions. Partnership Net Income and Net Loss will be allocated one percent (1%) to the General Partners and ninety-nine percent (99%) to the Limited Partners in accordance with their respective capital accounts provided however that taxable loss will not be allocated to Limited Partners in excess of their positive capital accounts. The term "Net Income or Net Loss" means for each fiscal year or any other period, an amount equal to the Partnership taxable income or loss for such fiscal year or other given period, determined in accordance with the applicable sections of the Internal Revenue Code. While unlikely, a taxable loss could occur for example in the event, the Partnership realized a loss of principal of its Mortgage Investments (through foreclosure or otherwise) and that loss was in excess of the income generated by the Partnership for that fiscal period. Cash flow, which means cash funds available from Earnings and from principal repayments received in connection with Mortgage Investments or the sale of a property underlying the Mortgage Investment at a foreclosure sale less the Partnership's costs associated with such sale, attributable to periodic interest payments on loans extended by the Partnership will be allocated to the Limited Partners and to the General Partners in accordance with their interest in Net Income and Net Loss. As among Limited Partners, cash flow will be allocated pro rata in accordance with their capital accounts. Prospective investors should note that, under the Partnership Agreement and the policies of the Partnership, cash distributions are not expected to be made unless cash flow from operations sufficient therefor has been received. Reports to Limited Partners. With ninety (90) days after the end of each fiscal year of the Partnership, the General Partners will deliver to each Limited Partner such information as is necessary for the preparation of such Limited Partner of his federal income tax return, and state income or other tax returns. Within 120 days after the end of each Partnership fiscal year, the General Partners will deliver to each Limited Partner and annual report which includes audited financial statements of the Partnership prepared in accordance with generally accepted accounting principals, and which contains a reconciliation of amounts shown therein with amounts shown on the method of accounting used for tax reporting purposes. Plan of Distribution. The Partnership is offering through qualified broker dealers on a best efforts basis, a maximum of 300,000 Units ($30,000,000) of Limited Partnership Interest at $100 per Unit. The minimum subscription is twenty (20) Units ($2,000). Participating Broker Dealers may receive commissions under one of the two following options: (i) at the rate of either five percent (5%) or nine percent (9%) (depending upon the investor's election to receive cash distributions or to reinvest Earnings in the Partnership) of the gross proceeds on their sales; or (ii) at the rate of four percent (4%) or seven percent (7%) (depending upon the investor's election to receive cash distributions or to reinvest Earnings in the Partnership) of the gross proceeds on sales together with the Continuing Servicing Fee. Although the General Partners may purchase Units (less applicable sales commissions), the General Partners do not anticipate that such purchases will be made by them or their affiliates. In the event the Partnership receives any unsolicited order directly from an investor who did not utilize the services of a Participating Broker Dealer, Redwood Mortgage will pay to the Partnership utilizing the Formation Loan an amount equal to the sales commissions otherwise attributable to a sale of a Unit through a Participating Broker Dealer assuming no Continuing Servicing Fee is paid. The Partnership will in turn credit such amounts received by Redwood Mortgage to the account of the Investor who placed the unsolicited order. Supplemental Sales Material. Sales material in addition to this Prospectus which may be used in connection with this offering include a sales brochure which will highlight and simplify certain information contained herein. If additional sales material is prepared for use in connection with the offering, use of such material will be conditioned on filing with and, if required, clearing by appropriate regulatory authorities. Legal Opinion. Legal matters in connection with the Units offered hereby will be passed upon for the Partnership by Wilson, Ryan & Campilongo, 115 Sansome Street, Suite 400, San Francisco, California 94104, counsel for the Partnership and the General Partners. Such counsel has not represented the Limited Partners in connection with the Units offered hereby. Experts. The balance sheet of the Partnership at December 31, 1995 and balance sheet at June 30, 1995 and 1996 of Gymno Corporation, a General Partner, included in this Prospectus have been examined by Parodi & Crooper, independent certified public accountants, as set forth in their report thereon appearing elsewhere herein and have been included herein in reliance on such reports and the authority of such firm as experts in accounting and auditing. Additional Information. The Partnership has filed with the Securities and Exchange Commission, Washington, D.C. 20549, a Registration Statement under the Securities Act of 1933, as amended, with respect to the Units offered pursuant to this Prospectus. For further information, reference is made to the Registration Statement and to the Exhibits thereto which are available for inspection at no fee in the Office of the Commission in Washington, D.C. 20549. Tabular Information Concerning Prior Programs Appendix I contains prior performance and investment information regarding this program and for the General Partners' previous programs. Tables I through III of Appendix I contain unaudited information relating to the prior programs and their experience in raising and investing funds, compensation of the General Partners and their Affiliates and operating results of prior programs. Table V of Appendix I contains unaudited information relating to the prior programs' payment of mortgage loans. Table IV is not included because none of the Partnerships has completed its operations or disposed of all of its loans. Glossary. This Prospectus includes simplified terms and definitions to make the Prospectus easier to understand. These simplified terms and conditions do not include all of the details of the terms, however, and investors therefore should review the "GLOSSARY" section for a more complete understanding. Subscription Procedures. In order to subscribe for Units, each Investor should cause the following to be delivered to the Participating Broker Dealers or to the General Partner in the case of unsolicited sales: 1. One executed copy of the Subscription Agreement, which incorporates a power of attorney to the General Partners. 2. A check in the amount of $100 per Unit subscribed for. All checks should be made payable to "Redwood Mortgage Investors VIII," and should be delivered to the Partnership's offices. The General Partners have the right to accept subscriptions for fractional units at any time. The subscription documents referred to above are contained in the Investor Subscription Documents provided to prospective investors under separate cover herewith. RISK FACTORS The purchase of the Units offered hereby involves a high degree of risk and is suitable only for persons with the financial capability of making and holding long-term investments not readily reducible to cash. Prospective investors must, therefore, have adequate means of providing for their current needs and personal contingencies. Prospective investors should also consider the following factors: REAL ESTATE AND OPERATING RISKS 1. Unspecified Investments Increase Uncertainty To Investors And Investors Must Rely On Judgment Of General Partners In Investing Proceeds Of The Offering. The Partnership's current Mortgage Investment portfolio are summarized in the Sections of the Prospectus entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP" and "BUSINESS." However the General Partners have not yet identified any specific investments with respect to the proceeds from this Offering and thus, this Offering presents increased uncertainties to investors. The Prospective Investors must rely entirely on the judgment of the General Partners in investing the proceeds of this Offering and will be unable to evaluate, in advance, the selection of borrowers, and the terms of the Mortgage Investments which will be made. Additionally, investors have no information to assist them in their investment decision as to the identification or location of, or as to other relevant economic and financial data pertaining to, the assets which will serve as collateral for Mortgage Investments. Thus, no assurance can be given that the Partnership will be successful in obtaining suitable investments or that, if investments are made, the objectives of the Partnership will be realized. 2. Loan Defaults And Foreclosures By Borrowers May Adversely Affect Partnership. The Partnership is in the business of lending money and, as such, takes the risk of defaults by borrowers. Many Mortgage Investments will be interest only or partially amortizing Mortgage Investments providing for relatively small monthly payments with a large "balloon" payment of principal due at the end of the term. Many borrowers are unable to repay such loans out of their own funds and are compelled to refinance or sell their property. Fluctuations in interest rates and the unavailability of mortgage funds could adversely affect the ability of borrowers to refinance their loans at maturity or sell their property. If the borrower defaults, the Partnership may be forced to purchase the property at a foreclosure sale. If the Partnership cannot quickly sell or refinance such property, and the property does not produce any significant income, the Partnership's profitability will be adversely affected. As of June 30, 1996, the Partnership's Mortgage Investment portfolio included two (2) loans delinquent over 90 days representing 2.49% of the total portfolio. These same two loans are in foreclosure. 3. Risks Associated With Reliance On Appraisals Which May Not Be Accurate Or Which May Be Affected By Subsequent Events. Since the Partnership is an "asset" rather than a "credit" lender, the Partnership is relying primarily on the real property securing the Mortgage Investments to protect its investment. Thus, the Partnership will rely on appraisals, prepared by non-affiliated third parties, to determine the fair market value of real property used to secure Mortgage Investments made by the Partnership. No assurance can be given that such appraisals will, in any or all cases, be accurate. Moreover, since an appraisal fixes the value of real property at a given point in time, subsequent events could adversely affect the value of real property used to secure a loan. Such subsequent events may include general or local economic conditions, neighborhood values, interest rates and new construction. Moreover, subsequent changes in applicable governmental laws and regulations may have the effect of severely limiting the permitted uses of the property, thereby drastically reducing its value. Accordingly, if an appraisal is not accurate or subsequent events adversely effect the value of the property, the Mortgage Investment would not be as secure as anticipated, and, in the event of foreclosure, the Partnership may not be able to recover its entire investment. 4. Risks Associated With Junior Encumbrances And Construction Loans. As of June 30, 1996, the Partnership's outstanding portfolio included Mortgage Investments of which forty-two percent (42%) were secured by first deeds by trust ($5,917,837), fifty-six percent (56%) by second deeds of trust ($7,979,116) and two percent (2%) by third deeds of trust ($300,000). In the event of foreclosure under a junior deed of trust the debt secured by a senior deed(s) of trust must be satisfied before any proceeds from the subsequent sale of the property can be applied toward the debt owed to the Partnership. Furthermore, to protect its junior security interest, the Partnership may be required to make substantial cash outlays for such items as loan payments to senior lienholders to prevent their foreclosure, property taxes, insurance, repairs, maintenance and any other expenses associated with the property. The Partnership may make construction loans up to a maximum of ten percent (10%) of the Partnership's Mortgage Investment portfolio. As of June 30, 1996 Construction loans accounted for nine percent (9%) of the Company's portfolio. Investing in construction loans will subject the Partnership to greater risk than loans related to properties with operating histories. Where the Partnership forecloses on property under construction, construction will generally have to be completed before the property can begin to generate an income stream. The Partnership may not have adequate cash reserves on hand with respect to junior-encumbrances and/or construction loans at all times to protect its security in which event the Partnership could suffer a loss of its investment in such Mortgage Investment (See "CERTAIN LEGAL ASPECTS OF MORTGAGE INVESTMENTS"). 5. Bankruptcy And Limitations On Personal Judgments May Prevent Recovery Of Loan Thereby Resulting In A Loss To The Partnership. The recovery of sums advanced by the Partnership in making Mortgage Investments and protecting its security may also be delayed or impaired by the operation of the federal bankruptcy laws or by irregularities in the manner in which the loan was made. Any borrower has the ability to delay a foreclosure sale by the Partnership for a period ranging from several months to several years or more by filing a petition in bankruptcy, which automatically stays any actions to enforce the terms of the loan. The length of this delay and the costs associated therewith will generally have an adverse impact on the Partnership's profitability. Certain provisions of California law applicable to all real estate loans may prevent the Partnership from obtaining a personal judgment against a borrower if the proceeds from a foreclosure sale were insufficient to pay the Mortgage Investments in full resulting in a loss to the Partnership. (See "CERTAIN LEGAL ASPECTS OF MORTGAGE INVESTMENTS"). As of the effective date of this Prospectus no borrowers are currently in bankruptcy. 6. Risks Associated With Unintended Violations Of The Usury Statute Or Other Statutes. Subject to the exemptions provided by law, interest, including "additional interest" or "reconveyance fees", on Mortgage Investments made by the Partnership will be subject to state usury laws imposing restrictions on the maximum interest charges. Potential penalties for violation of the usury law may generally include restitution of actual usurious interest paid by the borrower, damages in an amount equal to treble interest collected by the lender and unenforceability of the loan. Since Redwood Mortgage, a licensed California real estate broker, will arrange the Partnership's Mortgage Investments, such loans should be exempt from applicable state usury provisions. Under California Law, a loan arranged by a licensed California real estate broker will be exempt from applicable California usury provisions. Nevertheless, there can be no assurance that, in determining the legality of interest rates and other charges by the Partnership, unintended violations of the usury statutes may not occur. In such an event, the Partnership may have insufficient cash to pay any damages thereby adversely effecting the operations of the Partnership and may lose its entire investment. In March 1995, the Federal Reserve Board issued final regulations governing high cost mortgages. A high cost mortgage is any consumer loan secured by the consumer's principal residence if either (i) the annual percentage rate exceeds by more than ten points the yield on Treasury securities having comparable periods of maturity or (ii) the total fees payable by a consumer at or before closing exceeds the greater of eight percent (8%) of the total loan amount of $400. The new regulations primarily focus on additional disclosure with respect to the terms of the loan to the borrower, the timing of such disclosures and the prohibition of certain terms in the loan including balloon payments and negative amortization. The failure to comply with the new regulations even the unintended failure will render the loan rescindable for up to three (3) years and the lender could be held liable for attorney fees, finance charges and fees paid by the borrower and certain other money damages. Although the Partnership anticipates making relatively few Mortgage Investments that would qualify as high cost mortgages, the failure to comply with the new regulations could adversely affect the Partnership. 7. Loan-To-Value Ratio Are Determined By Appraisals Which May Be In Excess Of The Ultimate Purchase Price Of The Underlying Property. The General Partners will determine the principal amount of each loan. Generally, the amount of the loan combined with the outstanding debt secured by a senior deed of trust on the security property will not exceed eighty percent (80%) of the appraised value for residential properties, seventy percent (70%) of the appraised value for commercial property and fifty percent (50%) of the appraised value for unimproved land. Any of the foregoing loan-to-value ratios may be increased if, in the sole discretion of the General Partners, a given loan is supported by credit adequate to justify a higher loan-to-value ratio. To date, there have been no adjustments to the foregoing loan-to-value ratios. The factors to be considered by the General Partners include, but are not limited to, their previous experience with the borrower, the availability of additional collateral, an expected inheritance an/or an increase in the credit rating of the borrower. In addition, such loan-to-value ratios may be increased by ten percent (10%) to the extent mortgage insurance is obtained. The foregoing loan-to-value ratios will not apply to purchase-money financing offered by the Partnership to sell any Partnership real estate acquired through foreclosure or to refinancing of an existing loan in default upon maturity. Notwithstanding the foregoing, in no event will the loan-to-value ratio for construction loans exceed eighty percent (80%) of the independently appraised completed value of the property. The loan-to-value ratios set forth above relate to the appraised value of a property which may be in excess of the ultimate purchase price of the underlying property. No assurance can be given that such appraisals will reflect that actual amount buyers will pay for the property. Further, if the value of the property declines to a value below the amount of the loan, together with all senior loans, the loan could become under-collateralized. This would result in a risk of loss for the Partnership if the borrower defaults on the loan. 8. Use Of Leverage May Reduce The Partnership's Profitability Or Cause Losses Through Liquidation. The Partnership may borrow funds for the purpose of making Mortgage Investments or for any other proper partnership purpose on any terms commercially available and may assign all or a portion of its Mortgage Investment portfolio as security for such loans. The maximum aggregate indebtedness which may be incurred by the Partnership is fifty percent (50%) of the value of the Mortgage Investment portfolio. The Partnership has obtained from a commercial bank a line of credit in the amount of $3,000,000. As of June 30, 1996 the Partnership has borrowed $2,892,000 which represents 20.37% of the outstanding principal balance of the Mortgage Investment portfolio. The General Partners anticipate engaging in such borrowing when the interest rate at which the Partnership can borrow funds is somewhat less than the rate that can be earned by the Partnership on its Mortgage Investments (See "INVESTMENT OBJECTIVES AND CRITERIA - Borrowing"). Interest rate fluctuations may have a particularly adverse effect on the Partnership if it is using such borrowed money to fund Mortgage Investments. Such borrowed money will bear interest at a variable rate, whereas the Partnership may be making fixed rate loans. Therefore, if prevailing interest rates rise, the Partnership's cost of money could exceed the income earned from that money, thus reducing the Partnership's profitability or causing losses through liquidation of Mortgage Investments in order to repay the debt on the borrowed money or default if the Partnership cannot cover the debt on the borrowed money. 9. Fluctuations In Interest Rates May Effect Return On Investment. Recent years have demonstrated that mortgage interest rates are subject to abrupt and substantial fluctuations. The Partnership intends to make a large number of medium to long range term (three to fifteen year) Mortgage Investments, and the purchase of Units is a relatively illiquid investment. If prevailing interest rates rise above the average interest rate being earned by the Partnership's Mortgage Investment portfolio, investors may be unable to quickly liquidate their investment in order to take advantage of higher returns available from other investments. In addition, an increase in interest rates accompanied by tight supply of mortgage funds may cause refinancing by borrowers with balloon payments to be difficult or impossible, regardless of the market value of the collateral at the time such balloon payments are due. In such event, the property may be foreclosed upon (See above, "Loan Defaults and Foreclosures"). 10. Marshalling Of Assets Could Delay Or Reduce Recovery Of Mortgage Investments. As security for a single Mortgage Investment, the Partnership may require a borrower to execute deeds of trust on other properties owned by the borrower in addition to the property the borrower is purchasing or refinancing in order to further secure the borrower's obligation to the Partnership. In the event of a default by the borrower, the Partnership may be required to "marshal" the assets of the borrower, if there are lienholders junior to the Partnership. Marshalling is an equitable doctrine used to protect a junior lienholder with a security interest in a single property from being "squeezed out" by a senior lienholder, such as the Partnership, with security interest not only in the property, but in one or more additional properties. Accordingly, if another creditor of the borrower forced the Partnership to marshall the borrower's assets, foreclosure, and eventual recovery of the Mortgage Investment, could be delayed or reduced, and the Partnership's costs associated therewith could be increased. 11. Potential Liability For Toxic Or Hazardous Substances If Partnership Is Considered Owner Of Real Property. If the Partnership takes an equity interest in, management control of, or forecloses on any of the Mortgage Investments, it may be considered the owner of the real property securing such Mortgage Investments. If foreclosure on any loan becomes necessary, and the Partnership acquires record ownership of the property through foreclosure sale to protect its investment, the Partnership will conduct its management of the property primarily to protect its security interest in the property. The Partnership will not participate in the management of any facility on the property in order to minimize the potential for liability for cleanup of any environmental contamination under applicable federal, state, or local laws. There can be no assurance that the Partnership would not incur full recourse liability for the entire cost of any such removal and cleanup, or that the cost of such removal and cleanup would not exceed the value of the of the property. Full recourse liability means that property of the Partnership in addition to the contaminated property could be sold in order to pay the costs of cleanup in excess of the value of the property at which such contamination occurred. In addition, the Partnership could incur liability to tenants and other users of the affected property, or users of neighboring property, including liability for consequential damages. Consequential damages are damages which are a consequence of the contamination but are not costs required to clean up the contamination, such as lost profits of a business. The Partnership would also be exposed to risk of lost revenues during any cleanup, and to the risk of lower lease rates or decreased occupancy if the existence of such substances or sources on the property become known. If the Partnership fails to remove the substances or sources and clean up the property, it is possible that federal, state, or local environmental agencies could perform such removal and cleanup, and impose and subsequently foreclose Liens on the property for the cost thereof. A "Lien" is a charge against the property of which the holder may cause the property to be sold and use the proceeds in satisfaction of the Lien. The Partnership may find it difficult or impossible to sell the property prior to or following any such cleanup. If such substances are discovered after the Partnership sells the property, the Partnership could be liable to the purchaser thereof if the General Partners knew or had reason to know that such substances or sources existed. In such case, the Partnership could also be subject to the costs described above. If toxic or hazardous substances are present on real property, the owner may be responsible for the costs of removal or treatment of the substance. The owner may also incur liability to users of the property or users of neighboring property for bodily injury arising from exposure to such substances. If the Partnership is required to incur such costs or satisfy such liabilities, this could have a material adverse effect on Partnership profitability. Additionally, if a borrower is required to incur such costs or satisfy such liabilities, this could result in the borrower's inability to repay its loan from the Partnership. If the Partnership anticipates that it may become the owner of property that may be subject to toxic or hazardous clean-up, the General Partners may, in their discretion, seek to transfer or sell the Mortgage Investment to an affiliated or unaffiliated entity. 12. Potential Conflicts And Risks If Partnership Invests In Mortgage Investments With General Partners Or Affiliates. The Partnership may invest in mortgages acquired by the General Partners or Affiliates. The Partnership's portion of the total mortgage loan may be smaller or greater than the portion of the loan made by the General Partners or Affiliates, but will generally be on terms substantially similar to the terms of the Partnership's investment. Such an investment would be made after a determination by the General Partners that the entire loan is in an amount greater than would be suitable for the Partnership to make on its own or that the Partnership will benefit through broader diversification of its Mortgage Investment portfolio. However, investors should be aware that investing with the General Partners or Affiliates could result in a conflict of interest between the Partnership and the General Partners or Affiliates in the event that the borrower defaults on the loan and both the Partnership and the General Partners or Affiliates protect their own interest in the loan and in the underlying security. In order to minimize the conflicts of interest which may arise if the Partnership invests in Mortgage Investments with the General Partners or Affiliates, the Partnership will acquire its interest in the loan on the same terms and conditions as does the General Partners or Affiliates and the terms of the Loan will conform to the investment criteria established by the Partnership for the origination of Mortgage Investments. By investing in a loan on the same terms and conditions as does the General Partners or an Affiliate, the Partnership will be entitled to enforce the same rights as the General Partners or Affiliate in such loan and the General Partners and Affiliate will not have greater rights in the loan than does the Partnership. As a result, in the event of a default by the borrower, any efforts by the General Partners, an Affiliate or the Partnership to enforce the terms of the loan will benefit those persons with interests in the loan based upon their respective ownership interests. (See "CONFLICTS OF INTEREST"). INVESTMENT RISKS 13. No Assurance Of Cash Distributions To Partners. The General Partners and their Affiliates are paid and reimbursed by the Partnership for certain services performed for the Partnership and expenses paid on behalf of the Partnership (See "COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES"). The General Partners may retain other firms to perform other services. The Partnership bears all other expenses incurred in its operations. All of these fees and expenses are deducted from cash funds generated by the operations of the Partnership prior to computing the amount which is available for distribution to the General and Limited Partners. Therefore, the General Partners and Affiliates may benefit as a result of the Partnership's activities, irrespective of any cash distributions to the Limited Partners. The General Partners, in their discretion, may also retain any portion of cash funds generated from operations for working capital purposes of the Partnership. Accordingly, there is no assurance as to when or whether cash will be available for Distributions to the Limited Partners from Cash Available for Distribution. Further, Limited Partners who elect to acquire additional Units in lieu of receiving Periodic Cash Distributions will be entitled to receive a larger portion of the Cash Available for Distribution solely because of their election to acquire additional Units than those Limited Partners who elect to receive monthly, quarterly or annual distributions of Earnings. 14. Partner's Ability To Recover Investment On Dissolution And Termination Will Be Limited. In the event of a dissolution or termination of the Partnership, the proceeds realized from the liquidation of assets, if any, will be distributed to the Partners but only after the satisfaction of claims of creditors. Accordingly, the ability of a Partner to recover all or any portion of his investment under such circumstances will depend on the amount of funds so realized and claims to be satisfied therefrom. 15. Risk Of Losses As A Result Of Losses Not Insurable Or Not Economically Insurable. The Partnership will require comprehensive insurance, including fire and extended coverage, which is customarily obtained for or by a mortgagee or creditor on properties or other assets in which it acquires a security interest (generally, such insurance will be obtained by and at the cost of the Borrower). However, there are certain types of losses (generally of a catastrophic nature, such as civil disturbances and acts of god) which are either uninsurable or not economically insurable. Should such a disaster occur to, or cause the destruction of, any property serving as collateral for a Mortgage Investment, the Partnership could lose both its invested capital and anticipated profits from such investment. In addition, on certain real estate owned by the Partnership as a result of foreclosure, the Partnership may require homeowner's liability insurance. However, insurance may not be available for theft, vandalism, land or mudslides, hazardous substances or earthquakes on all real estate owned and losses may result from destruction or vandalism of the property thereby adversely effecting the profitability of the Partnership. 16. Investors Must Rely On Management For Decisions With Respect To Management Of The Partnership. All decisions with respect to the management of the Partnership will be made exclusively by the General Partners. The success of the Partnership will, to a large extent, depend on the quality of the management of the Partnership, particularly as it relates to lending decisions. Limited Partners have no right or power to take part in the management of the Partnership. Accordingly, no person should purchase any of the Units offered hereby unless he is willing to entrust all aspects of the management of the Partnership to the General Partners and has evaluated the General Partners' capabilities to perform such functions (See "MANAGEMENT"). 17. Investors Will Be Bound By Decision Of Majority Vote. Subject to certain limitations including notice, procedure and the inability to amend the Partnership Agreement if any such amendment would have the effect of increasing the duties or liabilities of any Partner or materially changing any Partner's interest in the Partnership, Limited Partners holding a majority of Units may vote to, among other things, amend or terminate contracts for services and goods between the General Partners and the Partnership, remove the General Partners, dissolve the Partnership, approve or disapprove of all or substantially all of the Partnership's assets and amend the Partnership Agreement. Limited Partners who do not vote with the majority in interest of the Limited Partners nonetheless will be bound by the majority vote. The General Partner shall have the right to increase of this offering or conduct an additional offering of securities without obtaining the consent of the Limited Partners. Because of the limitations on transfer of Units, a Limited Partner may not be able to liquidate his investment in the event he disagrees with the majority vote. (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT" and "TRANSFER OF UNITS"). 18. Net Worth Of The General Partners May Effect Ability Of General Partners To Fulfill Their Obligations To The Partnership. The General Partners have represented that they have an aggregate net worth on a GAAP basis in excess of $1,000,000, a significant portion of which consists of assets which are illiquid. This may be relevant in evaluating the ability of the General Partners to fulfill their obligations and responsibilities to the Partnership (See "MANAGEMENT"). 19. Operating History Of The Partnership. In addition to the Partnership, the General Partners have been the general partners of eight prior partnerships with similar investment objectives. The continued success of the Partnership depends on the extent to which the Partnership will continue to operate in accordance with the expectations and assumptions set forth in this Prospectus (See "PRIOR PERFORMANCE SUMMARY"). 20. Risks Regarding Formation Loan And Repayment Thereof. The Partnership will loan to Redwood Mortgage funds in an amount equal to the sales commissions and all amounts payable in connection with unsolicited orders received by the General Partners (See "PLAN OF DISTRIBUTION - Formation Loan"). The Formation Loan will be unsecured, will not bear interest and will be repaid in annual installments. Commencing with this Offering, Redwood Mortgage shall make annual installments of one-tenth of the principal balance of the Formation Loan as of December 31 of each year. Such payment shall be due and payable by December 31 of the following year. Prior to the termination of the offering, the principal balance of the Formation Loan will increase as additional sales of Units are made each year. The amount of the annual installment payment to be made by Redwood Mortgage, during the offering stage, will be determined by the principal balance of the Formation Loan on December 31 of each year with the first payement due by December 31, 1997 assuming this Offering commences in 1996. Upon completion of this Offering the balance of the Formation Loan will be repaid in ten (10) equal annual installments of principal, without interest, commencing on December 31 of the year following the year the offering terminates. Redwood Mortgage at its option may prepay all or any part of the Formation Loan. Redwood Mortgage intends to repay the Formation Loan principally from loan brokerage commissions earned on Mortgage Investments and other fees paid by the Partnership. Furthermore, the Partnership shall apply a portion of the amount it receives from withdrawing Limited Partners as early withdrawal penalties first to reduce the principal balance of the Formation Loan, which shall have the effect of reducing the amount owed by Redwood Mortgage to the Partnership. Since Redwood Mortgage will use the proceeds from loan brokerage commissions on Mortgage Investments to repay the Formation Loan, if all or any one of the initial General Partners are removed as a General Partner by the vote of a majority of Limited Partners and a successor or additional General Partner(s) is thereafter designated, and if such successor or additional General Partner(s) begins using any other loan brokerage firm for the placement of Mortgage Investments or loan servicing, Redwood Mortgage will be immediately released from any further payment obligation under the Formation Loan (except for a proportionate share of the principal installment due at the end of that year, pro rated according to the days elapsed). If all of the General Partners are removed, no other General Partners are elected, the Partnership is liquidated and Redwood Mortgage is no longer receiving payments for services rendered, the debt on the Formation Loan shall be forgiven by the Partnership and Redwood Mortgage will be immediately released from any further obligations under the Formation Loan. As noted above, the Formation Loan will not bear interest. The non-interest bearing feature of the Formation Loan will have the effect of sightly diluting the rate of return to Limited Partners, but to a much lesser extent than if the Partnership were required to bear all of its own syndication expenses out of the offering proceeds. 21. Delays In Investment Could Adversely Affect Return To Investors. A delay will occur between the time investors purchase their Units and the time the net proceeds of the Offering are invested. This delay could adversely affect the return paid to the Limited Partners. In order to mitigate this risk, pending the investment of the proceeds of this Offering, funds will be placed in such highly liquid, short-term investments as the General Partners shall designate. The interest earned on such interim investments is expected to be less than the interest earned by the Partnership on Mortgage Investments. The General Partners estimate, based upon their historical experience in previous, similar offerings, that it will be no longer than ninety (90) days from the time an investor's funds are received by the Partnership until they are invested in Mortgage Investments. 22. Subscriptions For Less Than The Maximum Number Of Units Could Effect Potential Profitability Of Partnership. The Partnership will begin making Mortgage Investments which will become part of the existing Mortgage Investment portfolio as soon as it receives subscriptions from investors. The potential profitability of the Partnership and its continued ability to diversify Mortgage Investments could be adversely affected if significantly less than the maximum offering is raised. 23. No Assurance Of Guaranteed Payment For Offering Period. The Limited Partners shall receive a guaranteed payment from the Earnings of the Partnership during the Guaranteed Payment Period (See "TERMS OF THE OFFERING - Guaranteed Payment for Offering Period"). The Guaranteed Payment Period is the period commencing on the day an investor is admitted to the Partnership and ending three (3) months after the offering terminates. The Guaranteed Payment shall not be made over the life of the Partnership. The Guaranteed Payment for Offering Period, calculated on a monthly basis, shall be equal to the greater of (i) the Partnership's Earnings or (ii) the interest rate established by the Monthly Weighted Average Cost of Funds for the Eleventh District Savings Institutions, as announced by the Federal Home Loan Bank of San Francisco during the last week of the preceding month, plus two points, up to a maximum interest rate of twelve percent (12%). To the extent the payment to be paid is in excess of the Partnership's Earnings, the General Partners will contribute sufficient capital to the Partnership so that the Guaranteed Payment can be made. Section 5.07 of the Partnership Agreement provides that the General Partners shall not be obligated to make such Capital Contribution if such amounts would be subject to claims of creditors such that the payments would not be available to be made to the Limited Partners. The General Partners believe that such event is unlikely. In such event, Section 5.07 provides that the General Partners will pay the guaranteed payment from fees which are payable to the General Partners or Redwood Mortgage as set forth above. 24. Possible Extension Of Offering Will Allow Subsequent Investors To Review Partnership's Mortgage Investment Portfolio. The General Partners anticipate that the offering will terminate one year from the effective date of the Prospectus. However, the General Partners, in their sole discretion, may elect to extend the offering for additional one year periods. Prospective investors who invest in the later stages of the offering will have a greater opportunity to review information regarding the Partnership's Mortgage Investment portfolio that will not be available to early investors. Although early investors will have the opportunity to review the Partnership's existing portfolio of Mortgage Investments, they will not have an opportunity to review any Mortgage Investments to be made with the proceeds of this Offering. In this regard, later investors may have an advantage in initially deciding whether to invest in the Partnership. Earlier investors will receive allocations of cash distributions from net proceeds already invested in mortgage loans and may receive a higher rate of return from such investments than could be earned on alternative investment by those who invest at a later stage. Except as noted above, there will be no investment advantages to investors who invest in the early stage of the offering versus investors who invest during the later stage of the offering during an extended offering period. 25. No Assurance Of Limitation Of Liability Of Limited Partners. A Limited Partner has no right to, and takes no part in, control and management of the Partnership business. However, the Partnership Agreement authorizes Limited Partners to exercise the right to vote on certain matters, including the right to remove the General Partners and elect a successor general partner(s) (See "SUMMARY OF PARTNERSHIP AGREEMENT - Rights and Liabilities of Limited Partners"). The California Revised Limited Partnership Act expressly provides that the right to vote on those matters will not cause the Limited Partners to have personal liability for Partnership obligations in excess of the amount of their Capital contributions which have not been previously returned to them (except that the Limited Partners may be required to return amounts distributed to them as a return of their Capital Contributions if the Partnership is unable to pay creditors who extended credit to the Partnership prior to the date of such return of capital). Wilson, Ryan & Campilongo, counsel for the Partnership, has advised that strong arguments may be made in support of the conclusion that California law governs in all states as to the liability of the Limited Partners and that neither the possession nor the exercise of such rights should affect the liability of the Limited Partners. However, Wilson, Ryan & Campilongo, counsel for the Partnership, has also advised that since there is no authoritative precedent on this issue, a question exists as to whether the exercise, or perhaps even the existence, of such rights might provide a basis on which a court in a state other than California could hold that the Limited Partners are not entitled to the limitation on liability for which the Partnership Agreement provides. 26. Compensation To General Partners And Affiliates Cannot Be Estimated. The General Partners and their Affiliates are unable to predict the estimated amounts of compensation to be paid to them as set forth under "COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES. Any such prediction would necessarily involve assumptions of future events and operating results which cannot be made at this time. 27. No Assurance That Reserves Will Be Adequate. The Partnership intends to maintain working capital reserves to meet the Partnership obligations, including carrying costs and operating expenses of the Partnership (See "ESTIMATED USE OF PROCEEDS"). The General Partners believe such reserves are reasonably sufficient for the contingencies of the Partnership. If for any reason those reserves are insufficient, the General Partners will have to borrow the required funds or require the Partnership to liquidate some or all of its Mortgage Investments. In the event the General Partners deem it necessary to borrow funds, there can be no assurance that such borrowing will be on acceptable terms or even available to the Partnership. Such a result might require the Partnership to liquidate its investments and abandon its activities. 28. Limited Transferability Of Units Requires That Investment Be Considered Long Term. It is highly unlikely that a public trading market will develop for the Units offered hereby. Article VII of the Partnership Agreement imposes substantial restrictions upon transferability of Units (See "SUMMARY OF LIMITED PARTNERSHIP AGREEMENT and "TRANSFER OF UNITS"). In addition, the Partnership Agreement does not provide for the buy-back or repurchase of Units by the Partnership or the General Partners, although it does provide for a limited right to withdraw capital from the Partnership after one year from the date of purchase if a ten percent (10%) early withdrawal penalty is paid on the sum withdrawn or after five years from the date of purchase without penalty if the capital is withdrawn over twenty (20) equal quarterly installments or longer as requested by the Limited Partner or as determined by the General Partners in light of available cash flow. Notwithstanding the five (5) years (or longer) withdrawal period, the General Partners may liquidate all or part of a Limited Partner's capital account in four equal quarterly installments subject to a ten percent (10%) withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn pursuant to the five (5) year or longer withdrawal period (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT - Withdrawal from Partnership"). Limited Partners may not, therefore, be able to liquidate their investments in the event of an emergency before the five year period without the ten percent (10%) penalty and any such liquidation is subject to certain restrictions, including the availability of cash. There is no assurance that the value of Units for purposes of this withdrawal in any way reflects the fair market value of the Units. In addition, Units may not be readily accepted as collateral for a loan. Consequently, the purchase of Units should be considered only as a long-term investment. 29. Partnership May Be Required To Forego More Favorable Investment To Avoid Regulation Under Investment Company Act Of 1940. The General Partners intend to conduct the operations of the Partnership so that it will not be subject to regulation under the Investment Company Act of 1940. Among other things, they will monitor the proportions of the Partnership's funds which are placed in various investments and the form of such investments so that the Partnership does not come within the definition of an investment company under such Act. As a result, the Partnership may have to forego certain investments which would produce a more favorable return to the Partnership. TAX RISKS 30. Material Tax Risks Associated With Investment In Units. An investment in Units involves material tax risks. Each prospective purchaser of Units is urged to consult his own tax adviser with respect to the federal (as well as state and local) income tax consequences of such an investment. For a more detailed description of the tax consequences of an investment in Units, see "FEDERAL INCOME TAX CONSEQUENCES." 31. Risks Associated With Partnership Status For Federal Income Tax Purposes. No ruling has been sought (nor would one likely be obtained) from the Internal Revenue Service that, for federal income tax purposes, the Partnership will be treated as a partnership and not as an association taxable as a corporation. While an opinion of Wilson, Ryan & Campilongo, counsel to the Partnership, has been received that the Partnership should be treated as a partnership for federal income tax purposes, there is no assurance that such treatment will, in fact, be accorded the Partnership. An opinion of Wilson, Ryan & Campilongo, counsel to the Partnership represents only their best legal judgment, and has no binding effect on the Internal Revenue Service or any court, and no assurance can be given that the conclusions reached in said opinion would be sustained by a court if contested. Any such contest to a determination by the Internal Revenue Service may impose representation expense on the Limited Partners. If the Partnership is taxed as a corporation it would, among other things, pay income tax on its earnings in the same manner and at the same rate as a corporation, and losses, if any, would not be deductible by the Limited Partners. Also, Limited Partners would be taxed upon Distributions substantially in the manner that corporate shareholders are taxed on dividends. Thus, if a Partnership were treated as an association taxable as a corporation many of the tax benefits that would otherwise be realized by the Limited Partners would be lost (See "FEDERAL INCOME TAX CONSEQUENCE - Tax Status of the Partnership"). 32. Risks Associated With Characterization Of Partnership Income As Portfolio Income. The General Partners anticipate, based upon the advice of Wilson, Ryan & Campilongo, counsel to the Partnership, that the Partnership will be engaged in the trade or business of mortgage lending, and accordingly, based upon the advice of Wilson, Ryan & Campilongo counsel to the Partnership (See "FEDERAL INCOME TAX CONSEQUENCES - Character of Income of Loss") anticipate that the Partnership will likely be considered an "equity financed lending activity" such that substantially all of the Partnership's income will not be considered passive income but rather will be considered portfolio income. Since such treatment is dependent upon a number of factors not yet determinable, such as whether the Partnership is engaged in a trade or business, whether the Partnership incurs liabilities in connection with its activities, and the proper matching of the allocable expenses incurred in the production of Partnership income, there can be no assurance that the Partnership will be treated as an equity financed lending activity. If not, it is possible that the Partnership would be unable to allocate expenses to the income produced, in which case Limited Partners might find their ability to offset income with allocable expenses limited by the two percent (2%) floor on miscellaneous investment expenses. Furthermore, the Partnership's Guaranteed Payment for Offering Period will likely be treated as a guaranteed payment to Limited Partners. As such, it should be treated as a payment to partners for the use of capital and, to that extent, will be treated as a payout of interest which again should be treated as portfolio income. If such Guaranteed Payment for Offering Period were treated as a Partnership distributive share, it is possible, although unlikely that such payment would constitute passive income. The determination of whether Partnership income will constitute passive, non-passive, or portfolio income is a technical one subject to the interpretation of recent and complex regulations whose full impact has not yet been determined. It is possible that the treatment of Partnership income will be different than what is currently anticipated by the General Partners. 33. Risks Of Partnership Characterization As A Publicly Traded Partnership. Based on representations by the General Partners regarding their compliance with certain safe harbors provided by the IRS, Wilson, Ryan & Campilongo, counsel for the Partnership has opined that is it more likely than not that the Partnership will not be treated as a "publicly traded partnership" for federal income tax purposes. Classification of the Partnership as a "publicly traded partnership" could result in: (i) taxation of the Partnership as a corporation; (ii) application of the passive activity loss rules in a manner that could adversely affect the Limited Partners; and (iii) taxation of a tax-exempt organization's share of the gross income of the Partnership as taxable unrelated trade or business income (See "FEDERAL INCOME TAX CONSEQUENCES Publicly Traded Partnerships"). 34. Risks Relating To Taxation Of Undistributed Revenues. The General Partners do not anticipate that the Partnership will be subject to the risk of generating so-called "phantom income" which is commonly associated with leveraged real estate investment programs. Whereas a leveraged real estate program would typically provide for tax sheltered cash flow in its early years, such a program generally reaches a cross-over point when the taxable income from the program exceeds the cash distributions (due to decreasing depreciation and increasing non-deductible principal payments under the typical amortization schedule for real estate loans). As the Partnership will not generally be claiming depreciation or interest deductions on real estate, except in the case of a foreclosure of one of the Partnership's loans, the General Partners anticipate based upon historical experience that the Partnership's taxable income will not differ substantially from the cash flow generated by the Partnership's lending activities. It is possible that during certain taxable years a Limited Partner's taxable income resulting from his ownership of Units will exceed the cash distributions attributable thereto. It is possible that this may occur because in any given year otherwise excess cash may have to be utilized to meet Partnership obligations. It is also possible that the tax payable by such Limited Partner may exceed the cash distributed to him, and accordingly, to the extent of such excess, the payment of taxes would constitute an out-of-pocket expenditure to the Limited Partner. In any year in which the Partnership reports income in excess of expenses, a Limited Partner will be required to report his allocable share of such income on his personal income tax return even though he may have received total cash distributions less than the amount of reportable income or even the resultant federal income tax. For example, a Limited Partner who elects to have Earnings credited to his capital account will be allocated his share of Partnership Net Income and Gain even though such Partner may receive no cash distributions from the Partnership. 35. Risks Relating To Creation Of Unrelated Business Taxable Income. A Tax-Exempt Limited Partner (such as an employee pension benefit plan or an IRA) may be subject to tax to the extent that income from the Partnership is treated as unrelated business taxable income ("UBTI"). Wilson, Ryan & Campilongo, counsel to the Partnership has opined that it is more likely than not that the income of the Partnership will not constitute UBTI. The General Partners currently intend to cause the Partnership to borrow funds on a limited basis. The General Partners do not currently intend to cause the Partnership to own and lease personal property. In the event the Partnership borrows funds or leases personal property, the General Partners have represented that they will use reasonable efforts to do so in a manner that does not cause Partnership income, in any significant amount, to be treated as UBTI. As a result of the possibility that some portion, although likely an insignificant portion, of Partnership income may be treated as UBTI, Prospective Investors must consult their own tax advisors. An investment in Units may not be suitable for charitable remainder trusts. 36. Risks Of Applicability Of Alternative Minimum Tax. The application of the alternative minimum tax to a Limited Partner could reduce certain tax benefits associated with the purchase of an Interest in the Partnership. The effect of the alternative minimum tax upon a Limited Partner depends on his particular overall tax situation, and each Limited Partner should consult with his own tax adviser regarding the possible application of this tax. 37. Risks Of Audit And Adjustment. A private letter ruling from the Service has not been obtained with respect to any of the federal income tax considerations associated with an investment in the Partnership. Certain federal income tax positions taken by the Partnership may be challenged upon audit by the Service. Any adjustment to the Partnership's return resulting from an audit by the Service would result in adjustments to the tax returns of each Limited Partner and might result in an examination of items in such returns unrelated to the Partnership or an examination of tax returns for prior or later years. Moreover, the Partnership and Limited Partners could incur substantial legal and accounting costs in contesting any Service challenge, regardless of the outcome. The General Partners generally will have the authority and power to act for and bind the Partnership in connection with any such audit or adjustment for administrative or judicial proceedings in connection therewith. 38. Risks Of Effects Of State And Local Taxation. The state in which a Limited Partner is a resident may impose an income tax upon his share of the taxable income of the Partnership. Furthermore, states in which the Partnership will own property generally imposes income tax upon each partner's share of a partnership's taxable income considered allocable to such states. Differences may exist between federal income tax laws and state and local income tax laws. Prospective Limited Partners are urged to consult with their own tax advisers with respect to state and local taxation. The Partnership may be required to withhold state taxes from distributions to Limited Partners in certain instances. ERISA RISKS 39. Risks Of Investment By Tax-exempt Investors. In considering an investment in the Partnership of a portion of the assets of a trust of a pension or profit-sharing plan qualified under Section 401(a) of the Code and exempt from tax under Section 501(a), a fiduciary should consider (i) whether the investment satisfies the diversification requirements of Section 404(a)(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"); (ii) whether the investment is prudent, since Units are not freely transferable and there may not be a market created in which he can sell or otherwise dispose of the Units; and (iii) whether interests in the Partnership or the underlying assets owned by the Partnership constitute "Plan Assets" for purposes of Section 4975 of the Code. 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 the Partnership sells or otherwise disposes of its investments (See "ERISA CONSIDERATIONS"). INVESTOR SUITABILITY STANDARDS Investment in the Partnership involves some degree of risk. No public market for the Units is likely to develop, and the transfer of Units by a holder could result in adverse tax consequences (See "RISKS AND OTHER FACTORS" and "FEDERAL INCOME TAX CONSEQUENCES"). Accordingly, the Units are suitable only for persons who have adequate financial means and desire a relatively long term investment with respect to which they do not anticipate any need for liquidity. The Partnership has established a minimum suitability standard which requires that an investor have either: (i) a net worth (exclusive of home, furnishings and automobiles) of at least $30,000 plus an annual gross income of at least $30,000, or (ii) irrespective of annual gross income, a net worth of $75,000 (determined with the same exclusions). Alternatively, the standard requires that the investor is purchasing in a fiduciary capacity for a person who (or for an entity which) meets such conditions. In the case of sales to fiduciary accounts, such conditions must be met by the fiduciary, by the fiduciary account or by the donor who directly and indirectly supplied the funds for the purchase of Units. The Partnership has established these standards for the purchase of Units based upon the relative lack of liquidity of such Units and the fact that the relative financial benefit of an investment therein may depend upon the tax bracket of the investor. All prospective investors will be required to represent in writing that: (1) they comply with the applicable standards; or (ii) they are purchasing in a fiduciary capacity for a person meeting such standards; or (iii) the standards are met by a donor who directly or indirectly supplies the funds for the purchase of Units. The Participating Broker Dealers will make reasonable inquiry to assure that every prospective investor complies with the investor suitability standards and the General Partners will not accept subscriptions from any persons who do not represent in their Subscription Agreements that they meet such standards. Under the laws of certain states, transferees may be required to comply with the suitability standards set forth herein as a condition to substitution as a Limited partner. Accordingly, the Partnership will require certain assurances that such standards are met before agreeing to any transfer of the Units. The General Partners have established the minimum purchase at twenty (20) Units ($2,000). The General Partners may accept subscriptions in excess of $2,000 in increments of one Unit ($100) or fractional Units. No person may become an Assignee of Record or a substituted Limited Partner unless he is the owner of a minimum of twenty (20) Units ($2,000). An Assignor of Units must continue to hold at least ten (10) Units ($1,000) if he holds any Units. As well as restrictions on transfer imposed by the Partnership, an investor seeking to transfer his Units subsequent to his initial investment may be subject to the securities or "blue sky" laws of the state in which the transfer is to take place (See "DESCRIPTION OF UNITS" and "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT -Restrictions on Transfer"). A minimum of 20 Units ($2,000) may be purchased, transferred, assigned or retained by an Individual Retirement Account ("IRA") and incremental amounts in excess thereof for spousal IRA's established under Section 408 of the Internal Revenue Code of 1986, as amended ("Code"). It should be noted, however, that an investment in the Partnership will not, in and of itself, create an IRA for any investor and that, in order to create an IRA, an investor must himself comply with the provisions of Section 408 of the Code. If the Partnership applies to have the Units qualified for sale in states which have established suitability standards and minimum purchase requirements different from those set by the Partnership, such suitability standards and minimum purchase requirements shall be set forth in a supplement to this Prospectus. The investment objectives and policies of the Partnership have been designed to make the Units suitable investments for employee benefit plans under current law. In this regard, the Employee Retirement Income Security Act of 1974 ("ERISA") provides a comprehensive regulatory scheme for "plan assets." In accordance with final Regulations published by the Department of Labor in the Federal Register on November 13, 1986, the General Partners intend to manage the Partnership is such a way so as to assure that an investment in the Partnership by a Qualified Plan will not, solely by reason of such investment, be considered to be an investment in the underlying assets of the Partnership so as to make the assets of the Partnership "plan assets." The final Regulations are also applicable to an IRA. (See "RISK FACTORS--Investment by Tax-Exempt Entities." The General Partners are not permitted to allow the purchase of Units with assets of any Qualified Plans if the General Partners (i) have investment discretion with respect to the assets of the Qualified Plan invested in the Partnership, or (ii) regularly give individualized investment advice that serves as the primary basis for the investment decisions made with respect to such assets. This prohibition is designed to prevent violation of certain provisions of ERISA. Subscription Agreement Warranties. The Subscription Agreement requires each of the subscribers to warrant that: he received, read and understood the Prospectus and is relying on it for his investment; he meets the applicable suitability standards set forth in the Prospectus; he is aware that the subscription may be rejected by the General Partners, the investment is subject to certain risks described in the Prospectus and there will be no public market for the Units; he has been informed by the Participating Broker Dealer of all facts relating to lack of liquidity or marketability; he understands the restrictions on transferability; he has sufficient liquid assets to provide for current needs and personal contingencies or, if a trustee, that limited liquidity will not affect its ability to make timely distributions; he has the power, capacity and authority to make the investment; he is capable of evaluating the risks and merits of the investment; and he is making the investment for his own account or his family or in his fiduciary capacity and not as an agent for another. The purpose of the warranties is to ensure that the subscriber fully understands the terms of the offering and the risks of an investment and he has the capacity to enter into a Subscription Agreement. The General Partners on behalf of the Partnership intend to rely on the warranties in accepting a Subscription. In any claim or action against the General Partners or Partnership, the General Partners or Partnership may use the warranties as a defense or basis for seeking indemnity from the subscriber. The General Partners anticipate, based upon their past experience and knowledge of professionals in the industry, that approximately thirty-five percent (35%) of the Units issued by the Partnership will be purchased by investors who elect to receive monthly, quarterly or annual distributions, and approximately sixty-five percent (65%) by investors who elect to allow their share of Earnings to be retained by the Partnership and credited to their capital accounts. The General Partners may reject Subscription Agreements tendered by investors electing to receive monthly, quarterly or annual distributions, to the extent necessary to maintain these proportions. Therefore, a prospective investor's Subscription Agreement may be rejected by the General Partners, even though such person meets the suitability and eligibility requirements of this offering. Subscription Procedure. In order to subscribe to Units in the Partnership, investors must read carefully and execute the "SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY." For each Unit subscribed, investors must tender the sum of $100 per Unit. The minimum investment is twenty (20) Units ($2,000). NOTICE TO CALIFORNIA RESIDENTS All Certificates of Limited Partnership Interests resulting from any offer and/or sale in California will bear the following legend restricting transfer: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFORE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. TERMS OF THE OFFERING A maximum of 300,000 Units ($30,000,000) are being offered on a "best efforts" basis, which means no one is guaranteeing that any minimum number of Units will be sold, through selected broker dealers (the "Participating Broker Dealers") who are members of the National Association of Securities Dealers, Inc. ("NASD"), at a price of $100 per Unit. The minimum subscription is twenty (20) Units ($2,000). The General Partners have the option to accept subscriptions for fractional units in excess of the minimum subscription. For purposes of meeting this minimum investment requirement, an investor may cumulate Units he or she purchased individually with those Units purchased by his or her spouse or Units purchased by his or her pension or profit sharing plan, IRA or Keogh plan. Purchasers of Units will pay $100 cash for each Unit upon subscription. The Offering will terminate one year from the effective date of this Prospectus, unless the General Partners, in their discretion, terminate the Offering earlier, or unless the General Partners, in their sole discretion, extend the Offering for additional one-year periods. As this is not the Partnership's first offering of Units, all proceeds from the sale of Units will be immediately available to the Partnership for investment and will not be held in an escrow account. Subscriptions received will be deposited into a subscription account at a federally insured commercial bank or other depository selected by the General Partner and invested in short-term certificates of deposit, a money market or other liquid asset account. Prospective investors whose subscriptions are accepted will be admitted into the Partnership only when their subscription funds are required by the Partnership to fund a Mortgage Investment, or the Formation Loan, to create appropriate reserves or to pay organizational expenses. During the period prior to admittance of investors as Limited Partners, proceeds of the sale are irrevocable and will be held by the General Partners for the account of the Limited Partner in the subscription account. Investors' funds will be transferred from the subscription account into the Partnership's operating account on a first-in, first-out basis. Upon admission of the Limited Partners to the Partnership, subscription funds will be released to the Partnership and Units will be issued at the rate of $100 per Unit or fraction thereof. Interest earned on subscription funds while in the subscription account will be returned to the subscriber, or if the subscriber elects to compound earnings, the amount equal to such interest will be added to his investment in the Partnership. If a subscriber elects to have such amount added to his investment in the Partnership, the number of Units actually issued shall be increased accordingly. The General Partners and their Affiliates may, in their discretion, purchase Units for their own account. Any Units so purchased will be counted for the purpose of obtaining the required maximum subscriptions and will not be included in reaching the minimum subscriptions. The maximum amount of Units that may be purchased by the General Partners or their Affiliates is 500 Units ($50,000). However, it is not anticipated that such purchases will be made by the General Partners and their Affiliates. Purchases of such Units by the General Partners or their Affiliates will be made for investment purposes only on the same terms, conditions and prices as to unaffiliated parties. Guaranteed Payment for Offering Period. The Limited Partners shall receive a guaranteed payment from the Earnings of the Partnership for Offering Period, calculated on a monthly basis, equal to the greater of (i) the Partnership's Earnings or (ii) the interest rate established by the Monthly Weighted Average Cost of Funds for the 11th District Savings Institutions, as announced by the Federal Home Loan Bank of San Francisco during the last week of the preceding month, plus two points, up to a maximum interest rate of twelve percent (12%). The Weighted Average Cost of Funds is derived from interest paid on savings accounts, Federal Home Loan Bank advances, and other borrowed money adjusted for valuation in the number of days in each month. The adjustment factors are 1.086 for February, 1.024 for 30 day months and 0.981 for 31 day months. As of the date of this Prospectus, the Monthly Weighted Average Cost of Funds for the 11th District as announced August 30, 1996 for the period ended July 30, 1996 and in effect until September 30, 1996 is 4.819%. The Guaranteed Payment Period is the period commencing on the day a Limited Partner is admitted to the Partnership and ending three (3) months after the Offering Termination Date which will be no later than two (2) years from the date of this Prospectus. The Guaranteed Payment Period shall not be made over the life of the Partnership. To the extent the payment to be paid is in excess of the Partnership's Earnings, the General Partners will contribute sufficient capital to the Partnership so that the Guaranteed Payment may be made. (See "RISK FACTORS - Guaranteed Payment for Offering Period"). Since the offering period may be for a period of one year, with additional one year periods, or such shorter period as when all the Units are sold, there is uncertainty regarding the exact length of the Guaranteed Payment Period. Election to Receive Periodic Cash Distributions. Upon subscription for Units, an investor must elect whether to receive Periodic Cash Distributions from the Partnership or to receive additional Units in lieu of Periodic Cash Distributions. This election, once made, is irrevocable for investors who choose to receive Periodic Cash Distributions from the Partnership. However, investors may change whether such distributions are received on a monthly, quarterly or annual basis. An investor who initially elects to receive additional Units in lieu of Periodic Cash Distributions may, after three (3) years, elect to receive Periodic Cash Distributions. Earnings allocable to investors who elect to compound their earnings will be retained by the Partnership for making further Mortgage Investments or other proper Partnership purposes. The Earnings from these further Mortgage Investments will be allocated among all investors; however; investors who receive additional Units will be credited with an increasingly larger proportionate share of such earnings than investors who receive Periodic Cash Distributions, since their capital accounts will increase over time. Annual cash distributions will be made shortly after the calendar year end. ESTIMATED USE OF PROCEEDS The following table sets forth the estimated application of the Gross Proceeds of the sale of both the minimum and the maximum number of Units being offered hereby. Initially, upon the formation of the Partnership, after deduction of the Public Offering Expenses, the General Partners estimate that approximately 86.7% if the maximum offering of 300,000 Units ($30,000,000) is subscribed of the gross offering proceeds will be used for making Mortgage Investments. However, as Redwood Mortgage repays the Formation Loan and working capital reserves are applied to Mortgage Investments, as has occurred in prior programs, approximately ninety-seven percent (97%) if the Maximum offering of 300,000 Units ($30,000,000) will be used for making loans. Many of the figures set forth are estimated, cannot be precisely calculated at this time and consequently should not be relied upon as being definitive. Maximum Offering(6) Maximum Offering(7) 300,000 Units ($45,000,000)sold 300,000 Units ($30,000,000) sold with leveraged funds
=================================================================================================================================== Dollar Amount Percent Dollar Amount Percent - ----------------------------------------------------------------------------------------------------------------------------------- Gross Proceeds ............................................. $30,000,000 100.00% $30,000,000 66.67% Leveraged Funds ............................................ 0 0 $15,000,000 33.33% Total Partnership Funds .................................... $30,000,000 100.00% 45,000,000 100.00% Less Public Offering Expenses (1) Organizational and Offering Expenses ....................... $ 900,000 3.00% $ 900,000 2.00% Total Offering Expenses .................................... $ 900,000 3.00% $ 900,000 2.00% Amount Available for Investment (2) ........................ $29,100,000 97.00% $44,100,000 98.00% Less: Formation Loan (3) ......................................... $ 2,190,000 7.30% $ 2,190,000 4.86% Working Capital Reserves (4) ............................... $ 900,000 3.00% $ 900,000 2.00% Cash Available for Extension of Loans (5) .................. $26,010,000 86.7% $41,010,000 91.13% (1) Consists of expenses incurred in connection with the organization and formation of the Partnership, including the legal, accounting and escrow holder fees and expenses, the printing costs, the filing fees and other disbursements in connection with the sale and distribution of Units including reimbursements to Participating Broker Dealers for bona fide expenses incurred for due diligence purposes in a maximum amount of one-half of one percent (.5%) of Gross Proceeds. The General Partners may prepay such expenses and will be reimbursed by the Partnership in an amount not to exceed the lesser of ten percent (10%) of the Gross Proceeds or $1,200,000. The General Partners will pay any amount of such expenses in excess of ten percent (10%) of the Gross Proceeds or $1,200,000 (See "COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES"). (2) Pending utilization of the Net Proceeds in the extension of Mortgage Investments and the operations of the Partnership, all of the Net Proceeds and, thereafter, the working capital reserves, may be invested in short-term, highly liquid investments, including government obligations, bank certificates of deposit, short-term debt obligations and interest bearing accounts (See "TERMS OF THE OFFERING" and "PLAN OF DISTRIBUTION"). (3) Participating Broker Dealers may receive commissions under one of the two following options: (i) at the rate of either five percent (5%) or nine percent (9%) (depending upon the investor's election to receive cash distributions or to compound earnings in the Partnership) of the Gross Proceeds on sales; or (ii) at the rate of four percent (4%) or seven percent (7%) (depending upon the investor's election to receive cash distributions or to reinvest Earnings in the Partnership) of the Gross Proceeds on all of their sales together with the Continuing Servicing Fee. The Partnership will loan to Redwood Mortgage funds in an amount equal to the sales commissions as a Formation Loan. The Formation Loan is to be used for the purpose of paying sales commissions to Participating Broker Dealers. The amount of the Formation Loan set forth in this table is based upon the maximum sales commissions allowable. The Continuing Servicing Fee will be paid by Redwood Mortgage, but will not be included in the Formation Loan. The Formation Loan will not exceed nine percent (9%) of the total Gross Proceeds of the Offering based upon the maximum sales commissions payable, (See "PLAN OF DISTRIBUTION - Formation Loan"). The General Partners anticipate, based upon historical experience and knowledge of professionals in the industry, that the Formation Loan will be in the amount of 7.3% of Gross Proceeds if the maximum is raised assuming that sixty-five percent (65%) of the investors elect to reinvest their Earnings, thirty-five percent (35%) elect to receive distributions and twenty percent (20%) of the Participating Broker Dealers elect to receive the Continuing Servicing Fee. However, in no event will the total compensation payable to Participating Broker Dealers exceed the ten percent (10%) limitation on underwriting compensation, or in the event the Participating Broker Dealer elects to receive the Continuing Servicing Fee three percent (3%) for each one percentage point that the sales commissions received falls below nine percent (9%) (collectively, "Compensation Limitation"). To the extent the actual amount of the Formation Loan is less than the maximum amount stated in the table, the cash available for extension of loans will be increased proportionately. The Formation Loan will be unsecured and will be repaid, without interest, in annual installments. (See "PLAN OF DISTRIBUTION"). Except for the Formation Loan made to Redwood Mortgage, and reimbursement of Organizational and Offering Expenses, no other Offering proceeds will be paid to the General Partners or their Affiliates (See "COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES"). (4) The Partnership anticipates maintaining an average balance of working capital reserve equal to three percent (3%) of the Gross Proceeds of the Offering. (5) These proceeds will be used to make Mortgage Investments (See "INVESTMENT OBJECTIVES AND CRITERIA"). The exact amount of the cash available for extension of Mortgage Investments will depend upon the amount of the Formation Loan, organization and operating expenses and cash reserves. (See Footnote (6) below). (6) Does not include a capital contribution of the General Partners in the amount of 1/10th of 1% of the Gross Proceeds (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT - Capital Contributions"). (7) This assumes that the General Partners can leverage approximately fifty percent (50%) of the Gross Offering Proceeds.
CAPITALIZATION OF PARTNERSHIP The capitalization of the Partnership as of June 30, 1996, and as adjusted to give effect to the sale of the maximum number of Units offered hereby, excluding any contributions of the General Partners is as follows: Actual As Adjusted (1) Units ($100.00 per Unit) $12,956,966 $42,056,966 _______________________ (1) Amount determined after deduction of certain offering expenses aggregating $900,000. (See "USE OF PROCEEDS"). COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES Set forth below in tabular form is a description of compensation that may be received by the General Partners and their Affiliates from the Partnership or in connection with the investment of the proceeds of this Offering. Other than as set forth herein, no compensation will be paid to the General Partners or any Affiliate. These compensation arrangements have been established by the General Partners and are not the result of arms-length negotiations. The General Partners have reviewed the compensation arrangements among unrelated parties for the same services and have accordingly determined the following compensation levels, based upon that review as well as a determination of what is fair to the Partnership, are fair and reasonable. In their review, the General Partners have analyzed the compensation arrangements in other offerings, spoken to other professionals in the industry including issuers, promoters and broker dealers, examined "rate sheets" from banks and savings & loans which set forth the rates being charged by those institutions for the same or similar services as well as collected data regarding compensation from trade association meetings and/or other relevant periodicals. Thus, the amounts are approximately equivalent to those which would customarily be paid to unrelated parties for the same services. The compensation to be received by the General Partners, as set forth below, is based upon the loan balances of the Mortgage Investments which during the term of the Partnership will be continually maturing and "turning over" or the net asset value of the Partnership. Accordingly, the exact amount of fees to be paid to the General Partners and their Affiliates cannot be determined. However, based upon the General Partners' prior experience with this Partnership and in similar programs and upon certain assumptions made as a result of that experience as set forth below, the General Partners can estimate on an annual average basis, assuming a minimum partnership life of twelve (12) years, the amount of fees they and their Affiliates will receive. Except as noted below, there is no limit on the dollar amount of compensation and fees paid to the General Partners and their Affiliates. The amount of fees to be paid will vary from those estimated below due to varying economic factors, over which the General Partners have no control, including, but not limited to, the state of the economy, lending competition in the area where partnership Mortgage Investmensts are made, interest rates and Partnership earnings. Because the Partnership is subject to public reporting requirements, the Partnership will file with the Securities and Exchange Commission quarterly and annual reports, which reports will be available to investors, setting forth, among other things, the exact amount compensation and/or fees being paid to the General Partners and the Affiliates. Moreover, the General Partners' or their Affiliates' ability to effect the nature of the compensation by undertaking different actions is extremely limited. The amount of fees paid to the General Partners and/or their Affiliates are competitive within the industry, and reflect what others, including some lending institutions, are charging for the same or similar services. Because the Partnership is only one of many lenders in their industry, the General Partners' ability to effect fees charged is virtually non-existent. Additionally, to a large extent the amount of fees paid to the General Partners and their Affiliates is based upon decisions made by the borrower regarding, among other things, type and amount of loan, prepayment on the loan and possible default on the loan. Certain of the terms used in this table are defined under the caption "GLOSSARY," and the relationships with the General Partners of the various entities referred to herein are described under the caption "MANAGEMENT." OFFERING STAGE Entity Receiving Compensation Form and Method of Estimated Amount Compensation General Partners Reimbursement of organization Maximum of and/or Affiliates and offering expenses including, $1,200,000. but not limited to, attorneys'fees, accounting fees, printing costs and other selling expenses (other than underwriting commissions) equal to the lesser of ten percent (10%) of the Gross proceeds of the Offering or $1,200,000. The General Partners will pay any offering and organization expenses in excess of this amount.(1) OPERATING STAGE Entity Receiving Compensation Form and Method of Estimated Amount Compensation Redwood Mortgage Loan Brokerage Commissions $285,000 per year(5) average approximately three to six percent (3-6%)of the principal amount of each Mortgage Investment, but may be higher or lower depending upon market conditions. Loan Brokerage Commissions will be limited to an amount not to exceed four percent (4%)of the total Partnership assets per year. Such Commissions are payable solely by the borrower and not by the Partnership. (See "TERMS OF THE OFFERING"). Redwood Mortgage Processing and Escrow Fees for $19,200 services in connection with notary, per year(5) document preparation, credit investigation, and escrow fees in an amount equal to the fees customarily charged by Redwood Mortgage for comparable services in the geographical area where the property securing the Mortgage Investment is located, payable solely by the borrower and not by the Partnership. Redwood Mortgage Loan Servicing Fee payable monthly $310,000 in an amount up to 1/8 of 1% of the per year(5) outstanding principal amount of each Mortgage Investment. (2) (3) General Partners Asset Management Fee payable monthly $119,000 in an amount up to 1/32 of 1% per year(5) of the "net asset value."(2) General Partners Reimbursement of expenses relating to $92,000 and/or Affiliates administration of the Partnership, per year(5) subject to certain limitations, see Article 10 of the Partnership Agreement.(1)(4) Gymno Corporation Reconveyance Fee for reconveyance of Approximately property upon full payment of loan, $65 per deed payable by borrower. of trust or market rate. Redwood Mortgage Assumption Fee for assumption $5,000 per of loans payable by borrower as year(5) either a set fee or a percentage of the loan. Redwood Mortgage Extension Fee for extending the $2,500 per loan period payable by borrower as year(5) a percentage of the loan. Redwood Mortgage Interest earned, if any, between $0 per year(5) the date of deposit of borrower's funds into Redwood Mortgage's trust account and date of payment of such funds by Redwood Mortgage General Partners One percent (1%) interest in Profits, $28,000 per Losses and Distributions of Earnings year(5) and Cash Available for Distribution. LIQUIDATING STAGE Entity Receiving Compensation Form and Method of Estimated Amount Compensation Redwood Mortgage Early withdrawal penalty equal $36,516 per year(5) to a percentage of the sums withdrawn by an early withdrawing Limited Partner, a portion of which will be paid, based upon the ratio between theFormation Loan and the total amount of organizational and syndication costs, to the Partnership as an early withdrawal penalty, to educe the principal amount owed by Redwood Mortgage for the Formation Loan and the balance of which will be retained by the Partnership for its own account. After the Formation Loan has been paid, amounts received from the early withdrawal penalty will be used first to pay Continuing Servicing Fee, and the balance will be retained by the Partnership for its own account (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT - Withdrawal from Partnership"). 1) The General Partners will endeavor to minimize such expenses to the extent possible and to the extent consistent with the terms of the offering. (See "TERMS OF THE OFFERING"). (2) The General Partners have assumed that the estimated amount of the Loan Servicing Fee payable will be approximately one percent (1%) per year. The General Partners are entitled to receive a Loan Servicing Fee of up to one and one-half percent (1-1/2%) per year. The General Partners and their Affiliates, in their sole discretion, may elect to lower the Loan Servicing Fee or Asset Management Fee for any period of time and thereafter raise the fees up to the stated limits. (3) On any property foreclosed upon, the Loan Servicing Fee is payable by the borrower up until the time of foreclosure. If, at the time of foreclosure, the Loan Servicing Fee has not been paid out of the trustee's sale; of the foreclosed property, the Loan Servicing Fee will be payable by the Partnership. (4) The Partnership shall reimburse the General Partners or their Affiliates for the actual cost of goods and materials used for or by the Partnership and obtained from unaffiliated parties. In addition, the Partnership shall reimburse the General Partners or their Affiliates for the cost of administrative services necessary to the prudent operation of the Partnership provided that such reimbursement will be the lesser of (a) the actual cost of such services or (b) ninety percent (90%) of the amount which the Partnership would be required to pay independent parties for comparable services. The Partnership's annual report to Limited Partners will provide a breakdown of the services performed and the amount reimbursed to the General Partners or Affiliates. (5) The amount of fees to be paid to the General Partners and their Affiliates are based on certain assumptions made in light of the General Partners' past experience with similar programs. In determining the average annual fees to be paid to the General Partners and their Affiliates the General Partners have assumed, based upon their historical experience the following: (i) a minimum Partnership life of twelve (12) years assuming $15,000,000 is raised in year one (1) and $15,000,000 is raised in year two (2); (ii) sixty percent (60%) of the investors elect to reinvest Earnings and forty percent (40%) elect to receive Periodic Cash Distributions; (iii) a nine percent (9%) yield in the first three (3) years of operation, an eight percent (8%) yield in years four (4), five (5) and six (6) and a nine percent (9%) yield thereafter; (iv) withdrawal rates similar to those experienced by past partnerships; (v) a turnover rate on Mortgage Investments of ten percent (10%) in year three (3), fifteen percent (15%) in year four (4) and twenty percent (20%) thereafter; and (vi) no leveraging of the portfolio has been considered. However, because the estimated amount of fees to be paid to the General Partners and their Affiliates are based on certain assumptions and conditions, including, historical experience, which may not provide an exact measurement of the fees to be paid, the general state of the economy, interest rates, the turnover rate of Mortgage Investments, Partnership Earnings, the duration and type of loans the Partnership will make, and the election of investors to receive Periodic Cash Distributions or additional Units, the actual amount of fees paid will vary from those set forth above. The following table summarizes the forms and amounts of compensation and reimbursed expenses paid to the General Partners or their affiliates for the year ended December 31, 1995 and the Period January 1, 1996 through June 30, 1996 showing actual amounts and the maximum allowable amounts for management and servicing fees. No other compensation was paid to the General Partners during such periods. Such fees were established by the General Partners and were not determined by the arms-length negotiation. Year Ended December 31, 1995 Period Ended January 1, 1996 June 30, 1996
Maximum Maximum Amount Amount Allowable Form Actual Allowable Actual for Period PAID BY PARTNERSHIP Servicing Fee (1) ............................ $ 85,457 $128,186 $ 67,389 $101,084 Management Fee (2) ........................... $ 11,587 $ 34,773 $ 7,760 $ 23,280 Reimbursement of Operating Espenses .......... $ 22,769 $ 22,769 $ 17,647 $ 17,647 1% of Profits, Losses and Disbursements ...... $ 8,368 $ 8,368 $ 5,606 $ 5,606 PAID BY BORROWERS Loan Brokerage Fees .......................... $265,890 $265,890 $236,435 $488,546 Processing and Servicing Fees ................ $ 7,957 $ 7,957 $ 6,950 $ 6,950 ________________________ (footnotes to table) (1) Redwood Mortgage is entitled to receive a monthly servicing fee of one-eighth of one percent (.125%) or 1-1/2% per year of the total unpaid principal balance of each loan, except for the Formation Loan. However, Redwood Mortgage elected only to receive Monthly Servicing Fees equal to one percent (1%) per year. (2) The General Partners are entitled to receive a monthly fee for managing the Partnership's Mortgage Investment Portfolio in an amount up to 1/32 of one percent (1%) (.03125%) or 3/8 of one percent (1%) per year of the "net asset value" of the Partnership which equals the Partnership's assets less its liabilities. However, the General Partners elected only to receive Asset Management Fees in an amount equal to 1/8 of one percent (1%) per year. (3) Although Redwood Mortgage can receive loan brokerage fees of up to six percent (6%) or higher if such fees could have been negotiated with borrowers, the figures reflect actual loan brokerage fees charged on the Mortgage Investments.
CONFLICTS OF INTEREST The Partnership is subject to various conflicts of interest arising out of its relationships with the General Partners and their Affiliates, including conflicts related to the arrangements pursuant to which the General Partners will be compensated by the Partnership (See "COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES"). Because the Partnership was organized and is operated by the General Partners, these conflicts will not be resolved through arms length negotiations but through the exercise of the General Partners' judgment consistent with their fiduciary responsibility to the Limited Partners and the Partnership's investment objectives and policies. In this regard, the General Partners are, and will be subject to, public reporting requirements for prior public programs and for this program and thus will continue to have an obligation to keep investors appraised of material developments with respect to all partnerships in which they are the general partners, including material developments or events which give rise to a conflict of interest. (See "PRIOR PERFORMANCE SUMMARY"). Additionally, the Limited Partnership Agreement also imposes upon the General Partners an obligation to disclose and keep investors appraised of any developments that would otherwise be disclosed in accordance with public reporting requirements, including those developments which would give rise to a conflict of interest. The powers of the Limited Partners with respect to any such developments including the power to amend the Partnership Agreement, remove the General Partners and/or amend or terminate contracts for services or goods between the General Partners and the Partnership act as a check to the actions of General Partners including their ability to resolve a conflict of interest, or to avoid a potential conflict of interest consistent with and in accordance with their fiduciary duty. (See "FIDUCIARY DUTY OF THE GENERAL PARTNERS" and "INVESTMENT OBJECTIVES AND CRITERIA"). These conflicts include, but are not limited to, the following: 1. Conflicts Arising As A Result Of The General Partners' Legal And Financial Obligations To Other Partnerships. The General Partners and their Affiliates serve as the general partners of other limited partnerships, including real estate mortgage limited partnerships with investment objectives similar to those of the Partnership. They may also organize other real estate mortgage limited partnerships in the future, including partnerships which may have investment objectives similar to those of the Partnership. The General Partners and such Affiliates have legal and financial obligations with respect to these partnerships which are similar to their obligations with respect to the Partnership. As general partners, they may have contingent liability for the obligations of such partnerships as well as those of the Partnership. The level of compensation payable to the General Partners or their Affiliates in connection with the organization and operation of other partnerships may exceed that payable in connection with the organization and operation of the Partnership. However, the General Partners and their Affiliates do not intend to offer for sale interests in any public programs (but not private programs) with investment objectives similar to the Partnership before substantially all initial proceeds of this Offering are invested or committed. Further, the General Partners believe that they have sufficient financial and legal resources to meet and discharge their obligations to the Partnership and to the other partnerships. In the event that a conflict were to arise, however, the General Partners will undertake the following steps: (i) they will seek the advice of counsel with respect to the conflict; (ii) in the event of a short fall of resources, they will seek to allot their financial and legal resources on a pro rata basis among the partnerships; (iii) in the event a pro rata allotment would materially adversely effect the operations of any partnership, the General Partners will use their best efforts to apply available resources to that partnership so as to attempt to prevent a material adverse effect, and the remainder of the resources, if any, would be applied on a pro rata basis. 2. Conflicts Arising From The General Partners' Allocation Of Time Between The Partnership And Other Activities. As a result of their possible future interests in other partnerships and the fact that they have also engaged and will continue to engage in other business activities, the General Partners and their Affiliates will have conflicts of interests in allocating their time between the Partnership and other activities in which they are involved. However, the General Partners believe that they, and their Affiliates, have sufficient personnel to discharge fully their responsibilities to other affiliated partnerships and ventures in which they are involved. Redwood Mortgage also provides loan brokerage services to other investors beside the Partnership. As a result, there will then exist conflicts of interest on the part of the General Partners between the Partnership and the other partnerships or investors with which they are affiliated at such time. The General Partners will decide which loans are appropriate for funding by the Partnership or by such other partnerships and investors after consideration of all relevant factors, including the size of the loan, portfolio diversification, and amount of uninvested funds and the length of time that excess funds have remained uninvested. To date, the General Partners have each allocated approximately 12-17 hours per week, exclusively on Partnership activities and estimate that they will continue to allocate approximately the same amount of time in the future. This amount may be higher during the initial offering and marketing stages and may be lower after several years of operations. The General Partners believe that they will have sufficient time, based upon the organization and personnel that they have built and retained over the last eighteen (18) years, to discharge fully their obligations to the Partnership. In the event that a conflict were to arise, however, the General Partners will take the following action: (i) they will seek the advice of counsel with respect to the conflict; (ii) in the event of a short fall of resources, they would seek to allot their financial and legal resources on a pro rata basis among the partnerships; (iii) in the event a pro rata allotment would materially adversely effect the operations of any partnership, the General Partners will use their best efforts to apply resources to that partnership so as to attempt to prevent a material adverse effect, and the remainder of the resources, if any, would be applied on a pro rata basis. 3. Amount Of Loan Brokerage Commissions Effects Rate Of Return To Limited Partners. None of the compensation set forth under "COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES" was determined by arms length negotiations. Redwood Mortgage anticipates that the loan brokerage commissions charged to borrowers by Redwood Mortgage will average approximately three to six percent (3-6%) of the principal amount of each loan, but may be higher or lower depending upon market conditions. The Loan Brokerage Commission shall be capped at four percent (4%) per annum of the Partnership's assets. Any increase in the Loan Brokerage Commission charged on loans may have a direct, adverse effect upon the interest rates charged by the Partnership on loans and thus the overall rate of return to Limited Partners. Conversely, if the General Partners reduced the loan brokerage commissions charged by Redwood Mortgage a higher rate of return might be obtained for the Partnership and the Limited Partners. This conflict of interest will exist in connection with every Mortgage Investment transaction, and Limited Partners must rely upon the fiduciary duties of the General Partners to protect their interests. In an effort to partially resolve this conflict, Redwood Mortgage has agreed that Loan Brokerage Commissions shall be limited to four percent (4%) per annum of the Partnership assets (See "COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES" and "INVESTMENT OBJECTIVES AND CRITERIA - Loan Brokerage Commissions"). As set forth in the Section of the Prospectus entitled "Compensation of the General Partners and Affiliates" the loan brokerage commissions to be paid to Redwood Mortgage are approximately equivalent to that fee which would customarily be paid to unrelated parties for the same service. However, in the event of a conflict with respect to the payment of the loan brokerage commissions or the quality or type of loan, the General Partners will resolve the conflict in favor of the Partnership. The General Partners have reserved the right to retain the services of other firms, in addition to or in lieu of Redwood Mortgage, to perform the brokerage services, loan servicing and other activities in connection with the Partnership's Mortgage Investment portfolio that are described in this Prospectus. Any such other firms may also be affiliated with the General Partners. 4. Terms Of Formation Loan Are Not A Result Of Arms Length Negotiations. Upon activation of the Partnership, Redwood Mortgage will borrow from the Partnership an amount equal to not more than nine percent (9%) of the Gross Proceeds of this Offering. This loan (the "Formation Loan") will not bear interest. Accordingly, the Partnership's rate of return on the Formation Loan will be below the rate obtainable by the Partnership on its Mortgage Investments. The terms of the Formation Loan were not the result of arm's length negotiations. Moreover, this loan will be an unsecured obligation of Redwood Mortgage (See "PLAN OF DISTRIBUTION - Formation Loan"). The amount of any early withdrawal penalties received by the Partnership from Investors shall reduce the principal balance of the Formation Loan, thus reducing the amount owed from Redwood Mortgage to the Partnership. In the event of default in the payment of such loan a conflict of interest would arise on the General Partners part in connection with the enforcement of the loan and the continued payment of other fees and compensation, including the Loan Brokerage Fee and Loan Servicing Fee, to Redwood Mortgage. If the General Partners are removed, no other General Partners are elected, the Partnership is liquidated and Redwood Mortgage is no longer receiving payments for services rendered, the debt on the Formation Loan shall be forgiven by the Partnership and Redwood Mortgage shall be immediately released from any further obligation under the Formation Loan. In the event of a conflict with respect to the repayment of the Formation Loan, or a default thereof or the continued payment of other fees and compensation to Redwood Mortgage, the Partnership, at the Partnership's expense, will retain independent counsel, who has not previously represented the General Partners to represent the Partnership in connection with such conflict. 5. Potential Conflicts if Partnerships Invests in Mortgage Investments With General Partners or Affiliates. The Partnership may invest in mortgages acquired by the General Partners or Affiliates. The Partnership's portion of the total Mortgage Investment may be smaller or greater than the portion of the Mortgage Investment made by the General Partners or Affiliates, but will generally be on terms substantially similar to the terms of the Partnership's investment. Such an investment would be made after a determination by the General Partners that the entire Mortgage Investment is in an amount greater than would be suitable for the Partnership to make on its own or that the Partnership will benefit through broader diversification of its Mortgage Investment portfolio. However, investors should be aware that investing with the General Partners or Affiliates could result in a conflict of interest between the Partnership and the General Partners or Affiliates in the event that the borrower defaults on the Mortgage Investment and both the Partnership and the General Partners or Affiliates protect their own interest in the Mortgage Investment and in the underlying security. In order to minimize the conflicts of interest which may arise if the Partnership invests in Mortgage Investments with the General Partners or Affiliates, the Partnership will acquire its interest in the loan on the same terms and conditions as does the General Partners or Affiliates and the terms of the Loan will conform to the investment criteria established by the Partnership for the origination of Mortgage Investments. By investing in a Mortgage Investment on the same terms and conditions as does the General Partners or an Affiliate, the Partnership will be entitled to enforce the same rights as the General Partners or Affiliate in such Mortgage Investment and the General Partners and Affiliate will not have greater rights in the loan than does the Partnership. 6. General Partners Will Represent Both Parties In Sales Of Real Estate Owned to Affiliates. In the event the Partnership becomes the owner of any real property by reason of foreclosure on a Mortgage Investment, the General Partners' first priority will be to arrange the sale of the property for a price that will permit the Partnership to recover the full amount of its invested capital plus accrued but unpaid interest and other charges, or so much thereof as can reasonably be obtained in light of current market conditions. In order to facilitate such a sale, the General Partners may, but are not required to, arrange a sale to persons or entities controlled by them, e.g., to another partnership formed by one of the General Partners for the express purpose of acquiring foreclosure properties from lenders such as the Partnership. The General Partners will be subject to conflicts of interest in arranging such sales since they will represent both parties to the transaction. For example, the Partnership and the potential buyer will have conflicting interests in determining the purchase price and other terms and conditions of sale. The General Partners decision will not be subject to review by any outside parties. The General Partners have undertaken to resolve these conflicts as follows: (a) No foreclosed property will be sold to the General Partners or an Affiliate unless the General Partners have first used their best efforts to sell the property at a fair price on the open market for at least 60 days. (b) In the event the property will be sold to an Affiliate, the net purchase price must be more favorable to the Partnership than any third party offer received. The purchase price will also be no lower than the independently appraised value of such property at the time of sale, and (2) no lower than the total amount of the Partnership's "investment" in the property. The Partnership's investment includes without limitation the following: the unpaid principal amount of the Partnership's Mortgage Investment, unpaid interest accrued to the date of foreclosure, expenditures made to protect the Partnership's interest in the property such as payments to senior lienholders and for insurance and taxes, costs of foreclosure (including attorneys' fees actually incurred to prosecute the foreclosure or to obtain relief from a stay in bankruptcy), and any advances made by the General Partners on behalf of the Partnership for any of the foregoing less any income or rents received, condemnation proceeds or other awards received or similar monies received. A portion of the purchase price may be paid by the affiliate executing a promissory note in favor of the Partnership. Any such note will be secured by a deed of trust on the subject property. The principal amount of such a note, plus any obligations secured by senior liens, will not exceed ninety percent (90%) of the purchase price of the property. The terms and conditions of such a note will be comparable to those the Partnership requires when selling foreclosed properties to third parties. (c) Neither the General Partners nor any of their Affiliates would receive a real estate commission in connection with such a sale. It is the General Partners' opinion that these undertakings will yield a price which is fair and reasonable for all parties, but no assurance can be given that the Partnership could not obtain a better price from an unaffiliated third party purchaser. 7. Professionals Hired By General Partners Do Not Represent Limited Partners. The attorneys, accountants and other experts who perform services for the Partnership also perform services for the General Partners and their Affiliates. It is anticipated that such representation will continue in the future. Such professionals, including, Wilson, Ryan & Campilongo, counsel for the Partnership and the General Partners, do not represent the Limited Partners. Under the Partnership Agreement, each of the Limited Partners acknowledges and agrees that such professionals, including, Wilson, Ryan & Campilongo, counsel for the Partnership and the General Partners, representing the Partnership and the General Partners and their Affiliates do not represent, and shall not be deemed under applicable codes of professional conduct and responsibility to have represented or be representing, any or all of the Limited Partners in any respect. Such professionals, however, are obligated under those codes not to engage in unethical or improper professional conduct. In the event of a conflict regarding services performed by attorneys, accountants and other experts, with respect to the General Partners and/or the Partnership and Limited Partners, then the Partnership, at Partnership expense, will retain independent counsel, who has not previously represented the Partnership or the General Partners to represent the interests of the Limited Partners solely with respect to the issue of a conflict regarding the services performed by professionals. FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNERS The General Partners are accountable to the Partnership as fiduciaries, and consequently are under a fiduciary duty to exercise good faith and integrity in conducting the Partnership's affairs and to conduct such affairs in the best interest of the Partnership. The California Revised Limited Partnership Act provides that a limited partner may institute legal action on behalf of himself and all other similarly situated limited partners (a class action) to recover damages for a breach by a general partner of its fiduciary duty, or on behalf of the partnership (a partnership derivative action) to recover damages from a general partner or third parties where the general partner has failed or refused to enforce the obligation. Based upon the present state of the law and federal statutes, regulations, rules and relevant judicial and administrative decisions, it appears that (1) the Limited Partners of the Partnership have the right, subject to the provisions of applicable procedural rules and statutes to: (a) bring Partnership class actions, (b) enforce rights of all Limited Partners similarly situated, and (c) bring Partnership derivative actions to enforce rights of the Partnership including, in each case, rights under certain rules and regulations of the Securities and Exchange Commission; and (2) Limited Partners who have suffered losses in connection with the purchase or sale of their Units due to a breach of fiduciary duty by the General Partners in connection with such purchase or sale, including misapplication by the General Partners of the proceeds from the sale of Units, may have a right to recover such losses from the General Partners in an action based on Rule 10b-5 under the Securities and Exchange Act of 1934. In addition, where an employee benefit plan has acquired Units, case law applying the fiduciary duty concepts of ERISA could be viewed to apply to the General Partners. The General Partners will provide quarterly and annual reports of operations and must, on demand, give any Limited Partner or his/her legal representative a copy of the Form 10-K and true and full information concerning the Partnership's affairs. Further, the Partnership's books and records may be inspected or copied by its Limited Partners or their legal representatives at any time during normal business hours. This is a rapidly developing and changing area of the law and this summary, describing in general terms the remedies available to Limited Partners for breaches of fiduciary duty by the General Partners, is based on statutes and judicial and administrative decisions as of the date of this Prospectus. Limited Partners who have questions concerning the duties of the General Partners or who believe that a breach of fiduciary duty by a General Partner has occurred should consult their own counsel. Provision has been made in the Partnership Agreement that the General Partners shall have no liability to the Partnership for loss arising out of any act or omission by the General Partners, provided that the General Partners determine in good faith that their conduct was in the best interest of the Partnership and, provided further, that their conduct did not constitute gross negligence or gross misconduct. As a result, purchasers of Units may have a more limited right of action in certain circumstances than they would in the absence of such a provision in the Partnership Agreement. The Partnership Agreement also provides that, to the extent permitted by law, the Partnership shall indemnify the General Partners against liability and related expenses (including attorneys' fees) incurred in dealings with third parties, provided that the conduct of the General Partners are consistent with the standards described in the preceding paragraph. Notwithstanding the foregoing, neither the General Partners nor their Affiliates shall be indemnified for any liability imposed by judgment (including costs and attorneys fees) arising from or out of a violation of state or federal securities laws associated with the offer and sale of Units offered hereby. However, indemnification will be allowed for settlements and related expenses of lawsuits alleging securities law violations and for expenses incurred in successfully defending such lawsuits provided that (a) a court either approves indemnification of litigation costs if the General Partners are successful in defending the action; or (b) the settlement and indemnification is specifically approved by the court of law which shall have been advised as to the current position of the Securities and Exchange Commission (as to any claim involving allegations that the Securities Act of 1933 was violated) and California Commissioner of Corporations or the applicable state authority (as to any claim involving allegations that the applicable state's securities laws were violated). Any such indemnification shall be recoverable out of the assets of the Partnership and not from Limited Partners. A successful claim for such indemnification would deplete Partnership assets by the amount paid. PRIOR PERFORMANCE SUMMARY THE INFORMATION PRESENTED IN THIS SECTION REPRESENTS THE HISTORICAL EXPERIENCE OF REAL ESTATE MORTGAGE PROGRAMS MANAGED BY THE GENERAL PARTNERS AND THEIR AFFILIATES. INVESTORS IN THE PARTNERSHIP SHOULD NOT ASSUME THAT THEY WILL EXPERIENCE RETURNS IF ANY, COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN SUCH PRIOR REAL ESTATE MORTGAGE PROGRAMS. Experience and Background of General Partners and Affiliates. The General Partners and their Affiliates have, since 1978, sponsored and managed eight (8) real estate mortgage limited partnerships not including the Partnership. All partnerships have investment objectives similar to the Partnership. Six of these partnerships were offered without registration under the Securities Act of 1933 in reliance upon the intrastate offering exemption from the registration requirements thereunder and/or the exemption for transactions not involving a public offering. Three of these partnerships including the Partnership were registered under Securities Act of 1933. The effect of not registering six of the prior partnerships is that the partners in the respective partnerships have differing rights with respect to the transfer of their interests in the partnerships. When securities are issued without registration under the Securities Act of 1933, either in reliance upon the intrastate exemption or the exemption for transactions not involving a public offering, those securities may not be transferred without registration under, or an exemption from, the Securities Act of 1933. On the other hand, securities issued pursuant to a registration statement under the Securities Act of 1933 generally may be sold without such registration. In general, securities issued pursuant to registration under the Securities Act of 1933 are more freely transferable than those which are issued without registration under the Securities Act of 1933. However, even securities issued pursuant to a registration statement are subject to restrictions on transfer under the securities laws of the states in which they are issued and under the terms of their respective partnership agreements. As of June 30, 1996, the eight (8) partnerships had raised aggregate capital contributions of approximately $47,637,000 from approximately 3,098 investors and had total current net assets under management of $43,805,044. As of June 30, 1996, the number of outstanding Mortgage Investments made by these partnerships was approximately 304 ($38,834,738) which are secured by properties located in Northern California. Of these loans, approximately 139 which represents twenty-two percent (22%) of the Partnerships portfolio ($8,673,500) are secured by single family residences, 30, which represents eleven percent (11%) of the Partnerships portfolio ($4,171,500) are secured by multi-family units, 120 which represents fifty-eight percent (58%) of the Partnerships portfolio ($22,391,210) are secured by commercial properties and 15 which represents nine percent (9%) of the Partnerships portfolio ($3,598,428) are secured by unimproved property. Redwood Mortgage Investors VII ("RMI VII") is a California limited partnership of which D. Russell Burwell, Michael R. Burwell and Gymno Corporation are the Co-General Partners. RMI VII was registered under the Securities Act of 1933. As of June 30, 1996, RMI VII had made 221 Mortgage Investments totalling $31,158,361. Of these Mortgage Investments, approximately 71 (thirty-seven percent (37%) of the total principal balance of all Mortgage Investments) are first mortgages, 117 (fifty-nine percent (59%) of the total principal balance of all Mortgage Investmenst) are second mortgages, 33 (four percent (4%) of the total principal balance of all Mortgage Investments) are third and fourth mortgages. Two are construction loans. The average size of the Mortgage Investment is $140,988. Redwood Mortgage Investors VI ("RMI VI") is a California limited partnership of which D. Russell Burwell, Michael R. Burwell and Gymno Corporation are the Co-General Partners. RMI VI was registered under the Securities Act of 1933. As of December 31, 1995, RMI VI had a total capitalization of $11,040,895 and 774 investors. Redwood Mortgage Investors V ("RMI V") is a California limited partnership of which D. Russell Burwell, Michael R. Burwell and Gymno Corporation are the co-General Partners. RMI V was qualified under California securities laws and a permit allowing RMI V to offer and sell Units was issued by the Commissioner of Corporations on September 15, 1986. As of June 30, 1996, RMI V had a total capitalization of $4,525,792 and 399 investors. Redwood Mortgage Investors IV ("RMI IV") is a California limited partnership of which D. Russell Burwell, Michael R. Burwell and Gymno Corporation are General Partners. RMI IV was qualified under California securities laws and a permit allowing RMI IV to offer and sell units was issued by the Commissioner of Corporations on October 2, 1984. The Commissioner of Corporations subsequently extended the effectiveness of the RMI IV offering permit until September 18, 1986. As of June 30, 1996, RMI IV had a total capitalization of $8,168,440 and 711 investors. Redwood Mortgage Investors ("RMI") and Redwood Mortgage Investors II ("RMI II") are California limited partnerships of which D. Russell Burwell, Michael R. Burwell and Gymno Corporation are General Partners. Redwood Mortgage Investors III ("RMI III") is also a California limited partnership of which D. Russell Burwell, Michael R. Burwell and Gymno Corporation are General Partners. All three of these partnerships were sold only to a limited number of selected California residents in compliance with applicable federal and state securities laws. As of June 30, 1996, RMI had 30 investors, RMI II had 36 investors and RMI III had 87 investors. The RMI offering terminated on July 31, 1982, at which time it had a total capitalization of approximately $1,090,916. The RMI II offering terminated on June 30, 1983, at which time it had a total capitalization of approximately $1,282,802. The RMI III offering terminated on June 30, 1984 at which time it had a total capitalization of approximately $1,429,624. This Partnership was reoffered in July, 1992 and as of June 30, 1996 additional contributions of $838,800, were received. Corporate Mortgage Investors ("CMI") is a California limited partnership of which D. Russell Burwell and A & B Financial Services, Inc. are the co-General Partners. The offering period for CMI commenced August 1, 1978, and interests in CMI have been closed. The interest in CMI were offered and sold exclusively to qualified pension and profit sharing plans and other institutional investors. Commencing January 1, 1984, a segregated portfolio was created within CMI, into which all new subscriptions received by CMI were placed. The two (2) Portfolios within CMI are designated Portfolio I and Portfolio II, respectively. As of June 30, 1996, the two portfolios were merged and the total assets were $1,735,506 and 134 investors. The funds raised by these partnerships have been used to make loans secured solely by deeds of trust. All loans are arranged and serviced by Redwood Mortgage, for which it receives substantial compensation. All of these partnerships will have funds to invest in loans at the same time as this Partnership (See "CONFLICTS OF INTEREST - Interest in Other Partnerships"). Copies of audited financial statements for all prior partnerships are available from the General Partners upon request and may be obtained upon payment of a fee sufficient to cover copying costs. Any investor or prospective investor who would like to receive such information, should contact D. Russell Burwell, a general partner of the Partnership at 650 El Camino Real, Suite G, Redwood City, California 94063; (415) 365-5341. All of the foregoing Partnerships have achieved their stated goals to date. Additional Information. Certain additional information regarding the eight partnerships whose investment objectives are similar to the Partnership's is set forth in Appendix I in the Prior Performance Tables: TABLE I Experience in Raising and Investing Funds. TABLE II Compensation to General Partners and Affiliates. TABLE III Operating Results of Prior Limited Partnerships. TABLE V Payment of Mortgage Investments. Table IV is not included herein because none of the partnerships has completed its operations or disposed of all of its loans. Table VI (Descriptions of Open Mortgage Investments of Prior Limited Partnerships) is contained in Part II of the Registration Statement. Upon request, the General Partners shall provide without charge a copy of the most recent Form 10-K Annual Report filed with the Securities and Exchange Commission by any prior public program that has reported to the Securities and Exchange Commission within the last twenty-four months. Exhibits to any Annual Report on Form 10-K may be obtained upon payment of a fee sufficient to cover the copying costs. No Major Adverse Developments. There have been no major adverse business developments or conditions experienced by any of the prior limited partnerships that would be material to prospective investors in the Partnership. While the Tax Reform Act of 1986 made a number of changes to the tax laws, some dealing with limitations on interest deductions, it is not expected to have a material adverse effect upon the performance of the prior limited partnerships. In fact, since the deductibility of residential mortgage interest is one of the few deductible items of interest remaining, the Tax Reform Act of 1986 may in fact enhance the utility of residential mortgage loans of the type offered by these limited partnerships. Prior Public Partnerships. In addition to the Partnership, the General Partners have previously sponsored two public partnership registered under the Securities Act of 1933. These partnerships are RMI VI and RMI VII. Three Year Summary of Mortgage Investments Originated by Prior Limited Partnerships. During the three-year period ending June 30, 1996, Mortgage Investments were made by prior programs with investment objectives similar to those of the Partnership. The following table provides a summary of the Mortgage Investments originated for the three-year period as of June 30, 1996. The last column of the following chart reflects total Mortgage Investment balances on all loans for each prior program including those which originated prior to the three (3) year period ending June 30, 1996. The following tables do not include information regarding the Partnership and its existing Mortgage Investment portfolio. - ------------------------- ---------------- ------------------- ------------------------ ---------------------------------------- Name of Partnership Number of Estimated Total Outstanding Mortgage Total Outstanding Mortgage Amount of Investment Balances Mortgage Investments Investments Mortgage Originated 07/01/93 as of 06/30/96 Investment to 06/30/96 (from inception)
- ------------------------ ---------------- ------------------- ------------------------ ----------------------------------------- CMI ............................. 20 $ 1,833,266.67 $ 1,227,711.55 $ 1,647,476.61 - ------------------------------------------- --- -------------- -------------- -------------- RMI ............................. 17 $ 1,308,542.94 $ 863,255.49 $ 1,138,168.22 - ------------------------------------------- --- -------------- -------------- -------------- RMI II ........................... 15 $ 1,088,733.18 $ 445,064.77 $ 725,978.94 - ------------------------------------------- --- -------------- -------------- -------------- RMI III ........................... 10 $ 820,383.27 $ 796,568.73 $ 1,244,106.12 - ------------------------------------------- --- -------------- -------------- -------------- RMI IV ........................... 28 $ 6,515,657.58 $ 4,839,848.80 $ 8,344,059.66 - ------------------------------------------- --- -------------- -------------- -------------- RMI V ............................ 20 $ 1,984,598.35 $ 1,507,214.52 $ 3,698,939.83 - ------------------------------------------- --- -------------- -------------- -------------- RMI VI ........................... 33 $ 7,835,488.84 $ 5,328,453.81 $ 9,879,967.86 - ------------------------------------------- --- -------------- -------------- -------------- RMI VII ........................... 48 $ 14,858,725.21 $ 7,944,672.89 $ 12,156,040.77 - ------------------------------------------- --- -------------- -------------- -------------- TOTAL ............................ 191 $ 36,245,396.04 $ 22,952,790.56 $ 38,834,738.01 - ------------------------------------------- --- -------------- -------------- --------------
A further breakdown of these Mortgage Investments according to the type of deed of trust, the location of the property securing the loans, and the type of property securing the Mortgage Investment is provided below: Loans First Trust Deeds $17,771,450.00 Second Trust Deeds 17,519,946.04 Third Trust Deeds 554,000.00 Fourth Trust Deeds 400,000.00 -------------------- Total $36,245,396.04 ==================== Location of Loans Santa Clara County $10,010,312.62 San Mateo County 5,883,925.00 AlamedaCounty 5,430,458.42 San Francisco County 4,587,750.00 Stanislaus 3,478,750.00 Contra Costa County 3,088,000.00 Santa Barbara 525,000.00 Sonoma 409,500.00 Marin 400,500.00 Monterey 397,000.00 Sacramento County 355,000.00 Mendocino 300,000.00 San Joaquin 275,000.00 Yuba 269,000.00 Shasta 225,000.00 San Luis Obispo 200,000.00 Santa Cruz County 100,000.00 Solano 60,000.00 Other Counties * 250,200.00 ----------------- Total $36,245,396.04 ==================== Type of Property Owner Occupied Homes $4,273,069.04 Non-Owner Occupied 3,044,000.00 Commercial 20,482,077.00 Raw Land 3,250,500.00 Apartmernts 5,195,750.00 -------------------- Total $36,245,396.04 ==================== * El Dorado Napa Mariposa Amador MANAGEMENT General. The General Partners will be responsible for the management of the proceeds of the offering and the investments of the Partnership. Services performed by the General Partners include, but are not limited to: implementation of Partnership investment policies; identification, selection and extension of Mortgage Investments, preparation and review of budgets, cash flow and taxable income or loss projections and working capital requirements; periodic physical inspections and market surveys, supervision of any necessary litigation; preparation and review of Partnership reports, communications with Limited Partners; supervision and review of Partnership bookkeeping, accounting and audits; supervision and review of Partnership state and federal tax returns; and supervision of professionals employed by the Partnership in connection with any of the foregoing, including attorneys and accountants. The General Partners may be removed by a majority of the Limited Partners (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT -Rights and Liabilities of the Limited Partners"). D. Russell Burwell. D. Russell Burwell, age 64, General Partner, Director (1978 present) and President (1979 present) of Redwood Home Loan Co.; Director (1978-present) and President (1979 present) of A & B Financial Services, Inc., a finance company; Director (since 1986) and president (since 1986) of Gymno Corporation. Mr. Burwell is licensed as a real estate sales person and is the majority owner of The Redwood Group, Ltd. (described below). Mr. Burwell is the father of Michael R. Burwell (described below). Michael R. Burwell. Michael R. Burwell, age 40, General Partner, past member of Board of Trustees and Treasurer, Mortgage Brokers Institute (1984-1986); Director, Chief Financial Officer, Secretary, and Treasurer Redwood Home Loan Co. (1979-present; Director, Secretary and Treasurer A & B Financial Services, Inc. (1980-present); Director, Chief Financial Officer and Secretary (since 1986) of Gymno Corporation; Director, Secretary and Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as a real estate sales person. He is the son of D. Russell Burwell (described above). Gymno Corporation. Gymno Corporation, General Partner, is a California corporation formed in 1986 for.the purpose of acting as a general partner of this Partnership and of other limited partnerships formed by the individual General Partners. D. Russell Burwell and Michael R. Burwell are equal (i.e., 50-50) shareholders of Gymno Corporation. D. Russell Burwell and Michael R. Burwell are Gymno's Directors; D. Russell Burwell is its President and Michael R. Burwell is its Chief Financial Officer and Secretary. The General Partners have represented that they have a combined net worth of in excess of $1,000,000 determined on a GAAP basis. Audited financial statements for Gymno Corporation are set forth hereafter. (See "CONFLICTS OF INTEREST - Interest in other Partnerships" and "RISK FACTORS - Net Worth of General Partners"). Redwood Mortgage. Redwood Mortgage 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 will act as the loan broker and servicing agent in connection with Mortgage Investments, as it has done on behalf of several other limited partnerships formed by the General Partners (See "PRIOR PERFORMANCE SUMMARY"). Redwood Mortgage is a subsidiary of The Redwood Group, Ltd. The Redwood Group, Ltd. The Redwood Group, Ltd., a California corporation, is a diversified financial services company specializing in various aspects of the mortgage lending and investment business. Its various subsidiaries have arranged over $400,000,000 in loans secured in whole or in part by first, second and third deeds of trust. Its subsidiaries include Redwood Mortgage and A & B Financial Services, Inc. D. Russell Burwell, one of the General Partners, is the majority shareholder of The Redwood Group, Ltd. Theodore J. Fischer. Theodore J. Fischer, age 47, Director and Vice President of Redwood Home Loan Co. (1980-present); licensed real estate broker (1979-present); Assistant Vice President, Western Title Insurance Co. (1977-1980); Business Development representative, Transamerica Title Insurance Co. (1976-1977). SELECTED OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT No person or entity owns beneficially more than five percent (5%) of the ownership interest in the Partnership. The following tables sets forth the beneficial ownership interests in the Partnership as of June 30, 1996 by (i) each General Partner of the Partnership and (ii) all General Partners as a group. Amount of Beneficial Percent Title of Class Name and Address Ownership of Class Units Gymno Corporation, $12,578 1/10 of 1% 650 El Camino Real, Suite G, Redwood City, California 94063(1) D. Russell Burwell, $0 0% 650 El Camino Real Suite G, Redwood City, California 94063 Michael R. Burwell, $0 0% 650 El Camino Real, Suite G, Redwood City, California 94063 All General Partners as a group $12,578 1/10 of 1% __________________________ (1) Gymno Corporation is owned fifty percent (50%) by D. Russell Burwell and fifty percent (50%) by Michael R. Burwell (See "MANAGEMENT"). SELECTED FINANCIAL DATA REDWOOD MORTGAGE INVESTORS VIII (A California Limited Partnership)
As of and for the Year ended December 31 -------------------------------------------------------------------- 1996 1995 1994 1993 As of June 30, 1996 Loans secured by trust deeds ............................ $ 14,196,953 12,047,252 6,484,707 2,336,674 Less: Allowance for loan losses ......................... $ (86,505) (39,152) (13,120) 0 Real estate held for Sale ............................... 0 0 0 0 Cash, cash equivalents and other assets ................. $ 1,754,518 1,376,237 1,008,205 414,178 Total assets ............................................ $ 15,864,966 13,384,337 7,479,792 2,750,852 Liabilities ............................................. $ 2,908,000 1,914,010 189,300 128,772 Partners capital General partners ...................................... $ 12,578 11,325 7,737 2,887 Limited partners ...................................... $ 12,944,388 11,459,002 7,282,755 2,619,193 Total partners capital ............................... $ 12,956,966 11,470,327 7,290,492 2,622,080 Total liabilities/partners capital ................... $ 15,864,966 13,384,337 7,479,792 2,750,852 Revenues ................................................ $ 744,289 964,780 468,546 113,476 Operating expenses Promotional interest ................................. 0 0 0 0 Management fee ....................................... $ 7,760 11,587 5,906 192 Provisions for losses on loans ....................... $ 19,085 26,032 13,120 0 Provisions for lossses on real estate held for sale ............................................... $ 0 0 0 0 Other ................................................ $ 156,810 90,328 39,651 8,269 Net income ............................................ $ 560,634 836,833 409,869 105,015 Net income allocated to General Partners ............. $ 5,606 8,368 4,099 1,050 Net income allocated to Limited Partners ............. $ 555,028 828,465 405,770 103,965 Net income per $1,000 invested by Limited Partners for entire period: - where income in reinvested and compounded ........... $ 83 81 85 41 - where partner receives income in monthly distributions .................................... $ 80 79 83 40
ORGANIZATIONAL CHART ------------------------------------------------- THE REDWOOD GROUP, INC. ------------------------------------------------- -------------------------------------------- D. RUSSELL BURWELL (1) -------------------------------------------- - ----------------------------------------- ------------------------ REDWOOD MORTGAGE (2) A & B FINANCIAL SERVICES, INC. (2) - ----------------------------------------- ------------------------ ------------------------------- GYMNO CORPORATION (Corporate General Partner) ------------------------------- - -------------------------------- --------------------------------- D. RUSSELL BURWELL (3) MICHAEL R. BURWELL (3) (Individual General Partner) (Individual General Partner) - -------------------------------- --------------------------------- ------------------------------------ PARTNERSHIPS WE MANAGE ------------------------------------ ----------------------------------------------------- CORPORATE MORTGAE INVESTORS REDWOOD MORTGAGE INVESTORS REDWOOD MORTGAGE INVESTOR II REDWOOD MORTGAGE INVESTORS III REDWOOD MORTGAGE INVESTORS IV REDWOOD MORTGAGE INVESTOR V REDWOOD MORTGAGE INVESTORS VI REDWOOD MORTGAGE INVESTORS VII REDWOOD MORTGAGE INVESTOR VIII ----------------------------------------------------- (1) D. Russell Burwell is the majority shareholder of The Redwood Group, Inc. (2) Redwood Mortgage and A&B Financial Services, Inc. Are subsidairies of The Redwood Group, Inc. (3) D. Russell Burwell and Michael R. Burwell are the sole shareholders of Gymno Corporationa. INVESTMENT OBJECTIVES AND CRITERIA Principal Objectives. The Partnership is in the business of extending loans to the general public secured by first and junior deeds of trust on real property. The Partnership has been operating for three years and has made Mortgage Investments in the aggregate in excess of $22,000,000. The General Partners have not yet identified nor committed to make any Mortgage Investments from the proceeds of this Offering and, as of the date of the Prospectus, have not entered into any negotiations with respect to extending any Mortgage Investments. The Partnership's primary objectives are to: 1. Yield a high rate of return from mortgage lending; and 2. Preserve and protect the Partnership's capital. Investors should not expect the Partnership to provide tax benefits of the type commonly associated with limited partnership tax shelter investments. The Partnership is intended to serve as an investment alternative for investors seeking current income. However, unlike other investments which are intended to provide current income, an investment in the Partnership will be less liquid, not readily transferable, and not provide a guaranteed return over its investment life. The foregoing objectives of the Partnership will not change, however, the Limited Partnership Agreement does provide that the General Partners shall have sole and complete charge of the affairs of the Partnership and shall operate the business for the benefit of all partners. General Standards for Mortgage Investments. The Partnership is engaged in the business of making loans to members of the general public which will generally be secured by deeds of trust on real property, including single-family residences (including homes, condominiums and townhouses), multiple unit residential property (such as apartment buildings), commercial property (such as stores, shops and offices), and unimproved land. Based on prior experience, the General Partners anticipate that of the number of Mortgage Investments made, approximately forty percent to sixty percent (40%-60%) of the total dollar amount of Mortgage Investments will be secured by single family residences, twenty percent to fifty percent (20%-50%) by commercial properties, ten percent to twenty percent (10%-20%) by apartments, and one percent to ten percent (1%-10%) by unimproved land. As of June 30, 1996, of the Partnership's outstanding Mortgage Investment portfolio twenty-nine percent (29%) is secured by single family residences, fifty-two percent (52%) by commercial properties, seventeen percent (17%) by multi-unit properties and two percent (2%) by unimproved land. The Partnership will also make Mortgage Investments secured by promissory notes which will be secured by deeds of trust and shall be assigned to the Partnership. The Partnership's Mortgage Investments will not be insured by the Federal Housing Administration or guaranteed by the Veterans Administration or otherwise guaranteed or insured. With the exception of the Formation Loan to be made to Redwood Mortgage for the purpose of paying certain of the Partnership's syndication expenses, Mortgage Investments will be made pursuant to a strict set of guidelines designed to set standards for the quality of the security given for the Mortgage Investments , as follows: 1. Priority of Mortgages. The lien securing each Mortgage Investment will not be junior to more than two other encumbrances (a first and, in some cases a second deed of trust) on the real property (the "security property") which is to be used as security for the loan. Although the Partnership may also make wrap-around (or "all-inclusive") Mortgage Investment, those wrap-around loans will include no more than two (2) underlying obligations (See "CERTAIN LEGAL ASPECTS OF Mortgage Investments - Special Considerations in Connection with Junior Encumbrances"). The General Partners anticipate that the Partnership's Mortgage Investments will be diversified as to priority approximately as follows: first mortgages - thirty-five percent (35%); second mortgages - sixty percent (60%); third mortgages - five percent (5%). As of June 30, 1996, of the Partnership's outstanding Mortgage Investment portfolio, forty-two percent (42%) were secured by first mortgages, fifty-six percent (56%) by second mortgages and two percent (2%) by third mortgages. 2. Geographic Area of Lending Activity. The Partnership will continue to generally limit lending to Deeds of Trust on properties located in Northern California. Approximately eighty percent (80%) of the Partnership's Mortgage Investments are secured by Deeds of Trust on properties in six San Francisco Bay Area counties and the General Partners anticipate that this will continue in the future. These counties, which have an aggregate population of over 3.5 million, are San Francisco, San Mateo, Santa Clara, Marin, Alameda and Contra Costa. The economy of the area where the security is located is important in protecting market values. Therefore, the General Partners will limit the geographic area of lending principally to the San Francisco Bay Area since it has a broad diversified economic base, an expanding working population and a minimum of buildable sites. The General Partners believe these factors contribute to a stable market for residential property. Although, the real estate market in Northern California, like most of the country, had fallen off during the early 1990's, the market appears to be recovering, the General Partners believe the strength of the economy of Northern California, especially in the Bay Area, will continue to protect market values. Although the General Partners anticipate that the Partnership's primary area of lending will continue to be Northern California, as the remainder of California economy continues its recovery the General Partner's may elect to make Mortgage Investments secured by real property located throughout California. A wide variety of indicators suggest that economic growth in California was strong in the first half of 1996. Statistics on the California labor market, personal income, consumer spending, firm formation and housing markets all point to large gains in economic activity this year. Strength in business and real estate loan demand contributed to a large increase in lending by California banks in April and May. This increase is reflected in a 16.5% increase in home sales volume in California on the first quarter, relative to a year earlier. The largest gains were in the San Francisco Bay Area, where sales were almost twenty-five percent (25%) higher than a year earlier. Home sales in San Mateo County were sixty-four percent (64%) higher in May over the same month last year. Sales in Alameda County were up 21.7% over the year. In the San Francisco Bay Area, the median single-family home price increased about three percent (3%) over the year ending in the first quarter. Although it is too early to declare that the California housing industry has recovered completely, rapid economic growth, job growth, decrease in unemployment rates, increase retail sales suggest that the California real estate market will remain strong. 3. Construction Mortgage Investments. The Partnership may make construction loans (other than home improvement loans on residential property) up to a maximum of ten percent (10%) of the Partnership's Mortgage Investment portfolio. As of June 30, 1996, nine percent (9%) of the Partnership's Mortgage Investment consisted of construction loans. In no event will the loan-to-value ratio on construction loans exceed eighty percent (80%) of the independently appraised completed value of the property. The Partnership will not make loans secured by properties determined by the General Partners to be Special-Use Properties. 4. Loan-to-Value Ratio. The amount of the Partnership's Mortgage Investment combined with the outstanding debt secured by a senior deed of trust on the security property generally will not exceed a specified percentage of the appraised value of the security property as determined by independent written appraisal at the time the loan is made, according to the following table: Type of Security Property Loan to-Value Ratio Residential 80% Commercial Property (including retail stores and office buidlings) 70% Unimproved Land 50% Any of the above loan-to-value ratios may be increased if, in the sole discretion of the General Partners, a given loan is supported by credit adequate to justify a higher loan-to-value ratio. In addition, such loan-to-value ratios may be increased by ten percent (10%) (e.g., to ninety percent (90%) for residential property), to the extent mortgage insurance is obtained; however, the General Partners do not anticipate obtaining mortgage insurance. Finally, the foregoing loan-to-value ratios will not apply to purchase-money financing offered by the Partnership to sell any real estate owned (acquired through foreclosure) or to refinance an existing loan that is in default at the time of maturity. In such cases, the General Partners shall be free to accept any reasonable financing terms that they deem to be in the best interests of the Partnership, in their sole discretion. Notwithstanding the foregoing, in no event will the loan-to-value ratio on construction loans exceed eighty percent (80%) of the independently appraised completed value of the property. The target loan-to-value ratio for Partnership Mortgage Investments as a whole is approximately seventy percent (70%). The Partnership will receive an independent appraisal for such security property on which it will make a mortgage loan. Generally, appraisers retained by the Partnership shall be licensed or qualified as independent appraisers and be certified by or hold designations from one or more of the following organizations: The Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"), the National Association of Review Appraisers, the Appraisal Institute, the Society of Real Estate Appraisers, M.A.I., Class IV Savings and Loan appraisers or other qualifications acceptable to the General Partners. The General Partners will review each appraisal report and will conduct a "drive-by" for each property on which an appraisal is made. A "drive by" means the General Partners or their Affiliates will drive to the property and assess the front exterior of the subject property, the adjacent properties and the neighborhood. A "drive by" does not include entering any structures on the property, however, in most cases the General Partners do enter the structures on the property. 5. Terms of Mortgage Investments. Most Mortgage Investments will be for a period of one to ten years, but in no event more than fifteen (15) years. Most Mortgage Investments will provide for monthly payments of principal and/or interest, with many Mortgage Investments providing for payments of interest only or are only partially amortizing with a "balloon" payment of principal payable in full at the end of the term. Some Mortgage Investments will provide for the deferral and compounding of all or a portion of accrued interest for various periods of time. 6. Equity Interests in Real Property. Most Mortgage Investments will provide for interest rates comparable to second mortgage rates prevailing in the geographical area where the security property is located. However, the General Partners reserve the right to make Mortgage Investments (up to a maximum of twenty-five percent (25%) of the Partnership's Mortgage Investment portfolio) bearing a reduced stated interest rate in return for an interest in the appreciation in value of the security property during the term of the Mortgage Investment (See "CONFLICTS OF INTEREST - Loan Brokerage Commissions"). 7. Escrow Conditions. Mortgage Investments will be funded through an escrow account handled by a title insurance company or by Redwood Mortgage, subject to the following conditions: (a) Satisfactory title insurance coverage will be obtained for all loans, with the title insurance policy naming the Partnership as the insured and providing title insurance in an amount at least equal to the principal amount of the loan. (Title insurance insures only the validity and priority of the Partnership's deed of trust, and does not insure the Partnership against loss by reason of other causes, such as diminution in the value of the security property, over appraisals, etc.). (b) Satisfactory fire and casualty insurance will be obtained for all loans, naming the Partnership as loss payee in an amount equal to cover the replacement cost of improvements (See "RISK FACTORS - Uninsured Losses"). (c) The General Partners do not intend to arrange for mortgage insurance, which would afford some protection against loss if the Partnership foreclosed on a loan and there were insufficient equity in the security property to repay all sums owed. If the General Partners determine in their sole discretion to obtain such insurance, the minimum loan-to-value ratio for residential property loans will be increased (See Paragraph 4 above). (d) All loan documents (notes, deeds of trust, escrow agreements, and any other documents needed to document a particular transaction or to secure the loan) and insurance policies will name the Partnership as payee and beneficiary. Mortgage Investments will not be written in the name of the General Partners, Redwood Mortgage or any other nominee. 8. Loans to General Partners and Affiliates. Generally, loans will not be made to the General Partners or their Affiliates. However, the Partnership will make the Formation Loan (see below) to Redwood Mortgage and may, in certain limited circumstances, loan funds to Affiliates to purchase real estate owned by the Partnership as a result of foreclosure. As of the date of this Prospectus no such loans have been made. 9. Purchase of Mortgage Investments from Affiliates and Other Third Parties. Existing Mortgage Investments may be purchased, from the General Partners, their affiliates or other third parties, only so long as any such Mortgage Investment is not in default and otherwise satisfies all of the foregoing requirements; provided, the General Partners and their affiliates will sell no more than a ninety percent (90%) interest and retain a ten percent (10%) interest in any Mortgage Investment sold to the Partnership which they have held for more than 180 days. In such case, the General Partners and affiliates will hold their ten percent (10%) interest and the Partnership will hold its ninety percent (90%) interest in the Mortgage Investment as tenants in common. The purchase price to the Partnership for any such loan will not exceed the par value of the note or its fair market value, whichever is lower. 10. Note Hypothecation. The Partnership also may make Mortgage Investments which will be secured by assignments of secured promissory notes. The amount of a Mortgage Investment secured by an assigned note will satisfy the loan-to-value ratios set forth in Paragraph 4 above (which are determined as a specified percentage of the appraised value of the underlying property) and also will not exceed eighty percent (80%) of the principal amount of the assigned note. For example, if the property securing a note is commercial property, the total amount of outstanding debts secured by such property, including the debt represented by the assigned note and any senior mortgages, must not exceed seventy percent (70%) of the appraised value of such property, and the Mortgage Investment will not exceed eighty percent (80%) of the principal amount of the assigned note. For purposes of making Mortgage Investments secured by promissory notes, the Partnership shall rely on the appraised value of the underlying property, as determined by an independent written appraisal which was conducted within the last twelve (12) months, or if such appraisal was not conducted within the last twelve months, then the Partnership will arrange for a new appraisal to be prepared for the property. All such appraisals will satisfy the standards described in Paragraph 4 above. Any Mortgage Investment evidenced by a note assigned to the Partnership will also satisfy all other lending standards and policies described herein. Concurrently with the Partnership's making of the Mortgage Investment, the borrower of Partnership funds, i.e., the holder of the promissory note, shall execute a written assignment which shall assign to the Partnership his/its interest in the promissory note. No more than twenty percent (20%) of the Partnership's portfolio at any time will be secured by promissory notes. 11. Joint Venturers. The Partnership may also participate in loans with other lenders (including certain other limited partnerships organized by the General Partners), other individuals and pension funds, by providing funds for or purchasing a fractional undivided interest in a loan meeting the requirements set forth above. Because the Partnership will not participate in a loan in which would not otherwise meet its requirements, the risk of such participation is minimized. 12. Diversification. The maximum investment by the Partnership in a Mortgage Investment will not exceed the greater of (a) $50,000, or (b) ten percent (10%) of the then total Partnership assets (See Joint Venturers, above). 13. Reserve Fund. A contingency reserve fund equal to three percent (3%) of the Gross Proceeds of the offering will be established for the purpose of covering unexpected cash needs of the Partnership. Credit Evaluations. The General Partners may consider the income level and general creditworthiness of a borrower to determine his ability to repay the Mortgage Investment according to its terms, but such considerations are subordinate to a determination that a borrower has sufficient equity in the security property to satisfy the loan-to-value ratios described above. Therefore, Mortgage Investments may be made to borrowers who are in default under other of their obligations (e.g., to consolidate their debts) or who do not have sources of income that would be sufficient to qualify for loans from other lenders such as banks or savings and loan associations. Loan Brokerage Commissions. Redwood Mortgage, an affiliate of the General Partners, will receive Loan Brokerage Commissions for services rendered in connection with the review, selection, evaluation, negotiation and extension of the Mortgage Investments from borrowers. Redwood Mortgage anticipates that Loan Brokerage Commissions will average approximately three to six percent (3-6%) of the principal amount of each Mortgage Investment, but may be higher or lower depending upon market conditions. The Loan Brokerage Commission will be limited to four percent (4%) per annum of the Partnership's total assets. The Loan Brokerage Commissions will be paid by the borrower through the title company or escrow agent at the close of escrow. Loan Servicing. It is anticipated that all Mortgage Investments will be "serviced" (i.e., loan payments will be collected) by Redwood Mortgage, an affiliate of the General Partners which will also act as a loan broker in the initial placement of Mortgage Investments. Redwood Mortgage will be compensated for such loan servicing activities (See "COMPENSATION TO GENERAL PARTNERS AND AFFILIATES"). Both Redwood Mortgage and the Partnership have the right to cancel this servicing agreement and any other continuing business relationships that may exist between them upon 30 days notice. Borrowers will make interest payments in arrears, i.e., with respect to the preceding 30-day period, and will make their checks payable to Redwood Mortgage Checks will be deposited in Redwood Mortgage's trust account, and, after checks have cleared, funds will be transferred to the Partnership's bank or money market account. Sale of Mortgage Investments. Although, the Partnership has not done so in the past, the Partnership or its Affiliates may sell Mortgage Investments to third parties including affiliated parties (or fractional interests therein) if and when the General Partners determine that it appears to be advantageous to do so. Borrowing. The Partnership will borrow funds for Partnership activities and may assign all or a portion of its loan portfolio as security for such loan(s). As of the date of this Prospectus, the Partnership has borrowed up to $2,892,000 pursuant to $3,000,000 line of credit. The General Partners anticipate engaging in this type of transaction when the interest rate at which the Partnership can borrow funds is somewhat less than the rate that can be earned by the Partnership on its Mortgage Investments, giving the Partnership the opportunity to earn a profit on this "spread." Such a transaction involves certain elements of risk and also entails possible adverse tax consequences (See "RISK FACTORS - Use and Risk of Leverage" and "FEDERAL INCOME TAX CONSEQUENCES - Investment by Tax-Exempt Investors"). It is the General Partners present intention to finance no more than fifty percent (50%) of the Partnership's investments with borrowed funds. (See "RISK FACTORS - Risks Relating to Creation of Unrelated Business Taxable Income"). Other Policies. The Partnership shall not: (i) issue senior securities, (ii) invest in the securities of other issuers for the purpose of exercising control, (iii) underwrite securities of other issuers, or (iv) offer securities in exchange for property. CERTAIN LEGAL ASPECTS OF MORTGAGE INVESTMENTS Each of the Partnership's Mortgage Investments (except the Formation Loan to Redwood Mortgage) will be secured by a deed of trust, the most commonly used real property security device in California. The following discusses certain legal aspects of the Mortgage Investments with respect to Federal and California law only. The deed of trust (also commonly referred to as a mortgage) creates a lien on the real property. The Parties to a deed of trust are: the debtor-trustor, a third-party grantee called the "trustee", and the lender-creditor called the "beneficiary." The trustor grants the property, irrevocably until the debt is paid, "in trust, with power of sale" to the trustee to secure payment of the obligation. The trustee has the authority granted by law, by the express provisions of the deed of trust and by the directions of the beneficiary. The Partnership will be a beneficiary under all deeds of trust securing Mortgage Investments. Foreclosure. Foreclosure of a deed of trust is accomplished in most cases by a nonjudicial trustee's sale under the power-of-sale provision in the deed of trust. Prior to such sale, the trustee must record a notice of default and send a copy to the trustor, to any person who has recorded a request for a copy of a notice of default and notice of sale, to any successor in interest to the trustor and to the beneficiary of any junior deed of trust. The trustor or any person having a junior lien or encumbrance of record may, until five business days before the date a foreclosure sale is held, cure the default by paying the entire amount of the debt then due, exclusive of principal due only because of acceleration upon default, plus costs and expenses actually incurred in enforcing the obligation and statutorily limited attorneys and trustee's fees. After the notice of default is recorded and following a three (3) month notice period and at least 20 days before the trustee's sale, notice of sale must be posted in a public place and published once a week over such period. A copy of the notice of sale must be posted on the property, and sent to the trustor, to each person who has requested a copy, to any successor in interest to the trustor and to the beneficiary of any junior deed of trust, at least 20 days before the sale. Following the sale, neither the debtor-trustor nor a junior lienholder has any right of redemption, and the beneficiary may not obtain a deficiency judgment against the trustor. A judicial foreclosure (in which the beneficiary's purpose is usually to obtain a deficiency judgment where otherwise available in the case of non-residential or commercial property) is subject to most of the delays and expenses of other lawsuits, sometimes requiring up to several years to complete. Following a judicial foreclosure sale, the trustor or his successors in interest will have certain rights to redeem the Property. However, such redemption rights will not be available if the creditor waives the right to any deficiency. Foreclosed junior lienholders do not have a right to redeem the Property after a Judicial foreclosure sale. The Partnership generally will not pursue a judicial foreclosure to obtain a deficiency judgment, except where, in the sole discretion of the General Partners, such a remedy is warranted in light of the time and expense involved. Tax Liens. Any liens for federal or state taxes filed after a loan is made which is secured by a junior deed of trust will be junior in priority to rights of the senior lienholder and any junior lienholders. Accordingly, the filing of federal or state tax lien will not effect the priority of the Partnership's deed of trust, regardless of whether it is a senior or junior deed of trust. Real property tax liens will be in all instances a lien senior to any deed of trust given by borrowers. Accordingly, even if the Partnership is the senior lienholder, if a real property tax lien is filed, the Partnership's deed of trust will be junior to the real property tax lien. For a discussion of the effect of a junior lien see "Special Considerations in Connection with Junior Encumbrances" below. Anti-Deficiency Legislation. California has four principal statutory prohibitions which limit the remedies of a beneficiary under a deed of trust. Two statutes limit the beneficiary's right to obtain a deficiency judgment against the trustor following foreclosure of a deed of trust, one based on the method of foreclosure and the other on the type of debt secured. Under one statute, a deficiency judgment is barred where the foreclosure was accomplished by means of a nonjudicial trustee's sale. It is anticipated that most of the Partnership's Mortgage Investments will be enforced by means of a nonjudicial trustee's sale, if foreclosure becomes necessary, and, therefore, a deficiency judgment may not be obtained. However, it is possible that some of the Partnership's Mortgage Investments will be enforced by means of judicial trustee's sale. Under the other statute, a deficiency judgment is barred in any event where the foreclosed deed of trust secured a "purchase money" obligation. With respect to Mortgage Investments, a promissory note evidencing a loan used to pay all or a part of the purchase price of a residential property occupied, at least in part, by the purchaser, will be a purchase money obligation. Thus, under either statute, the Partnership will not be able to seek a deficiency judgment. Another statute, commonly know as the "one form of action" rule, provides that the beneficiary commence an action to exhaust the security under the deed of trust by foreclosure before a personal action may be brought against the borrower. The fourth statutory provision limits any deficiency judgment obtained by the beneficiary following a judicial sale to the excess of the outstanding debt over the fair market value of the property at the time of sale, thereby preventing a beneficiary from obtaining a large deficiency judgment against the debtor as a result of low bids at the judicial sale. Other matters, such as litigation instituted by a defaulting borrower or the operation of the federal bankruptcy laws, may have the effect of delaying enforcement of the lien of a defaulted loan and may in certain circumstances reduce the amount realizable from sale of a foreclosed property. Special Considerations in Connection with Junior Encumbrances. In addition to the general considerations concerning trust deeds discussed above, there are certain additional considerations applicable to second and third deeds of trust ("junior encumbrances). By its very nature, a junior encumbrance is less secure than more senior ones. Only the holder of a first trust deed is permitted to bid in the amount of his credit at his foreclosure sale; junior lienholders must bid cash. If a senior lienholder forecloses on its loan, unless the amount of the bid exceeds the senior encumbrances, the junior lienholders will receive nothing. However, in that event the junior lienholder may have a personal action against the borrower to enforce the promissory note. Accordingly, a junior lienholder (such as the Partnership) will in most instances be required to protect its security interest in the property by taking over all obligations of the trustor with respect to senior encumbrances while the junior lienholder commences his foreclosure, making adequate arrangements either to (i) find a purchaser of the property at a price which will recoup the junior lienholder's interest or (ii) to pay off the senior encumbrances so that his encumbrance achieves first priority. Either alternative will require the Partnership to make substantial cash expenditures to protect its interest (See "RISK FACTORS - Loan Defaults and Foreclosures"). The Partnership may also make wrap-around mortgage loans (sometimes called "all-inclusive loans"), which are junior encumbrances to which all the considerations discussed above will apply. A wrap-around loan is made when the borrower desires to refinance his property but does not wish to retire the existing indebtedness for any reason, e.g., a favorable interest rate or a large prepayment penalty. A wrap-around loan will have a principal amount equal to the outstanding principal balance of the existing debts plus the amount actually to be advanced by the Partnership. The borrower will then make all payments directly to the Partnership, and the Partnership in turn will pay the holder of the senior encumbrance(s). The actual yield to the Partnership under a wrap-around mortgage loan will exceed the stated interest rate to the extent that such rate exceeds the interest rate on the underlying senior loan, since the full principal amount of the wrap-around loan will not actually be advanced by the Partnership. The Partnership will record a Request For Notice of Default at the time its trust deed is recorded. This procedure entitles the Partnership to notice when any senior lienholder files a Notice of Default and will provide more time to make alternate arrangements to protect its security interest. In the event the borrower defaults solely upon his debt to the Partnership while continuing to perform with regard to the senior lienholder, the Partnership (as junior lienholder) will foreclose upon its security interest in the manner discussed above in connection with deeds of trust generally. Upon foreclosure by a Junior Lienholder, the property remains subject to all liens senior to the foreclosed lien. Thus, were the Partnership to purchase the security property at its own foreclosure sale, it would acquire the property subject to all senior encumbrances. The standard form of deed of trust used by most institutional lenders, like the one that will be used by the Partnership, confers on the beneficiary the right both to receive all proceeds collected under any hazard insurance policy and all awards made in connection with any condemnation proceedings, and to apply such proceeds and awards to any indebtedness secured by the deed of trust, in such order as the beneficiary may determine. Thus, in the event improvements on the property are damaged or destroyed by fire or other casualty, or in the event the property is taken by condemnation, the beneficiary under the underlying first deed of trust will have the prior right to collect any insurance proceeds payable under a hazard insurance policy and any award of damages in connection with the condemnation, and to apply the same to the indebtedness secured by the first deed of trust before any such proceeds are applied to repay the Partnership's Mortgage Investment. Applicable case law, however, has imposed upon the lender the good faith obligation to apply those proceeds towards the repair of the Property in those situations. "Due-on-Sale" Clauses. The Partnership's forms of promissory notes and deeds of trust, like those of many lenders generally, contain "due-on-sale" clauses permitting the Partnership to accelerate the maturity of a loan if the borrower sells the property although some forms of the Partnership's promissory notes and deeds of trust will permit assumption by a subsequent buyer, but do not usually contain "due-on-encumbrance" clauses which would permit the same action if the borrower further encumbers the property (i.e., executes further deeds of trust). The enforceability of these types of clauses has been the subject of several major court decisions and Congressional legislation in recent years. 1. Due-on-Sale. Federal law now provides that, notwithstanding any contrary preexisting state law, due-on-sale clauses contained in mortgage loan documents are enforceable in accordance with their terms by any lender after October 15, 1985. Wilson, Ryan & Campilongo, counsel for the Partnership, has advised that under the Garn-St. Germain Act the Partnership will probably be entitled to enforce the "due-on-sale" clause anticipated to be used in the deeds of trust given to secure the Mortgage Investments. On the other hand, acquisition of a property by the Partnership by foreclosure on one of its loans, may also constitute a "sale" of the property, and would entitle a senior lienholder to accelerate its loan against the Partnership. This would be likely to occur if then prevailing interest rates were substantially higher than the rate provided for under the accelerated loan. In that event, the Partnership may be compelled to sell or refinance the property within a short period of time, notwithstanding that it may not be an opportune time to do so. 2. Due-on-Encumbrance. With respect to mortgage loans on residential property containing four or less units, federal and California law prohibits acceleration of the loan merely by reason of the further encumbering of the property (e.g., execution of a junior deed of trust). This prohibition does not apply to mortgage loans on other types of property. Although most of the Partnership's second mortgages will be on properties that qualify for the protection afforded by federal law, some Mortgage Investments will be secured by apartment buildings or other commercial properties. Second mortgage loans made by the Partnership may trigger acceleration of senior loans on such properties if the senior loans contain due-on-encumbrance clauses, although both the number of such instances and the actual likelihood of acceleration is anticipated to be minor. Failure of a borrower to pay off the accelerated senior loan would be an event of default and subject the Partnership (as junior lienholder) to the attendant risks (See "RISK FACTORS - Special Considerations in Connection with Junior Encumbrances"). Prepayment Charges. Some Mortgage Investments originated by the Partnership provide for certain prepayment charges to be imposed on the borrowers in the event of certain early payments on the Mortgage Investments. Any prepayment charges collected on Mortgage Investments will be retained by the Partnership. Mortgage Investments secured by deeds of trust encumbering single-family owner-occupied dwellings may be prepaid at any time, regardless of whether the note and deed of trust so provides, but prepayments made in any 12-month period during the first five years of the term of the loan which exceed twenty percent (20%) of the original balance of the loan may be subject to a prepayment charge. The law limits the prepayment charge in such loans to an amount equal to six months advance interest on the amount prepaid in excess of the permitted twenty percent (20%), or interest to maturity, whichever is less. If a loan that is secured by residential property is being repaid because the lender has accelerated the loan upon the sale of the property, California law does not allow a prepayment penalty to be charged. Real Property Mortgage Investments. California statutory law imposes certain disclosure requirements with respect to loans arranged by a California real estate broker and secured by residential property. However, those requirements are applicable to loans that are in a lesser amount than the anticipated Mortgage Investments. Notwithstanding the preceding, the Partnership intends to make disclosures to borrowers that would satisfy these statutes to the extent reasonably practicable, regardless of whether the statutes are applicable to the relevant Mortgage Investments. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP Results of Operations. For the years ended December 31, 1994 and 1995 and the six months ended June 30, 1996 The net income increase of $304,854 (290%) for the year ended December 31, 1994, $426,964 (104%) for the year ended December 31, 1995 and $197,540 (54%) for the six month period ended June 30, 1996, as compared to the six month period ended June 30, 1995 was primarily attributable to the increase in Mortgage Investments held by the Partnership from $2,336,679 on December 31, 1993 to $6,484,707 as of December 31, 1994 and $12,047,252 as of December 31, 1995 and to $14,196,953 as of June 30, 1996, respectively. Net income was reduced by $13,120 and $26,032 for the years ended December 31, 1994 and 1995, respectively and by $19,085 for the six months ended June 30, 1996 so as to provide a provision for doubtful accounts. The Partnership did not own any real estate as of December 31, 1994 and 1995, or as of June 30, 1996. The Partnership did allow a senior mortgage to foreclose out its secured position on a Deed of Trust held by the Partnership as security for one of its Mortgage Investments. The General Partners, in reviewing the Partnership's security at the time of the senior lender's foreclosure, felt that the Partnership would have a better chance to recover all or a portion of sums owed the Partnership in a suit under the promissory note. As of June 30, 1996 the Partnership had obtained a judgment against the borrower and was pursuing a collection action to recover sums owed of approximately $72,866. The Partnership's ability to increase its Mortgage Investments was due to an increase in the capital raised, the compounding of earnings by those Limited Partners who have chosen to reinvest and by leveraging the Mortgage Investments through the use of a credit line from a commercial bank. During the years ended December 31, 1994 and 1995, and the six month period ended June 30, 1996 the Partnership received new Capital Contributions of $4,508,824, $3,834,799, and $1,254,945, respectively. Earnings compounded by Limited Partners totaled $239,956, $525,551 and $341,223 for the years ended December 31, 1994 and 1995, and the six months ended June 30, 1996. The Partnership obtained a line of credit in 1995 and increased its ability to fund Mortgage Investments by $3,000,000 at that time. As of December 31, 1995 and June 30, 1996, the outstanding balance on the line of credit was $1,910,000 and $2,892,000, respectively. The credit line has a fluctuating interest rate of 3/4 of one percent (1%) over the commercial bank's reference rate. At December 31, 1995 and as of June 30, 1996 the interest rate on the credit line was seven percent (7%) and nine percent (9%), respectively. The Partnership's average Mortgage Investment coupon rate, after reduction for loan servicing fees, was 10.68% and 10.77% on December 31, 1995 and June 30, 1996, thereby providing the Partnership with a borrowed funds spread of 1.43% and 1.77% respectfully. The Partnership's average yield has remained relatively consistent at 8.1%, 8.3% and 8.4% (annualized) for Limited Partners who elect to reinvest Earnings for the years ending December 31, 1994 and 1995 and the six months ended June 30, 1996. Limited Partners who have chosen to liquidate their Earnings monthly have received a somewhat lower yield as they do not receive the benefit of reinvest Earnings. Non-compounding Limited Partner yields were 7.9%, 8.0% and 8.1% (annualized) for the years ended December 31, 1994 and 1995 and the six months ended June 30, 1996. The yield represents the net income of the Partnership after all expenses. The Partnership is in the business of lending money secured by real property. As a lender, the Partnership anticipates that it will experience Mortgage Investment delinquencies. These delinquencies are anticipated to be at a higher level than at banks and thrifts as these lenders are primarily credit lenders while the Partnership is primarily an asset lender basing its loan decisions primarily on the equity available to secure the mortgage investment. Additionally, the Partnership began funding loans in the midst of a significant economic downturn which caused significant value reductions in California real estate. The Partnership's primary source of repayment, the Partnership's securing real estate values, were adversely affected by the recent recession. In some of the Partnership's lending areas, and on specific types of properties, real estate values declined by as much as fifty percent (50%). Nevertheless, the Partnership is experiencing loan delinquencies below the anticipated expected range. The General Partners believe that the favorable delinquency rate being experienced by the Partnership is in part due to diligent underwriting of the Mortgage Investments funded by the Partnership. As of December 31, 1994 and 1995 and June 30, 1996, the Partnership's delinquency rate on loans late over 90 days was .96% ($62,486), 2.49% ($353,829) and 2.49% ($353,829), respectively. As of December 31, 1994 and 1995, and June 30, 1996, the Partnership had outstanding filed Notices of Default on one (1) Mortgage Investment ($62,486), two (2) Mortgage Investments ($350,929), and two (2) Mortgage Investments ($353,829). As of June 30, 1996, the Partnership had only completed one foreclosure wherein the Partnership became the owner of the property at the Trustee's Sale. This property was subsequently sold within the same quarter and at a net price greater than the Partnership's net basis in the property. Redwood Mortgage, the General Partner's affiliate which services the Mortgage Investments charged monthly loan servicing fees of $85,456 and $67,389 for the year ended December 31, 1995 and the six months ended June 30, 1996. These fees were at 1/12 of 1% (1% annually) and were less than the maximum amount allowable. For the year ended December 31, 1994 the loan servicing fees based upon a rate of 1/12 of 1% (1% annually) would have amounted to $44,405. The actual charged loan servicing fees were $15,278, with the remainder waived. These fees were less than the amount allowable. The General Partners may receive a monthly Asset Management Fee equal to 1/32 of 1% annually) of the Partnership's net asset value. The charged fees of $5,906, $11,587, and $7,760 were less than the allowed Asset Management Fees of $17,718, $34,773, and $23,280 for the years ended December 31, 1994, and 1995 and the six months ended June 30, 1996, respectively. If the maximum fees allowed had been charged the effect would have been a reduction in the Partnership's income and therefor a reduction in the Limited Partner's yield. The General Partner has chosen to reduce its fees in order to increase the yield to the Limited Partners. Income has also been affected by the continuing heavy competition for good lending opportunities, which has reduced borrowers' acceptable interest rates and fees. PORTFOLIO REVIEW - For the years ended December 31, 1994 and 1995 and the six months ended June 30, 1996 Loan Portfolio The Partnership has placed a total of 88 Mortgage Investments since it began investing in Mortgage Investments in April of 1993. The outstanding number of Mortgage Investments increased to $6,484,707, $12,047,252 and $14,196,953 as of the years ended December 31, 1994 and 1995 and the six months ended June 30, 1996. The average loan balance increased to $231,678 as of December 31, 1995 and $262,907 as of June 30, 1996. The average loan balance increases reflect the Partnership's increased ability to invest in larger Mortgage Investments, meeting the Partnership's objectives. By investing in larger mortgage market as the number of lenders capable of funding larger equity loans is greatly diminished therefore reducing competition and increasing interrest rates paid by the borrower. The Partnership's loan portfolio consists primarily of short-term (one to five years), fixed rate loans secured by real estate. As of December 31, 1994 and 1995 and June 30, 1996 the Partnership's Mortgage Investments secured by real property collateral in the six San Francisco Bay Area Counties (San Francisco, San Mateo, Santa Clara, Alameda, Contra Costa, and Marin) represented 84.5%, ($5,480,742), 81.3%, ($9,799,123), and 80.4% ($11,414,218) of the outstanding Mortgage Investment portfolio. The remainder of the portfolio represented Mortgage Investments in Northern California. As of December 31, 1994 approximately 35.9% ($2,325,223) of the Mortgage Investment portfolio was invested in single family homes (1-4 units), approximately 13.3% ($861,936), of the Mortgage Investment portfolio was invested in multi-family dwellings, (apartments over 1-4 units), and approximately 50.8% ($3,297,549), of the Mortgage Investment portfolio was invested in commercial properties. As of December 31, 1995, approximately, 34.4% ($4,145,083), of the Mortgage Investment portfolio was invested in single family homes (1-4 units) approximately 22.1% ($2,664,963), of the Mortgage Investment portfolio was invested in multi-family dwellings, (apartments over 4 units), and approximately 43.5%, ($5,237,206), of the Mortgage Investment portfolio was invested in commercial properties. As of June 30, 1996, approximately, 28.8%, ($4,091,433), was invested in single family homes (1-4 units), approximately 16.9%, ($2,389,966), was invested in multi-family dwellings (apartments over 4 units) approximately, 52.2%, ($7,415,554) was invested in commercial properties, and approximately 2.1%, ($300,000) was invested in unimproved land. As of June 30, 1996, the Partnership held 54 Mortgage Investments secured by Deeds of Trust. The following table sets forth the priorities, asset concentrations and maturities of the Mortgage Investments held by the Partnership as of June 30, 1996. PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF MORTGAGE INVESTMENTS (As of June 30, 1996) Number of Mortgage Amount Percent Investments
================================================================================ 1st Mortgages ..................... 30 $ 5,917,837 41.7% 2nd Mortgages ..................... 23 7,979,116 56.2% 3rd Mortgages ..................... 1 300,000 2.1% ----------- ----------- ----- Total ........................... 54 14,196,953 100.0% Maturing prior to 1/1/98 .......... 21 5,704,299 40.2% Maturing prior to 1/1/00 .......... 14 4,388,332 30.9% Maturing prior to 1/1/02 .......... 7 1,714,421 12.1% Maturing after 1/1/02 ............. 12 2,389,901 16.8% ----------- ----------- ----- Total ............................. 54 14,196,953 100.0% Average Mortgage Investment ....... 262,907 1.8% Largest Mortgage Investment ....... 1,050,000 7.4% Smallest Mortgage Investment ...... 40,000 .3% Average Loan-to-Value ............. 62.4%
The average loan-to-value ratio of 62.4%, and the largest mortgage investment of $1,050,000 are within the parameters set forth in the Prospectus. The diversification of Mortgage Investments, with approximately eighty percent (80%) of the Mortgage Investments being placed in the six counties making up the San Francisco Bay Area, and the remaining Mortgage Investments spread over Northern California are also within the parameters set forth in the Prospectus. The average loan-to-value ratio of 62.4% is lower than the originally contemplated in the offering circular by approximately 7.6%. This lower loan-to-value ratio helps to ensure a greater degree of equity to protect the Partnership's Mortgage Investments. ASSET QUALITY A consequence of lending activities is that losses will be experienced and that the amount of such losses will vary from time to time, depending upon the risk characteristics of the mortgage investment portfolio as affected by economic conditions and the financial experiences of borrowers. Many of these factors are beyond the control of the General Partners. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on particular segments of the loan portfolio, especially in light of the current economic environment. The conclusion that a Mortgage Investment may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to requirements and regulations that, among other things, require them to perform ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and to obtain and maintain current information regarding their borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted these practices. Rather, the General Partners, in connection with the periodic closing of the accounting records of the Partnership and the preparation of the financial statements, causes an evaluation, and a determination is made as to whether to allowance for loan losses is adequate to cover potential mortgage investment losses of the Partnership. As of June 30, 1996, the General Partners have determined that the allowance for loan losses of $86,505 is adequate in amount. Because of the number of variables involved, the magnitude of the swings possible and the General Partners' inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the General Partners. As of June 30, 1996, Mortgage Investments delinquent over 90 days amounted to $353,829, of which all $353,829 had notices of default filed. Additionally, the Partnership has obtained a judgment of $72,866 against a borrower, which the Partnership is attempting to collect. This judgment resulted from the General Partners' determination that the most likely recovery of sums owed the Partnership, in whole or in part, was through a lawsuit based on the terms of the Promissory Note. The Partnership allowed the senior note holder to foreclose rather than reinstate the senior mortgage holder to protect the Partnership's security interest in the property. The Partnership does not own any real estate acquired through foreclose, as of June 30, 1996. LIQUIDITY AND CAPITAL RESOURCES The Partnership relies upon purchases of Units, Mortgage Investment payoffs, borrowers' mortgage payments, and, to a lessor degree, its line of credit for the source of funds for Mortgage Investments. Currently, mortgage interest rates have declined somewhat from those available at the inception of the Partnership.If general market interest rates were to increase substantially, the yield of the Partnership's Mortgage Investments may provide lower yields than other comparable debt-related investments. As such, additional Limited Partner Unit purchases could decline, which would reduce the overall liquidity of the Partnership. Additionally, since the Partnership has made Mortgage Investments in primarily fixed rate loans, if the interest rates were to rise the likely result would be a slower prepayment rate for the Partnership. This could cause a lower degree of liquidity as well as a slowdown in the ability of the Partnership to invest in Mortgage Investments at the then current rate. Conversely, in the event interest rates were to decline, the Partnership could see both or either of a surge of unit purchases by prospective Limited Partners, and significant borrower prepayments, which, if the Partnership can only obtain the then existing lower rates of interest may cause a dilution of the Partnership's yield on Mortgage Investments, thereby lowering the Partnership's overall yield to the Limited Partners. The Partnership to a lessor degree relies upon its line of credit to fund Mortgage Investments. Generally, the Partnership's Mortgage Investments are fixed rate, whereas the credit line is a variable rate loan. In the event of a significant increase in overall interest rates, the credit line rate of interest could increase to a rate above the average portfolio rate of interest. Should such an event occur, the General Partners would desire to pay off the line of credit. Retirement of the line of credit would reduce the overall liquidity of the Partnership. CURRENT ECONOMIC CONDITIONS The Partnership has been affected by the current regional economic downturn; however the Partnership has not suffered any material losses to date. As of June 30, 1996, the Partnership did not own any real estate acquired through foreclosure and is experiencing delinquencies at the low end of General Partners expectations. It is now clear that the Northern California recession reached bottom in 1993. Since then, the California economy has been improving, slowly at first, but now, more vigorously. A wide variety of indicators suggest that the economy in California was strong in the first half of 1996, and the State is well positioned for fast growth in the second half of the year. This improvement is reflective in increasing property values, in job growth, personal income growth, etc., all of which translates into more loan activity. These positive factors for the California economy have also enticed many lenders with excess capital to invest in the residential and commercial lending markets. The entrance of new lenders, and an increase in capital devoted to mortgage lending by existing mortgage lenders, has created significant lending competition and demand for high quality loans. The competition is fiercest in the residential lending markets. This competition has led to a downward trend in both interest rates and fees charged to borrowers as well as liberalizing underwriting standards by the Partnership's competition. The result is a reduction in the residential loans available for the Partnership to invest in and a greater concentration of commercial loans. BUSINESS The Partnership, formed on May 27, 1992, is engaged in the business as a mortgage lender, for the primary purpose of making Mortgage Investments secured primarily by first and second deeds of trust on California real estate ("Mortgage Investments"). Approximately ninety-eight percent (98%) of the Partnership's Mortgage Investments are secured by first and second deeds of trust. The Partnership commenced operations in April, 1993. The Partnership's address is 650 El Camino Real, Suite G, Redwood City, California 94063 and its telephone number is (415) 365-5341. Mortgage Investments are arranged and serviced by Redwood Mortgage, an affiliate of the General Partners. As of June 30, 1996 approximately forty-two percent (42%) of the Partnership's Mortgage Investments are secured by first deeds of trust ($5,917,837), fifty-six percent (56%) are secured by second deeds of trust ($7,979,116) and two percent 2% by third deeds of trust ($300,000). The aggregate principal balance of these Mortgage Investments total $14,196,953. Of these loans approximately eighty percent (80%) are secured by properties located in the San Francisco Bay Area. As of June 30, 1996, of the Partnership's Mortgage Investment portfolio twenty-nine percent (29%) is secured by single family residences, fifty-two percent (52%) by commercial properties, seventeen percent (17%) by multi-unit properties and two percent (2%) by unimproved property. No Mortgage Investment may exceed the greater of $50,000 or ten percent (10%) of the Partnership's total assets at the time the investment is made. The following table shows the growth in total Partnership capital, Mortgage Investments and net income as of June 30, 1996, and for the years ended December 31, 1995, 1994, 1993: Capital Mortgage Net Income Investments
1996 (as of 6/30/96) ........... 12,956,966 14,196,953 560,634 1995 11,470,327 12,047,252 836,833 1994 7,290,492 6,484,707 409,869 1993 (April - December) ........ 2,622,080 2,336,674 105,015
As of June 30, 1996, the Partnership had made eighty-eight (88) Mortgage Investments, including forty-four (44) first deeds of trust, forty (40) second deeds of trust and four (4) third deeds of trust. The following table sets forth the types and maturities of Mortgage Investments held by the Partnership as of December 31, 1995. TYPES AND MATURITIES OF MORTGAGE INVESTMENTS (As of June 30, 1996) Number of Mortgage Investments Amount Percent ------------------ -------- -------
First Mortgage ..................... 44 $10,222,573 42.2% Second Mortgage .................... 41 $13,524,957 55.9% Third Mortgage ..................... 3 $ 458,500 1.9% _________ ___________ _____ 88 $24,206,030 100.0% ========= =========== ===== Maturing before 1/1/98 ............. 42 $11,929,825 49.3% Maturing after 1/1/98 and .......... 25 $ 5,760,155 23.8% before 1/1/2000 Maturing after 1/1/2000 and ........ 8 $ 1,733,000 7.1% before 1/1/2002 Maturing after 1/1/2002 ............ 13 $ 4,783,050 19.8% __________ ___________ _____ 88 $24,206,030 100.0% ========== =========== ===== Single Family Residences ........... 42 $ 7,722,200 31.9% Commercial Residences .............. 30 $11,251,550 46.5% Multi-Unit Property ................ 12 $ 4,482,280 18.5% Unimproved Land .................... 4 $ 750,000 3.1% ---------- ----------- ----- 88 $24,206,030 100.0% ======== =========== =====
=============================================================================== DELINQUENCIES As of June 30, 1996, the Partnership had two Mortgage Investments ($350,292) which were delinquent over 90 days. Both of these Mortgage Investments were in foreclosure. The Mortgage Investments delinquent and in foreclosure represented 2.5% ($350,929) of the total Mortgage Investment portfolio as of June 30, 1996. REAL ESTATE OWNED As of June 30, 1996, the Partnership did not own any real estate. During the term of the Partnership, the Partnership has completed one foreclosure wherein the Partnership became the owner of the secured property. The property was subsequently sold at a net price greater than the Partnerships basis in that property. RESERVE FOR LOAN LOSSES Mortgage Investments and the related accrued interest, fees and advances are analyzed on a continuous basis for recoverability. Delinquencies are identified and followed as part of the Mortgage Investment system A provision is made for doubtful accounts to adjust the allowance for doubtful accounts to an amount considered by Management to be adequate to provide for unrecoverable accounts receivable. At June 30, 1996, $86,505 was provided as an allowance for possible Mortgage Investment losses. FEDERAL INCOME TAX CONSEQUENCES CAUTION: THE PARTNERSHIP IS NOT INTENDED TO PROVIDE TAX BENEFITS OF THE TYPE COMMONLY ASSOCIATED WITH LIMITED PARTNERSHIP TAX SHELTERS. NONETHELESS THE INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP ARE COMPLEX. ACCORDINGLY PROSPECTIVE INVESTORS SHOULD NOT CONSIDER THIS DISCUSSION AS A SUBSTITUTE FOR CAREFUL INDIVIDUAL TAX PLANNING. PROSPECTIVE INVESTORS SHOULD CONSULT WITH THEIR TAX ADVISORS, ATTORNEYS OR ACCOUNTANTS ON MATTERS RELATING TO AN INVESTMENT IN THE PARTNERSHIP WITH SPECIAL REFERENCE TO THEIR OWN SITUATION. The following is a summary of federal income tax considerations material to an investment in the Partnership by prospective Limited Partners. This summary is based upon the Code, effective and proposed administrative regulations (the "Regulations"), judicial decisions, published and private rulings procedural announcements issued by the Treasury Department as in effect as of the date of this Prospectus, any of which may be subject to change, possibly with adverse retroactive effect. Many provisions of the Code that significantly affect the tax consequences of investments in real estate limited partnerships have not yet been the subject of court decisions or authoritative interpretation by the IRS. It is impossible to predict what tax legislation, if any, will be enacted, and there can be no assurance that proposals that would adversely affect an investment in the Units will not be enacted into law. In considering the tax aspects of the Offering, Prospective Investors should note that the Partnership is not intended to be a so-called "tax shelter" and that, accordingly, many of the tax aspects commonly associated with a "tax shelter" are inapplicable to the Partnership or are of minor importance. The Partnership does not expect to generate tax losses that can be used to offset Limited Partners' income from sources other than the Partnership (and, if the Partnership's investment objectives are met, the Partnership's operations will generate taxable income, as opposed to taxable loss, for investors). The availability and amount of tax benefits that will be claimed by the Partnership will depend not only upon the general legal principles described below, but also upon certain decisions and factual determinations which will be made in the future by the General Partners as to which no legal opinion is expressed and which are subject to potential controversy on factual or other grounds. Such determinations include the proper characterization and purpose of various fees, commissions and other expenses of the Partnership, the reasonableness and timing of fees, the dates on which the Partnership commences business, whether loans made by the Partnership are for investment purposes, the terms of the loans, whether the loans will have equity participation or original issue discount features, whether the Partnership is engaged in a trade or business and other matters of a factual nature which will only be determined based upon the future operations of the Partnership. No rulings have been or will be requested from the IRS concerning any of the tax matters described herein. Accordingly, there can be no assurance that the IRS or a court will not disagree with the following discussion or with any of the positions taken by the Partnership for federal income tax purposes. This summary provides a discussion of tax consequences deemed material by counsel but is not, and is not intended to be, a complete or exhaustive analysis of all possible applicable provisions of the Code, the Regulations, and judicial and administrative interpretations thereof. The income tax considerations discussed below are necessarily general and will vary with the individual circumstances of each prospective Limited Partner. In particular, this summary assumes that the Limited Partners will be U.S. Taxpayers who are individuals or tax-exempt pension or profit-sharing trusts or IRAs. It does not generally discuss the federal income tax consequences of an investment in the Partnership peculiar to corporate taxpayers, foreign taxpayers, estates, taxable trusts, or to a transferee of Limited Partners. Other tax issues of relevance to other taxpayers should be reviewed carefully by such investors to determine special tax consequence of an investment prior to their subscription. FOR THE FOREGOING REASONS, EACH PROSPECTIVE LIMITED PARTNER IS URGED TO CONSULT HIS OWN TAX ADVISER WITH RESPECT TO THE FEDERAL AND STATE CONSEQUENCES TO SUCH LIMITED PARTNER RESULTING FROM THE PURCHASE OF UNITS AND FROM FUTURE CHANGES IN TAX LAWS AND REGULATIONS. Summary of Material Tax Aspects. The following summarizes the primary material tax aspects for an investment in the Partnership. The very nature of an investment in the Partnership involves complex issues of taxation, and accordingly, investors are urged to review the entire discussion of tax matters in "FEDERAL INCOME TAX CONSEQUENCES" and "RISK FACTORS - Tax Risks" in the Prospectus. With respect to these issues, the Partnership has received an opinion of counsel as to the material tax aspects ("FEDERAL INCOME TAX CONSEQUENCES - Opinion of Counsel"). The principal tax aspect likely to be material to an investor is the "flow through" of net income and net loss for tax purposes to Limited Partners. Unlike a corporation, the Partnership will not be liable for income taxes on net income generated by the Partnership. Rather, such income and loss will be allocated among the Limited Partners and reported individually by the Limited Partners on their income tax returns. If for any reason, as such possibilities are described in the balance of this section, the Partnership was not treated as a partnership for tax purposes it could result in the Partnership being taxed on its net income as well as Limited Partners being taxed for any distributions to them. The manner in which net income and net loss are allocated to the Partners will also likely be a material consideration. In general, the General Partners are allocated one percent (1%) of the net income and net loss and the Limited Partners are allocated ninety-nine percent (99%) of such items. Among the Limited Partners such items are allocated according to their capital accounts. While counsel is opining that such allocations will be respected, in the event such allocations were recharacterized for tax purposes it could involve a shift in the income or loss from the Limited Partners to the General Partners. The character of the Partnership's income may also be material to investors. The Partnership's income will generally be characterized as passive income or portfolio income for tax purposes. Counsel is opining that the Partnership's income should be treated as a portfolio income for tax purposes and not as unrelated business taxable income. Portfolio income is generally income from interest, dividends, royalties or certain rentals. Such income generally cannot be offset by passive losses generated from other passive investments. The Partnership is not anticipated to generate taxable losses or passive losses. Other aspects of an investment in the Partnership may be considered material to Limited Partners based upon unique circumstances applicable to individual partners. Accordingly, investors are urged to review the balance of the discussion of tax consequences in this section. Opinion of Counsel. The Partnership has obtained an opinion from Wilson, Ryan & Campilongo ("Counsel") which states that the sections of the Prospectus which discuss the material tax risks and the section of the Prospectus entitled "FEDERAL INCOME TAX CONSEQUENCES" accurately described each of the material tax issues and reflect Counsel's opinion regarding such matters referred to therein. Counsel has also opined that in the aggregate, the significant tax benefits anticipated to result from an investment in the Partnership are more likely than not to be realized by an investor. However, the significant tax benefits should not be considered a primary investment feature of the Partnership. The Partnership is intended to serve as an investment vehicle for investors seeking current income, and possibly, appreciation through Earnings compounding. Counsel has opined herein that, subject to certain conditions and based upon certain representations, that: 1. Partnership Tax Status. It is more likely than not that the Partnership will be treated as a partnership as defined in Sections 7701(a)(2) and 761(a) of the Code and not as an association taxable as a corporation, and that the Limited Partners will be subject to tax as partners pursuant to Sections 701-706 of the Code. 2. Publicly Traded Partnerships. Based upon Notice 88-75, the representations of the General Partners, and the provisions of the Partnership Agreement, it is more likely than not that the Partnership will not constitute a publicly traded partnership for purposes of Sections 7704, 469(k) and 512(c) of the Code. 3. Portfolio Income and Unrelated Business Taxable Income. Assuming that the Partnership makes the Mortgage Investments on substantially the terms and conditions described in "INVESTMENT OBJECTIVES AND CRITERIA" it is more likely than not that the income of the Partnership will be treated as portfolio income and not constitute unrelated business taxable income. 4. Basis. It is more likely than not a Limited Partner's basis for his or her Units will equal the Purchase Price of the Units. 5. Allocations to the Limited Partners. It is more likely than not that all material allocations to the Limited Partners of income, gain, loss and deductions, as provided for in the Partnership Agreement and as discussed in the Prospectus, will be respected under Section 704(b) of the Code, or in the alternative, will be deemed to be in accordance with the Partners' interests in the Partnership. Counsel's opinion is based upon the facts described in this Prospectus and upon facts and assumptions as they have been represented by the General Partners to Counsel or determined by them as of the date of the opinion. Counsel has not independently audited or verified the facts represented to it by the General Partners. The material assumptions and representations are summarized below: (i) The Partnership will be organized and operated in accordance with the Revised Uniform Limited Partnership Act, as adopted by, and in effect in, the State of California. (ii) The Partnership will be operated in accordance with the Partnership Agreement, and the Partnership will have the characteristics described in the Prospectus and will be operated as described in the Prospectus. (iii) The Partnership will not participate in any Loan on terms other than those described in "INVESTMENT OBJECTIVES AND CRITERIA" without first receiving certain advice of Counsel. (iv) The Mortgage Investments will be made by on substantially the terms and conditions described in the Prospectus in "INVESTMENT OBJECTIVES AND CRITERIA." (v) The net worth of the individual General Partners will continue to exceed an amount that is intended to assure that the Partnership may qualify as a partnership for federal income tax purposes. (vi) The General Partners will take certain steps in connection with the transfer of Units to decrease the likelihood that the Partnership will be treated as a publicly traded partnership for purposes of Sections 7704, 469(k), and 512(c) of the Code. Any alteration of the facts may adversely affect the opinion rendered. Furthermore, the opinion of Counsel is based upon existing law and applicable Regulations and Proposed Regulations, current published administrative positions of the Service contained in Revenue Rulings and Revenue Procedures, and Judicial decisions, which are subject to change either prospectively or retroactively. Counsel does not prepare or review the Partnership's income tax information return, which is prepared by the General Partners and independent accountants for the Partnership. The Partnership will make a number of decisions on tax matters in preparing its Partnership tax return and such matters and such Partnership tax return will be handled by the Partnership, often with the advice of independent accountants retained by the Partnership, and usually is not reviewed with Counsel. Each Prospective Investor should note that the opinion described herein represents only Counsel's best legal judgment and has no binding effect or official status of any kind. Thus, in the absence of a ruling from the Service, there can be no assurance that the Service will not challenge the conclusion or propriety of any of Counsel's opinions and that such challenge would not be upheld by the courts. Tax Status of the Partnership. The Partnership has not requested and does not intend to request a ruling from the Service that the Partnership will be treated for federal income tax purposes as a partnership and not as an association taxable as a corporation. It is more likely than not, in Counsel's opinion, that the Partnership will be treated for federal income tax purposes as a partnership and not as an association taxable as a corporation. The General Partners have been advised by Counsel that for federal income tax purposes an organization is treated, under the currently applicable Regulations, as a partnership and not as an association taxable as a corporation as long as the organization does not have a preponderance of the corporate characteristics described in such regulations. In the opinion of Counsel, the Partnership will not have a preponderance of those corporate characteristics set forth in the Regulations as those Regulations are currently interpreted by the Service and, consequently, the Partnership will not be an association taxable as a corporation for federal income tax purposes, provided that the General Partners have "substantial assets" as that term is used in Section 301.7701-2(d)(2) of the Regulations, and provided that the Partnership meets the conditions outlined in the following paragraphs. That opinion expressly assumes that (i) the Partnership has been duly formed and will operate in conformity with the requirements of California law and the provisions of the Limited Partnership Agreement; (ii) the net worth of the General Partners is sufficient and will remain sufficient to satisfy the requirements of "substantial assets" within the meaning of the Regulations at all times during the existence of the Partnership; (iii) no lender on a nonrecourse basis will obtain or have the right to obtain a proprietary interest in the Partnership or its assets other than as a creditor; (iv) the General Partners will at all times have at least a one percent (1%) interest in the profits, losses and each specially allocated item of income, credit or deduction of the Partnership; (v) the Partnership and the Partners will enter into the transactions described herein with a reasonable expectation of profit; and (vi) criteria or standards other than those specified in the Regulations will not be applied in determining such classifications. At present, no specific criteria have been established by the Service (other than procedural guidelines) as to the minimum net worth or other characteristics that general partners must maintain to qualify a limited partnership for federal tax classification as such, other than that the General Partners must have substantial assets and not be a mere "dummy." Based on the current net worth of the General Partners, it is likely that the General Partners would be deemed to have "economic substance" within the meaning of the Regulations. In 1976, the Tax Court, with six judges dissenting, in Phillip G. Larson, 66 T.C. 159 (1976), held that two California limited partnerships met the criteria contained in the currently applicable Regulations to be taxed as partnerships. The Service has acquiesced in this case. The Tax Court, in the course of its opinion, suggested that the Commissioner of Internal Revenue modify the currently applicable Regulations. On January 5, 1977, the Commissioner issued Proposed Regulations that would have altered drastically the criteria for determining the tax status of partnerships, with the result that the Partnership would be treated as an association taxable as a corporation rather than as a partnership. In that case, Partners would not be entitled to the deductions for tax purposes available to Limited Partners with respect to their investments in the Partnership. The Proposed Regulations were withdrawn by the Secretary of the Treasury on the same day they were proposed for comment, and on January 14, 1977, the then Secretary of the Treasury, William E. Simon, announced that the Proposed Regulations would not be reissued. However, there can be no assurance that this decision will not be reversed and that the Proposed Regulations will not be reissued. A similar proposal has been included in certain tax bills being considered by Congress. Revenue Procedure 89-12. The Service recently issued Revenue Procedure 89-12 which specifies certain conditions that must be present before it will consider issuing an advance ruling on the classification of a limited partnership for federal income tax purposes. The conditions set forth in the Revenue Procedure are as follows: (1) The general partners interest in each item of income gain, deduction and loss must, in the aggregate, equal at least one percent (1%) of each such item throughout the existence of the partnership. (2) The general partners, in the aggregate, must maintain a minimum capital account balance equal to the lesser of (a) one percent (1%) of the total positive capital account balances for the partnership or (b) $300,000. An exception to this condition, however, provides that the minimum capital account balance need not be met if at least one general partner will contribute substantial services as a partner to the partnership which are not compensated by guaranteed payments and the partnership agreement provides that, upon the dissolution and termination of the partnership, the general partners will contribute to the partnership an amount equal to the lessor of (a) the deficit balance, if any, in their capital accounts or (b) the excess of 1.01% of the total capital contributions of the limited partners over the capital previously contributed by the general partners. (3) The net worth of corporate general partners (if a partnership has only corporate general partners) must equal at least ten percent (10%) of the total capital contributions to the partnership throughout the life of the partnership. (4) The partnership agreement may not permit, in the case of the removal of a general partner, less than a majority in interest of limited partners to elect a new general partner to continue the partnership. (5) Limited partner interest may not exceed eighty percent (80%) of the total interest in the partnership or the Service will not rule that the partnership lacks the corporate characteristic of centralized management. The Partnership will not satisfy all the conditions (1) through (5) set forth above. It should be emphasized that the Revenue Procedure 89-12 specifically states that it is to be applied only in determining whether advance ruling letters will be issued and that its provisions are not intended to be substantive rules for determining whether an organization should be classified as a partnership. Similarly, these rules are not to be applied as criteria for audits of a taxpayer's returns. Nonetheless, if the Service should at some future time adopt these rules at the audit level and such a position were to be upheld in the courts, the Partnership could be treated as an association taxable as a corporation for federal income tax purposes. Publicly Traded Partnerships. Certain limited partnerships are subject to the risk of being reclassified as a "publicly traded partnerships" which are taxed as corporations for certain federal income tax purposes. The term "publicly traded partnerships for this purpose means any partnership if the interests in such partnership are: (i) traded on an established securities market; or (ii) readily tradeable on a secondary market (or the substantial equivalent of a secondary market). This second test includes partnerships that are not traded on an established securities market, but whose partners are nevertheless readily able to buy, sell or exchange their partnership interests in a manner that is comparable, economically, to trading on an established securities market. In the event that the Partnership is deemed to be a "publicly traded partnership" and the Partnership does not meet the ninety percent (90%) or more gross income exception (described below), then the Partnership shall be treated as a corporation. In the event the Partnership were treated as a corporation, there would be several adverse tax consequences to the Partners. In addition, the Partnership will be regarded as having transferred all of its assets (subject to all of its liabilities) to a newly formed corporation in exchange for stock which will be deemed distributed to the Partners in liquidation of their interests in the Partnership. (See "Results if Partnership Taxed as a Corporation" below). In addition, if the Partnership is deemed to be a "publicly traded partnership," then special rules under Section 469 govern the treatment of losses and income of the Partnership. There is an exception from treatment as a corporation for a "publicly traded partnership" if ninety percent (90%) or more of its gross income consists of "qualifying income" for such taxable year and each preceding taxable year beginning after December 31, 1987 during which the partnership (or any predecessor) was in existence. Qualifying income includes interest. Even if the Partnership meets the ninety percent (90%) exception rule, its income and losses will still be subject to special rules under Section 469. Units in the Partnership will not be traded on a national securities exchange, a local exchange or an over-the-counter market. The prospectus and sales material for the Partnership states that there is no public market for the Units and it is not expected that any market will develop; and (ii) all potential investors should be aware that the Units should be purchased only as a long-term investment. The Conference Committee Report to the 1987 Act provides several factors to look at in determining whether a partnership should be classified as a publicly traded partnership. The major factors are whether trades in the partnership interests are frequent, whether a regular plan of redemption exists, whether a partnership interest can be traded in a time frame similar to a secondary market, and what types of restrictions are placed on the transferability of interests. No regulations have been issued under Sections 469(k)(2) or 7704(b) to clarify when interests in a partnership that are not traded on an established securities market will be treated as readily tradeable on a secondary market or the substantial equivalent thereof. However, on June 17, 1988 the IRS recently issued Advance Notice 88-75 ("Advance Notice") providing guidance with respect to whether interests in a partnership are considered readily tradable on a secondary market or the substantial equivalent thereof within the meaning of Sections 469(k)(2), 512(c)(2), and 7704(b). Interests in a partnership will not be considered readily tradeable on a secondary market or the substantial equivalent thereof within the meaning of Sections 469(k)(2), 513(c)(2) and 7704(b) of the Code for a taxable year of the partnership if the sum of the percentage interests in partnership capital or profits represented by partnership interests that are sold or otherwise disposed of (including purchases by a partnership of its own interests ("redemptions")) during the taxable year does not exceed five percent (5% in the case of a partnership that also relies on a separate matching service safe harbor described below) of the total interest in partnership capital or profits ("Five Percent Safe Harbor"). In addition, certain types of transfers will be disregarded for purposes of the Five Percent Safe Harbor. The Advance Notice also provides that sales thorough a matching Service ("Matched Sales") will be disregarded (the "Matching Service Safe Harbor") for purposes of determining whether partnership interests are to be considered readily tradeable on a secondary market or the substantial equivalent thereof. The Partnership Agreement provides that Limited Partners must obtain the consent of at least the General Partners to transfer a Unit in the Partnership, which consent can be withheld if such transfer in counsel to the Partnership's opinion or the General Partners' opinion may cause the Partnership to be treated as a "publicly traded partnership" or would not satisfy the Five Percent Safe Harbor or Matching Service Safe Harbor contained in IRS Advance Notice 88-75 or Regulations subsequently issued. The restrictions have been placed in the Partnership Agreement to prevent the Units from being able to be bought or sold in a manner that is comparable, economically to trading on an established securities market. The General Partners have represented that they will use their best efforts to assure that the Partnership is not treated as a "publicly traded partnership." The General Partners have also represented that they will not take any affirmative action on behalf of the Partnership to intentionally establish a market for the Partnership interests. Based on IRS Advance Notice 88-75, the General Partners representations contained herein and the terms contained in the Partnership Agreement, Counsel is of the opinion that the Partnership, more likely than not, will not be treated as "publicly traded partnership" as defined above. Although the General Partners will use their best efforts to make sure that a secondary market or substantial equivalent thereof does not develop for interests in the Partnership, there can be no assurance that a secondary market for the Units will not develop, or that the IRS may take the position that the Partnership should be classified as a "publicly traded partnership" for this purpose. In addition, regulations may be adopted that would cause the Partnership to be treated as a publicly traded partnership. Results if Partnership is Taxable as Association. If the Partnership were classified as an association taxable as a corporation, the Partnership itself would be subject to a federal income tax on any taxable income at regular corporate tax rates. The Limited Partners would not be entitled to take into account their distributive share of the Partnership's deductions or credits, and would not be subject to tax on their distributive share of the Partnership's income. Distributions to the Partners would be treated as dividends to the extent of accumulated and current earnings and profits; as a return of capital to the extent of basis; and thereafter, as taxable income, perhaps as ordinary income, to the extent Distributions were in excess of the tax basis. In addition, if the loss of partnership status occurred at a time when the Partnership's indebtedness exceeded the tax basis of its assets and such corporate status was prospective only, it could be argued that a constructive incorporation occurred, and that the Limited Partners realized gain under Section 357(c) of the Code, measured by the difference between such indebtedness and the Partnership's tax basis of its assets. If the Regulations proposed on January 5, 1977, are reissued and do become applicable to the Partnership at a future date such that the Partnership becomes taxable as a corporation prospectively, a constructive incorporation may be deemed to have occurred and Partners may be required to recognize income as described in this Section. Taxation of Partners - General. If the Partnership is treated for federal income tax purposes as a partnership and not as an association taxable as a corporation, it will file an annual informational income tax return, but will not be subject as an entity to the payments of federal income tax. On his personal income tax return, each Limited Partner will be required to report his share of Partnership income or loss without regard to the amount, if any, of cash or other distributions made to him. Thus, each Limited Partner will be taxed on his share of income even though the amount of cash distributed to him may be more or less than the resulting tax liability. Subject to various limitations referred to herein, each Limited Partner may deduct his share of the Partnership losses if any, to the extent of his tax basis in his Partnership interest. Any losses in excess of basis may be carried forward indefinitely to offset future taxable income of the Partnership. In computing income or losses, the Partnership will include appropriate deductions for non-capital costs and the depreciation portion of capital costs. If Distributions in any one year exceed the Partnership's taxable income (whether in liquidation or otherwise), the amount of such excess will be treated as a return of capital reducing the tax basis of the Limited Partner in his interest. Any cash distributions in excess of the recipient's basis are treated as a sale or exchange of the Limited Partnership Interest resulting in taxable income to the recipient. Within 90 days after the end of each fiscal year, the General Partners will provide each Partner with a report containing such information as is necessary for the completion of the Partner's federal income tax return with respect to his share of the Partnership's income, gains, losses, and deductions for the previous calendar year. Partnership Basis. A Limited Partner's adjusted tax basis for federal income tax purposes includes the cost of his Partnership interest. Investors in the Partnership will pay the $100 purchase price for each Unit in cash upon subscription. Based on these facts, it is Counsel's opinion that the Limited Partners basis for their Units will initially be the cash purchase price of their Units. A Limited Partner's basis will be increased by any subsequent cash contribution he makes to the Partnership, by his distributive share of Partnership taxable income, by any income exempt from taxation, and by his share, equal to his proportionate share of Partnership profits, of non-recourse loans (i.e., neither the General nor Limited Partners are personally liable for the repayment of the loan) made to the Partnership. A Limited Partner's basis will be decreased (but not below zero) by actual distributions to him from the Partnership, by his distributive share of Partnership losses, by an actual or deemed decrease in his share of Partnership nonrecourse borrowings, and by his share of nondeductible expenses of the Partnership which are not properly chargeable to his capital account. In the event that cash distributions to a Limited Partner exceed the adjusted basis of his Units, a Limited Partner must recognize gain equal to such excess. Pursuant to the 1984 Act, the Treasury has issued regulations regarding the conditions under which recourse and non-recourse liabilities may be reflected on partner's bases in their partnership interests. Such regulations permit an increase in a limited partner's basis for non-recourse debts and an increase where the limited partner assumes or guarantees or otherwise bears the "economic risk" for the partnership debt. Allocation of Profits and Losses. The net profits and net losses of the Partnership will be allocated as specified in Article V of the Limited Partnership Agreement (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT"). For federal income tax purposes, each Partner's distributive share of specific items of income, gain, loss, deduction and credit is determined by reference to the general ratio for sharing profits and losses as provided in the Partnership Agreement. In general, the allocation provided in a partnership agreement will control unless such allocation does not have "substantial economic effect." If an allocation provision of a partnership agreement is found to lack "substantial economic effect" partnership items will be allocated in accordance with a partner's interest in the partnership based on all the facts and circumstances. Under the Regulations which are extremely complex, one of three alternative tests, must be met in order for an allocation to be valid under Section 704(b). Allocations are valid if: (i) the allocation has substantial economic effect; or (ii) the partners can show that, taking into account all facts and circumstances, the allocation is in accordance with the partners interests in the partnership; or (iii) the allocation can be deemed to be in accordance with the partners interests in the partnership in accordance with special rules set forth in the Regulations. Counsel believes that the allocations of the income and loss of the Partnership has "substantial economic effect" based upon the fact that the allocations affect the dollar amount of each Partner's share of total Partnership income or loss independent of tax consequences; the capital accounts of the Partners will reflect the allocation; and the economic risk of loss will be borne by the Limited Partners, or that in the alternative, the allocations, if held to lack substantial economic effect, would nonetheless be deemed to be in accordance with the partners' interests in the Partnership. This would result in the same treatment as if the allocations were held to have substantial economic effect. Sale of Partnership Interest. A Limited Partner may be unable to sell his Limited Partnership interest as there may be no public market for it. Gain or loss recognized on the sale of an interest in the Partnership by a Limited Partner, who is not a "dealer" with respect to such interest and who has held it for more than one year, will ordinarily result in the recognition of long-term capital gain or loss. Gain or loss will be recognized by a Partner measured by the difference between the consideration received including the Partner's pro rata share of the Partnership's liabilities and the Partner's adjusted basis of the Units being sold. Notwithstanding this general rule, the 1986 Act taxes capital gains at the same rate as ordinary income beginning January 1, 1988. If, at the time of the sale of the Partnership interest, the Partnership has "unrealized receivables" (which includes accelerated depreciation of real property) or substantially appreciated inventory items," that portion of the amount realized from the sale of the interest that is attributable to the value of such items will give rise to ordinary income to the extent such amount exceeds the basis to the Partnership of the selling Partner's share of such "unrealized receivables" and "inventory items." Any Partner desiring to sell his interest should consult his personal tax advisor for proper planning in regard to these provisions. The Revenue Act of 1978 increased the amount of ordinary income of a non-corporate taxpayer against which net capital losses may be deducted to $3,000 in 1978 and subsequent years (or in the case of a husband and wife filing separate returns, to $1,500 respectively). As was the case prior to the enactment of the Act within these dollar limitations, only fifty percent (50%) of the net long-term capital losses in excess of net short-term capital gains may be deducted from ordinary income, while all of the excess of the net short-term capital loss over net long-term capital gain may be so deducted. Section 706 of the Code, as amended by the 1984 Act, provides special rules for the allocation of income and loss, and items thereof, to any partner whose interest in the partnership changes during a taxable year, whether by the sale of all or a part of such interest, the entry of a new partner or otherwise. In determining the income, loss and special items allocable to the partners whose interests have changed, a partnership is required to allocate certain "allocable cash basis items" (generally interest, taxes and payments for services or for the use of property) to the days in the taxable year to which they are attributable. Other items may be allocated on any basis approved in Regulations to be issued, which Regulations are expected to follow the guidelines set out in the Committee Reports on the 1984 Act. The general purpose of the 1984 Act amendments to Section 706 is to prevent retroactive allocations of economically accrued deductions to partners who enter a partnership after such accrual. The Partnership's taxable year will close on the date of sale with respect to a Limited Partner (but not the remaining Partners) who sells his entire interest in the Partnership. In such a case the Partnership items would be prorated pursuant to Section 706. In the event of a sale of less than the entire interest of a Limited Partner, the Partnership year will not terminate with respect to the selling Partner, but his proportionate share of items of income, gain, loss, deduction and credit will also be determined pursuant to Section 706. In the case of either the sale of the Properties or a sale of a Partner's interest in the Partnership, a Limited Partner may realize taxable income substantially in excess of the cash, if any, he receives as a result of such sale. Further, a Partner who sells an interest in the Partnership may be required to report a share of Partnership income for the year of such sale even though he received no cash Distribution during the year or the amount of cash Distribution was less than his share of income required to be reported. Character of Income or Loss. The 1986 Act distinguishes between income from a "passive" activity and portfolio income. A passive activity includes (1) trade or business activities in which the taxpayer does not materially participate, and (2) rental activities where payments are primarily for the use of tangible property. In general, losses generated by a passive activity will only be allowed to offset income from a passive activity. Portfolio income generally includes interest, dividends, royalty or annuity income and gain from sales of portfolio assets, for example, property held for investment. Portfolio income is not treated as passive income and must be accounted for separately. Portfolio income is reduced by deductible expenses (other than interest) that are clearly and directly allocable to such income. Properly allocable interest expenses also reduces portfolio income. With regard to interest, the Treasury has issued Temporary Regulations which adopt a tracing rule. Interest attributable to indebtedness which is used to purchase an interest in a passive activity will be regarded as passive and subject to the passive loss rules. Thus, if a Limited Partner borrowed all or a portion of the funds used to purchase his Unit(s), interest paid on such borrowing could be used to offset income attributable to a passive activity. The distinction between passive income and portfolio income thus has a material effect on the Partnership and the Limited Partners. If the Partnership is engaged in a passive activity, any income from the Partnership is deemed "passive income" which is available to be offset by any other passive losses which the Limited Partner has from other sources. Portfolio income cannot be offset by such passive losses. Specifically, passive losses from the Partnership net of taxable income from the Partnership may be used to offset passive income from other sources, with any unused losses carried over into the next tax year, where they are available to offset passive income from the Partnership and other sources. In the year that the Unit is disposed of, or the Partnership is dissolved, any unused passive loss is available to offset any gain upon the disposition or dissolution, as the case may be, then to offset any passive income from other sources and, finally, to offset ordinary income. The Treasury has promulgated certain Temporary Regulations which provide that the lesser of the Partnership's net passive income or the Partnership's equity financed interest income shall be treated as not from a passive activity. Such income is in turn treated as interest income, or in other words, portfolio income. The Partnership's equity financed interest income is that portion of its net interest income derived by excluding interest income allocable to liabilities incurred in the activity. It is determined by multiplying net interest income by a fraction whose numerator is the excess of the average outstanding balance for the year of interest bearing assets less the average outstanding balance for the year of the liabilities incurred in the activity and whose denominator is the average outstanding balance for the year of the interest bearing assets held in the activity. Net interest income is the gross interest income less expenses from the activity reasonably allocable to the gross interest income. The Partnership does not currently anticipate that it will have significant liabilities incurred in connection with its lending activities. Accordingly, its equity financed interest income should equal its net passive income and such amount should be treated as portfolio income. To the extent that the Partnership does incur liabilities, it would require a portion of income between passive and portfolio income. The treatment of the Partnership's equity financed interest income as portfolio income is premised upon the Partnership being engaged in a trade or business. Whether the Partnership is engaged in the trade or business of lending money will depend on the facts and circumstances. Such facts and circumstances include the manner in which the Partnership conducts its affairs and the nature of its dealings with borrowers and other third parties and the number of loans made by the Partnership in any one year. For example, the courts have held that a person who makes one or two loans in a year is not engaged in a trade or business even though that person made many loans in preceding years. Similarly, making up to five loans did not constitute a trade or business. On the other hand, the making of twenty loans was deemed to be a trade or business. It is not possible under the circumstances to determine whether the Partnership will be deemed to be engaged in a trade or business. The Partnership may also make payments to Limited Partners under its Guaranteed Payment for Offering Period. The Guaranteed Payment for Offering Period is likely to constitute a guaranteed payment as provided under Section 707(c). As such, these payments should be considered interest payments treated as portfolio income. Treatment of Mortgage Investments Containing Participation Features. The Partnership may extend Mortgage Investments with an equity interest in the property securing the Mortgage Investments (See "INVESTMENT OBJECTIVES AND CRITERIA- Equity Interests in Real Property"). With respect to Mortgage Investments containing participation features, an issue may arise as to whether the relationship between the Partnership and the mortgagor is that of debtor and creditor or whether the Partnership is engaged in a partnership or joint venture with the mortgagor. If the Partnership is a creditor of the mortgagor, a Limited Partner's distributive share of income derived from the mortgagor will be treated in full as interest income. If the Partnership is a partner or a joint venturer with the mortgagor, the income from the participation feature of the Mortgage Investments and/or the stated interest may be treated as a distribution of profits of the Partnership or Joint venture. This would result in the receipt of unrelated business taxable income for certain Tax-Exempt Investors investing in the Partnership and would have material adverse effects for certain trusts. In analyzing whether a partner's unsecured loan to a partnership should be treated as a loan or a capital contribution (See Joseph Hambuechen, 43 T.C. 90 (1964)) and whether an unsecured loan constitutes a joint venture (See Hyman Podell, 55 T.C. 429 (1970)), courts have considered all the facts and circumstances surrounding the transactions and at times both lines of authority consider the same factors. Counsel believes that in determining whether the relationship between the Partnership and a mortgagor is that of a debtor paying interest or a joint venturer distributing net profits, a Court would consider the following factors: (1) the names given to the certificates evidencing the indebtedness; (2) the presence or absence of a maturity date; (3) the source of the payments; (4) the right to enforce the payment of principal and interest; (5) participation in management; (6) a status equal to or inferior to that of regular creditors; (7) the intent of the parties; (8) "thin" or adequate capitalization; (9) identity of or interest between creditor and borrower; (10) payment of interest only out of net proceeds; and (11) the ability of the entity to obtain loans from outside lending institutions. Under relevant case law, whether a partnership or joint venture exists for federal income tax purposes turns on the intent of the parties, as evidenced by their conduct, relevant agreements, and their respective abilities and capital contributions. (See Commissioner v. Culbertson, 337 U.S. 733 (1949) Podell, supra; Utility Trailer Mfg. Co. v. U.S., 212 F.Supp. 733 (D. Cal. 1963)). Repayment or Sale of Mortgage Investments. No gain or loss will be recognized by the Partnership upon the full repayment of principal of a Mortgage Investment. Any gain recognized by the Partnership on the sale or exchange of a Mortgage Investment will be treated as a capital gain unless the Partnership is deemed to be a "dealer" in Mortgage Investments for federal income tax purposes (See "Property Held Primarily for Sale; Potential Dealer Status" below). In such case, the entire gain, if any, would constitute ordinary income. Property Held Primarily for Sale; Potential Dealer Status. The Partnership has been organized to invest in Mortgage Investments. However, if the Partnership were at any time deemed for tax purposes to be holding one or more Mortgage Investments primarily for sale to customers in the ordinary course of business, any gain or loss realized upon the disposition of those loans would be taxable as ordinary gain or loss rather than as capital gain or loss. Furthermore, such income would also constitute unrelated business taxable income to any investors which are tax-exempt entities (See "Investment by Tax-Exempt Investors"). Under existing law, whether property is held primarily for sale to customers in the ordinary course of business must be determined from all the facts and circumstances surrounding the particular property and sale in question. The Partnership intends to hold the Mortgage Investments for investment purposes and to make such occasional dispositions thereof as in the opinion of the General Partners are consistent with the Partnership's investment objectives. Accordingly, the Partnership does not anticipate that it will be treated as a "dealer" with respect to any of its properties. However, there is no assurance that the Service will not take the contrary position. Tax Consequences of Reinvestment in Mortgage Investments. Limited Partners may avail themselves of a plan pursuant to which Limited Partners may forego current distributions of Cash Available for Distribution and have said amounts credited to their capital accounts and used by the Partnership in conducting Partnership activities. Limited Partners who avail themselves of such an option may incur a tax liability on their pro rata share of Partnership income with no corresponding cash with which to pay such tax liability. However, Unit Holders which are Tax-Exempt Investors should not incur any such tax liability, to the extent said income is interest income and not UBTI (See "Property Held Primarily for Sale; Potential Dealer Status" and "Investment by Tax-Exempt Investors"). Partnership Organization, Syndication Fees and Acquisition Fees. Under Section 709 of the Code, all Organization, Syndication Fees and Acquisition Fees must be capitalized. Organization fees and expenses paid or incurred after December 31, 1976, may be amortized over a five year period. Amortization is not allowed with respect to syndication expenses paid by a partnership. The Regulations under Section 709 state that syndication costs include commissions, professional fees and printing costs in marketing sales of Partnership interests, brokerage fees and legal and accounting fees regarding disclosure matters. A portion of the fees incurred will be allocated to organizational costs. The Partnership intends to amortize all organization expenses ratably over a five year period. The Service may challenge the deductibility of these organization fees on the basis that these are fees paid in connection with the syndication of the Limited Partners Interests rather than organization fees. If the Service were successful in taking these or other positions on such fees, the Partnership's and therefore the Limited Partners deductions during 1992 through 2000 would be less than projected although not substantially so. Original Issue Discount. The Partnership may be subject to the original issue discount rules with respect to interest to be received with respect to Mortgage Investments. Original issue discount may arise with respect to Mortgage Investments if (a) the interest rate varies according to fixed terms; (b) the borrower is permitted to defer interest payments to years after such interest accrues; and (c) the amount of the Partnership's share of interest income with respect to additional interest or deferred interest related to the income appreciation from the mortgage property under a right of participation is determined in a year prior to the year in which payment of such amount is due. The Partnership anticipates extending mortgage loans under some or all of the proceeding terms, and to the extent it does, the original discount rules may be applicable. Counsel cannot opine as to the applicability of these rules prospectively since the Partnership has not identified as Mortgage Investments as of the date of this Prospectus. The amount of original issue discount under a mortgage loan containing any of the foregoing terms is to be computed based upon the compound interest method of calculation, resulting in the reporting of interest income in increasing amounts each taxable year. Recognition by the Partnership of original issue discount with respect to a Mortgage Investment will increase the Partnership's basis in that loan, thereby reducing in like amount the income the Partnership must recognize in the year payment of the amount giving rise to the original issue discount is actually received or upon disposition of the Mortgage Investment. The reporting of the recognition by the Partnership of original issue discount as income in any particular tax year will have the effect of increasing the amount of income which the Limited Partners must report from the Partnership, without the concurrent receipt of the cash distribution with which to pay tax, if any, resulting from the reporting of such income. However, to the extent such original issue discount constitutes "interest" tax exempt investors may exclude such original issue discount in computing their unrelated business taxable income liability. Deduction of Investment Interest. The Code imposes substantial limitations upon the deductibility of interest on funds borrowed by an investor to purchase or to carry investment assets. Code Section 163(d) provides that a deduction for "investment interest" may be taken by an individual only to the extent of such individual's net investment income for the taxable year. Investment interest generally is any interest that is paid or accrued on indebtedness incurred or continued to purchase or carry investment property. Investment interest includes interest expenses allocable to portfolio income and investment and interest expenses allocable to an activity in which the taxpayer does not materially participate, if such activity is not treated as a passive activity under the passive loss rules. Investment interest does not include any interest that is taken into account in determining a taxpayer's income or loss from a passive activity or a rental activity in which a taxpayer actively participates. Therefore, an investment expense attributable to an investment as a Limited Partner in the Partnership, will be subject to the investment interest limitations. This exclusion will not apply for interest expenses, if any, allocable to portfolio income. See "Limitations on Losses and Credits from Passive Activities." Net investment income consists of the excess of investment income over investment expenses. Investment income generally includes gross income from property held for investment, gain attributable to property held for investment and amounts treated as portfolio income under the passive loss rules. Investment income does not include income taken into account in computing gain or loss from a passive activity. Passive losses allowable solely as a result of the passive activity loss phase-in rules may, however, reduce investment income. Investment expenses are deductible expenses (other than interest) directly connected with the production of investment income. Generally, in calculating investment expenses, however, only those expenses in excess of two percent (2%) of adjusted gross income are included. It is not anticipated the Partnership will incur any material amount of "investment interest" that will be significantly limited by these rules. However, investment interest that cannot be deducted for any year because of these limitations may be carried over and deducted in succeeding taxable years, subject to certain limitations. Section 754 Election. Because of the complexities of the tax accounting required, the Partnership does not presently intend to file under Section 754 of the Code an election to adjust the basis of the properties in the case of a transfer of a Limited Partnership Interest, although the General Partners have the authority to make such an election. The effect of such an election would be that, with respect to the transferee Limited Partner only, the basis of the Partnership's properties would either be increased or decreased by the difference between the transferee's basis for his Limited Partnership Interest and his proportionate share of the Partnership's adjusted basis for all properties. A substitute Limited Partner would have to account separately in his personal income tax return for the special basis (and the deductions in connection therewith) in his Partnership interest attributable to the election made pursuant to Section 754. Any increase or decrease resulting from such an adjustment would be allowable among the Partnership's assets in accordance with rules established under the Code. After such adjustment has been made, the transferee Limited Partner's share of the adjusted basis of the Partnership's properties would equal the adjusted basis of his Limited Partnership Interest. If (as presently anticipated) the Partnership does not make such an election, upon a sale of the properties subsequent to a transfer of a Limited Partnership Interest, taxable gain or loss to the transferee will be measured by the difference between his share of the gross proceeds of such sale and his share of the Partnership's tax basis in the properties (which, in the absence of a Section 754 election, will be unchanged by the transfer of the Limited Partnership Interest to him), rather than by the difference between his share of such proceeds and the portion of the purchase price for his interest that was allocable to the properties. As a consequence, such transferee will be subject to a tax upon a portion of the proceeds which represents as to him a return of capital, if the purchase price for his interest exceeds his share of the adjusted basis for all properties. However, in the event of a taxable sale orother disposition of his Limited Partnership Interest, the purchase price paid by the transferee is important since, notwithstanding the Partnership's failure to make a Section 754 election, such purchase price will be taken into account in determining such transferee's basis for such interest. The absence of a right to have such election made by the Partnership may inhibit transferability of a Limited Partnership Interest since a potential transferee may consider this factor as reducing the value of the interest. Termination of the Partnership. A partnership is terminated for tax purposes only (i) if no part of the partnership business, financial operation or venture continues to be carried on by any of its partners, or (ii) if, within any 12-month period, there is a sale or exchange of fifty percent (50%) or more of the total interest in partnership capital and profits. If, upon such termination, the partnership business is continued by the partners, they are deemed to have received a distribution in liquidation of the partnership and to have recontributed the distributed property to a successor entity. The original partnership's taxable year closes with respect to all partners as the result of such a "constructive" liquidating distribution and recontribution. Upon a termination of a partnership for federal income tax purposes, a partner generally will recognize a capital gain to the extent cash distributed, and the reduction, if any, in his pro rata share of partnership debt) exceeds his adjusted tax basis for his Units immediately before the distribution, and will recognize capital loss to the extent his adjusted tax basis of unrealized receivables and substantially appreciated inventory distributed to him (if no other property is distributed). However, if substantially appreciated inventory or unrealized receivables are distributed non-pro rata in liquidation, such distribution would be treated as a sale or exchange, with the result that the distributee partners could be required to recognize both ordinary income and capital gain on the distribution. Furthermore, depending upon the partnership election, there may be a recapture of any investment tax credit taken. Tax Returns. The Partnership will furnish annually to the Limited Partners (but not to assignees of Limited Partners unless they become substituted Limited Partners) sufficient information from the Partnership's tax return for the Limited Partners to prepare their own federal, state and local tax returns. The Partnership's tax returns will be prepared by accountants to be selected by the General Partners. The Revenue Act of 1978 provides a substantial additional penalty for failure to timely file the federal information tax return of the Partnership and/or filing of such a return that fails to show the information required under Section 6031 of the Code. Audit of Tax Returns. The General Partners understand that the Service is paying increased attention to the proper application of the tax laws to partnerships. While the Partnership is not being formed so as to allow investors to avail themselves of losses or deductions generated by the Partnership, the Service still may choose to audit the Partnership's information returns. An audit of the Partnership's information returns may precipitate an audit of the income tax returns of Limited Partners. Any expense involved in an audit of a Limited Partner's returns must be borne by such Limited Partner. Prospective investors should also be aware that if the Service successfully asserts a position to adjust any item of income, gain, deduction or loss reported on a Partnership information return, corresponding adjustments would be made to the income tax returns of Limited Partners. Further, any such audit might result in Service adjustments to items of non-Partnership income or loss. If a tax deficiency is determined, the taxpayer is liable for interest on such deficiency from the due date of the return. Interest on underpayment is payable at the federal short-term rate plus three percentage points, rounded to the nearest full percent (rounding up in the case of a multiple of one-half of one percent). The federal short-term rate is determined for the first month of each quarter, and the rate so determined governs the calculation of the rate of interest on underpayment for calendar quarter after the quarter during the first month of which the rate is so determined. The "federal short-term rate" for a month is determined by the Service based on the average market yield on outstanding marketable obligations of the United States with remaining periods to maturity of three years or less. In the case of any "substantial underpayment" attributable to a "tax motivated transaction," the interest rate on underpayment is one hundred twenty percent (120%) of the interest rate that otherwise apply. A "substantial underpayment" is any underpayment of tax in excess of $1,000 attributable to one or "tax motivated transaction," which are defined to include (among other things) certain valuation overstatements, any use which may result in a substantial distortion of income for any period, and any sham or fraudulent transaction. The tax treatment of items of partnership income, gain, loss, deductions or credit is to be determined at the partnership level in a unified partnership proceeding, rather than in separate proceedings with the partners. However, any partner has the right to participate in any administrative proceeding at the partnership level. Generally, the "tax matters partner," Michael R. Burwell, would represent the Partnership before the Service and may enter into a settlement with the Service as to partnership tax issues which generally will be binding on all of the partners, unless a partner timely files a statement with the Service providing that tax matters partner shall not have the authority to enter into a settlement agreement on his behalf. Similarly, only one judicial proceeding contesting a Service determination may be filed on behalf of a partnership and all partners. However, if the tax matters partner fails to file such an action, then any partner, unless such partner owns less than one percent (1%) interest in a partnership having more than 100 partners) or a group of partners owning five percent (5%) or more of the profits interest in the partnership may file such an action. The tax matters partner may consent to an extension of the statute of limitation period for all partners with respect to partnership items. Investment by Tax-Exempt Investors. Tax-exempt Investors, including Employee Trusts and Individual Retirement Accounts ("IRAs"), are generally exempt from federal income taxation. However, such organizations are subject to taxation on their "unrelated business taxable income," as defined in Section 512 of the Code. Unrelated business taxable income does not, in general, include interest, dividends, rents from real property, gain from the sale of property other than inventory or property held primarily for sale to customers in the ordinary course of business, and certain other types of passive investment income, unless such income is derived from "debt-financed property" as defined in Section 514 of the Code. In addition to receiving interest income (which will comprise substantially all of its income), the Partnership may also receive payments in the nature of points or loan servicing or origination fee at the time funds are advanced under a Mortgage Investment. The fees paid for services rendered in connection with the making or securing of Mortgage Investments, as opposed to fees paid merely for the use of money, will not be treated as interest income and will most likely constitute unrelated business taxable income. Any Partnership borrowing for the purpose of making additional loans may result in "debt financed property" and, therefore, unrelated business taxable income to tax-exempt Limited Partners to the extent that the Service concludes that such borrowings are allocable to the Limited Partners for this purpose (see Rev. Rule 76-354, 1976-2 C.B. 179). Furthermore, any borrowings by a Limited Partner for the purpose of financing his investment in the Partnership can result in "debt-financed property" and, therefore, unrelated business taxable income. As a consequence of the exercise of a default remedy under a Partnership, the Partnership may be forced to foreclose and hold real or other property (which secures the Mortgage Investment) for a short period of time. The Partnership is permitted to borrow funds to assist in the operation of any property on the security of which it has previously made a Mortgage Investment and the operations of which it has subsequently taken over as a result of a default. Furthermore, the foreclosed properties may be subject to other existing mortgages. Consequently, any such acquired property may be deemed to be "debt-financed property." In such event, net income and gain from any such property may constitute unrelated business taxable income, although Employee Trusts (but not most other tax-exempt organizations, including IRAs) may nevertheless qualify for an exception, found in Code Section 514(c)(9), which would exempt them from taxation on such net income in the case of the real property. The Partnership intends to hold its Mortgage Investments for investment and, therefore, no unrelated business taxable income should result from the disposition of these assets. Such may not be the case, however, if the Partnership does not act in accordance with this intention and it is determined that the Partnership is a dealer in the business of buying and selling Mortgage Investments. The General Partners have represented that they intend to conduct the activities of the Partnership in a manner so as to minimize or eliminate the risk of having the Partnership classified as a "dealer" for federal income tax purposes (See "Property Held Primarily for Sale/Potential Dealer Status.") In computing unrelated business taxable income, a Tax-Exempt Investor, including an Employee Trust or IRA, may deduct a proportionate share of all expenses which are directly connected with the activities generating such income or with the "debt-financed property," as the case may be, and is also entitled to an annual exclusion of $1,000 with respect to unrelated business taxable income. Even though a portion of the income of a Tax-Exempt Investor is unrelated business taxable income, income from other sources which is not unrelated business taxable income will not be subject to federal income taxation. In addition, the receipt of unrelated business taxable income by a Tax-Exempt Investor generally will not affect its tax-exempt status if the investment is not otherwise inconsistent with the nature of its tax exemption. In addition to the general tax treatment of unrelated business taxable income received by tax-exempt investors, special rules apply to charitable remainder trusts. In general, a charitable remainder trust is a trust in which a portion of an asset will be transferred to a charitable organization through the use of a trust and the trust itself will not be subject to taxation on its income. If a charitable remainder trust (which includes charitable remainder annuity trusts, charitable remainder unitrusts and charitable remainder net income trusts) receives any unrelated business taxable income for any taxable year, the trust is taxable on all of its income as a complex trust. The remainder trust is taxable on its accumulated income to the extent the income is not distributed to beneficiaries and to the extent the income exceeds the amount deductible under Section 661(a). The Partnership does not anticipate that it will generate any significant unrelated business taxable income. However, Prospective Investors which are charitable remainder trusts should review their individual tax situation with their tax advisors to determine the effect of the receipt of unrelated business taxable income to the trust. A Prospective Investor which is a Tax-Exempt Investor is strongly urged to consult its own tax adviser with regard to the foregoing unrelated business taxable income aspects of an investment in the Partnership. Furthermore, with regard to certain non-tax aspects of an investment in the Partnership, see "RISK FACTOR - Investments by Tax-Exempt Investors" and "ERISA CONSIDERATIONS." State and Local Taxes. In addition to the federal income tax consequences described above, prospective investors may be subject to state and local tax consequences by reason of investment in the Partnership. A Limited Partner's distributive share of the taxable income or loss of the Partnership generally will be required to be included in determining his reportable income for state or local income tax purposes in the jurisdiction in which he is a resident. Further, upon his death, estate or inheritance taxes might be payable in such Jurisdictions based upon his interest in the Partnership. In addition, a Limited Partner might be subjected to income tax, estate or inheritance tax, or both. Depending upon the applicable state and local laws, tax benefits which are available to Limited Partners for federal income tax purposes may not be available to Limited Partners for state or local income tax purposes. Potential investors are urged to consult their personal tax advisor regarding the impact of state and local taxes upon an investment in the Partnership. A discussion of state and local tax law is beyond the scope of this Prospectus. ERISA CONSIDERATIONS General. The law governing retirement plan investment in the Partnership is the Employee Retirement Income Security Act of 1974 ("ERISA") and the Code. Persons or organizations that exercise discretion or control over plan assets are deemed to be fiduciaries under ERISA. Section 404 of ERISA provides that a fiduciary is subject to a series of specific responsibilities and prohibitions and is required to manage plan assets "solely in the interest of plan participants." Section 404 of ERISA requires that plan fiduciaries discharge their duty with care, skill, prudence and diligence (the so called "prudent man rule") and that the fiduciary diversify the investments of the plan unless under the circumstances it is clearly not prudent to do so. Regulations issued by the Department of Labor ("DOL") under these statutory provisions require that in making investments, the fiduciary consider numerous factors, current return of the portfolio relative to the anticipated cash flow requirements of the plan, and the projected return of the portfolio relative to the funding objectives of the plan. In addition, before the enactment of ERISA, the Internal Revenue Service, proceeding under a statutory mandate that all qualified plans be for the exclusive benefit of participants and beneficiaries, issued a similar set of investment considerations for plan fiduciaries. That Internal Revenue Service position has not been modified since ERISA. Consequently, a "Tax-Exempt Investor", which is defined as a qualified profit-sharing, pension or retirement trust, an HR-10 (Keogh) Plan, or an Individual Retirement Account (IRA), should, in general, purchase Units of Limited partnership interest only when, considering all assets held by such plans, those prudence, liquidity and diversification requirements are satisfied. Fiduciaries Under ERISA. A fiduciary of a Qualified Plan is subject to certain requirements under ERISA, including the duty to discharge of responsibilities solely in the interest of, and for the benefit of the Qualified Plan's participants and beneficiaries. A fiduciary is required to (a) perform its duties with the skill, prudence and diligence of a prudent man acting in like capacity, (b) diversify investments so as to minimize the risk of large losses and (c) act in accordance with the Qualified Plan's governing documents. Fiduciaries with respect to a Qualified Plan include any persons who exercise or possess any discretionary power of control, management or disposition over the funds or other property of the Qualified Plan. For example, any person who is responsible for choosing a Qualified Plan's investments, or who is a member of a committee that is responsible for choosing a Qualified Plan's investments, is a fiduciary of the Qualified Plan. Also, an investment professional whose advice will serve as one of the primary basis for a Qualified Plan's investment decisions may be a fiduciary of the Qualified Plan, as may any other person with special knowledge or influence with respect to a Qualified Plan's investment or administrative activities. While the beneficiary "owner" or "account holder" of an IRA is generally treated as a fiduciary of the IRA under the Code, IRAs generally are not subject to ERISA's fiduciary duty rules. Where a participant in a Qualified Plan exercises control over such participant's individual account in the Qualified Plan in a "self-directed investment" arrangement that meets the requirements of Section 404(c) of ERISA, such Participant (rather than the person who would otherwise be a fiduciary of such Qualified Plan) will generally be held responsible for the consequences of his investment decisions under interpretations of applicable regulations of the Department of Labor. Certain Qualified Plans of sole proprietorships, partnerships and closely-held corporations of which the owners of one hundred percent (100%) of the equity of such business and their respective spouses are the sole participants in such Plans at all times generally not subject to ERISA's fiduciary duty rules, although they are subject to the Code's prohibited transaction rules, explained below. A person subject to ERISA's fiduciary rules with respect to a Qualified Plan should consider those rules in the context of the particular circumstances of the Qualified Plan before authorizing an investment of a portion of the Qualified Plan's assets in Units. Prohibited Transactions Under ERISA and the Code. Section 4975 of the Code (which applies to all Qualified Plans and IRAs) and Section 406 of ERISA (which does not apply to IRAs or to certain Qualified Plans that, under the rules summarized above, are not subject to ERISA's fiduciary rules) prohibit Qualified Plans and IRAs from engaging in certain transactions involving "plan assets" with parties that are "disqualified persons" under the Code or "parties in interest" under ERISA ("disqualified persons" and "parties in interest" are hereafter referred to as "Disqualified Persons"). Disqualified Persons include fiduciaries of the Qualified Plan or IRA, officers, directors, shareholders and other owners of the company sponsoring the Qualified Plan and natural persons and legal entities sharing certain family or ownership relationships with other Disqualified Persons. "Prohibited transactions" include any direct or indirect transfer or use of a Qualified Plan's or IRA's assets to or for the benefit of a Disqualified Person, any act by a fiduciary that involves the use of a Qualified Plan's or IRA's assets in the fiduciary's individual interest or for the fiduciary's own account, and any receipt by a fiduciary of consideration for his or her own personal account from any party dealing with a Qualified Plan or IRA in connection with a transaction involving the assets of the Qualified Plan or the IRA. Under ERISA, a Disqualified Person that engages in a prohibited transaction will be required to disgorge any profits made in connection with the transaction and for any losses sustained by the Qualified Plan. In addition, ERISA authorizes additional penalties and further relief from such transaction. Section 4975 of the Code imposes excise taxes on a Disqualified Person that engages in a prohibited transaction with a Qualified Plan or IRA. In order to avoid the occurrence of a prohibited transaction under Section 4975 of the Code and/or Section 406 of ERISA, Units may not be purchased by a Qualified Plan or IRA from assets as to which the General Partners or any of their Affiliates are fiduciaries. Additionally, fiduciaries of, and other Disqualified Persons with respect to, Qualified Plans and IRAs should be alert to the potential for prohibited transactions that may occur in the context of a particular Qualified Plan's or IRA's decision to purchase Units. Plan Assets. If the Partnership's assets were determined under ERISA or the Code to be "plan assets" of Qualified Plans and/or IRAs holding Units, fiduciaries of such Qualified Plans and IRAs might under certain circumstances be subject to liability for actions taken by the General Partners or their Affiliates. In addition, certain of the transactions described in the Prospectus in which the Partnership might engage, including certain transactions with Affiliates, might constitute prohibited transactions under the Code and ERISA with respect to such Qualified Plans and IRAs, even if their acquisition of Units did not originally constitute a prohibited transaction. Moreover, fiduciaries with responsibilities to Qualified Plans (other than IRAs) might be deemed to have improperly delegated their fiduciary responsibilities to the General Partner in violation of ERISA. Although under certain circumstances ERISA and the Code, as interpreted by the Department of Labor in currently effective regulations, apply a "look-through" rule under which the assets of an entity in which a Qualified Plan or IRA has made an equity investment may generally constitute "plan assets," the applicable regulations except investments in certain publicly registered securities from the application of the "look-through" principle. In order to qualify for the exception described above, the securities in question must be "publicly-offered securities." Publicly-offered securities are defined as freely transferable, owned by at least 100 investors independent of the issuer and of one another, and registered either (a) under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, or (b) sold as part of a public offering pursuant to an effective registration statement under the Securities Act of 1933 and registered under the Securities Exchange Act of 1934 within 120 days (or such later time as may be allowed by the Securities and Exchange Commission) after the end of the issuer's fiscal year during which the offering occurred. The Partnership's Units should constitute "publicly-offered securities" because (a) the General Partners have represented that it is highly likely that substantially more than 100 independent investors will purchase and hold Units in the Partnership, and the Regulation states that, when 100 or more investors independent of the issuer and of one another purchase a class of securities, the class will be deemed to be widely held; (b) the General Partners have represented that the Partnership's offering the Units is registered under the Securities Act of 1933 and that the General Partners intend to register the Units in the Partnership under the Securities Exchange Act of 1934; and (c) although whether a security is freely transferable is a factual determination, the limitations on the assignment of Units and substitution of Limited Partners contained in the Partnership Agreement, with the possible exception for publicly-traded partnership discussed below, fall within the scope of certain restrictions enumerated in the Regulation that ordinarily will not affect a determination that securities are freely transferable when the minimum investment is $10,000 or less. The Partnership Agreement prohibits the assignment or other transfer of Units without the General Partners' written consent if the General Partners determine in good faith that such transfer might result in a change in the status of the Partnership to a publicly-traded partnership within the meaning of Section 7704 of the Code, as currently or hereafter interpreted by the Service in rulings, regulations or other publications, or by the courts, and such status would have a material adverse impact on the Limited Partners or their assignees. In order to prevent the Partnership from being classified as a publicly-traded partnership, the General Partner has represented that it intends to prohibit transfers of Units only to the extent necessary to comply with the safe harbors contained in IRS Notice 88-75, under which certain levels of trading are permissible (See "FEDERAL INCOME TAX CONSEQUENCES-Publicly Traded Partnerships"). The Regulation permits restrictions that prohibit any transfer or assignment that would result in a reclassification of the entity for federal income tax purposes. In Advisory Opinion 89-14A, dated August 2, 1989, the Department of Labor expressed its opinion that a restriction against transfer of partnership interests that is drafted to avoid reclassification of a partnership as a publicly-traded partnership would qualify as the type of restriction contemplated by the Regulation. Therefore, the restriction in the Partnership Agreement should not, absent unusual circumstances, affect the free transferability of the Units within the meaning of the Regulation. Potential Consequences of Treatment as Plan Assets. In the event that the Units do not constitute "publicly-offered securities," the underlying assets of the Partnership are treated as plan assets under the regulations. If the Partnership's underlying assets are deemed to be plan assets, the Partnership may be required to take steps which could affect Partners who are subject to income tax, as well as Qualified Plans which may invest in the Partnership. In such event, the fiduciary duties, including compliance with the exclusive benefit rule and the diversification and prudence requirements, must be considered with respect to the investment in the Partnership. Each Partner of the Partnership who has authority or control with respect to the management or disposition of the assets of the Partnership, or who renders investment advice for a fee or other compensation, direct or indirect, with respect to the assets of the Partnership would be treated as a fiduciary and therefore would be personally liable for any losses to a Qualified Plan which invests in the Partnership resulting from a breach of fiduciary duty. The prohibited transaction restrictions would apply to any transactions in which the Partnership engages involving the assets of the Partnership and a party-in-interest. Such restrictions could, for example, require that the Partnership and the General Partners avoid transactions with entities that are affiliated with the Partnership or the General Partners or that Qualified Plan investors be given the opportunity to withdraw from the Partnership. Also, the General Partners who participate in a prohibited transaction may be subject to an excise tax. Finally, entering into a prohibited transaction may result in loss of the Qualified Plan's tax-exempt status. DESCRIPTION OF UNITS The Units will represent a Limited Partnership Interest in the Partnership. Units will be evidenced by a Certificate of Limited Partnership Interest. Each Unit will represent a Limited Partnership Interest of $100. The Limited Partners representing a majority of the outstanding Limited Partnership Interests may, without the concurrence of the General Partners, vote to take the following actions: (a) terminate the Partnership; (b) amend the Limited Partnership Agreement, subject to certain limitations described in Section 12.4 of the Limited Partnership Agreement; (c) approve or disapprove the sale of all or substantially all of the assets of the Partnership; or (d) remove or replace one or all of the General Partners. In addition, Limited Partners representing ten percent (10%) of the Limited Partner Interests may call a meeting of the Partnership. (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT"). An assignee of Units shall not become a substituted Limited Partner in place of his assignor unless the written consent of the General Partners to such substitution shall have been obtained, which consent shall not be unreasonably withheld. An assignee who does not become a substituted Limited Partner shall be entitled to receive allocations and distributions attributable to the Unit properly transferred to him, but shall not have any of the other rights of a Limited Partner, including the right to vote as a Limited Partner and the right to inspect and copy the Partnership's books. It is not anticipated that there will be a public trading market for the Units and the transferability of the Units will be subject to a number of restrictions. Accordingly, the liquidity of the Units will be limited and holders of the Units may not be able to liquidate their investment in the event of an emergency, except as permitted in the withdrawal provisions described below. Any transferee must be a person that would have been qualified to purchase Units in this offering and no transferee may acquire less than 20 Units. No Unit may be transferred if, in the judgment of the General Partners, a transfer would jeopardize the status of the Partnership or cause a termination of the Partnership for federal income tax purposes. Transfers of the Units will generally require the consent of the California Commissioner of Corporations, except as permitted in the Commissioner's Rules. The certificates representing the Units will bear a legend setting forth this restriction. Additional restrictions on transfers of Units may be imposed under the securities laws of other states upon transfers occurring in or involving the residents of such states. In addition, no Limited Partner will be permitted to make any transfer or assignment of his Limited Partnership Interest if the General Partners determine such transfer or assignment would result in the Partnership being classified as a "publicly traded partnership" within the meaning of Section 7704(b) of the Code or any rules, regulations or safe-harbor guidelines promulgated thereunder. The Partnership will not repurchase any Units from the Limited Partners. However, the Limited Partners may withdraw from the Partnership after one year from the date of purchase in four quarterly installments subject to a ten percent (10%) early withdrawal penalty being deducted from their Capital Account. Limited Partners may also withdraw after five years on an installment basis, generally a five year period in twenty installments or longer, without the imposition of any penalty (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT - - Withdrawal from Partnership"). SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT The following is a summary of the Limited Partnership Agreement for the Partnership, and is qualified in its entirety by the terms of the Agreement itself. Potential investors are urged to read the entire Agreement, which is set forth as Exhibit A to this Prospectus. Rights and Liabilities of Limited Partners. The rights, duties and powers of Limited Partners are governed by the Limited Partnership Agreement and Sections 15611, et seq. of the California Corporations Code (the California Revised Limited Partnership Act (the "Partnership Act")) and the discussion herein of such rights, duties and powers is qualified in its entirety by reference to such Agreement and Partnership Act. Investors who become Limited Partners in the Partnership in the manner set forth herein will not be responsible for the obligations of the Partnership. However, they will be liable to the extent of any deficit in their capital accounts upon dissolution, and may also be liable for any return of capital plus interest if necessary to discharge liabilities existing at the time of such return. Any cash distributed to Limited Partners may constitute, wholly or in part, return of capital. Limited Partners will have no control over the management of the Partnership, except that Limited Partners representing a majority of the outstanding Limited Partnership interests may, without the concurrence of the General Partners, take the following actions: (a) terminate the Partnership (including merger or reorganization with one or more other partnerships); (b) amend the Limited Partnership Agreement; (c) approve or disapprove the sale of all or substantially all of the assets of the Partnership; or (d) remove and replace one or all of the General Partners. The approval of all Limited Partners is required to elect a new general partner to continue the business of the Partnership where there is no remaining General Partner after a General Partner ceases to be a general partner other than by removal. The General Partners shall have the right to increase the size of this Offering or conduct an additional offering of securities without obtaining the consent of the Limited Partners. Limited Partners representing ten percent (10%) of the Limited Partnership interests may call a meeting of the Partnership. Capital Contributions. Interests in the Partnership will be sold in Units of $100, and no person may acquire less than 20 Units ($2,000). The General Partners have the discretion to accept subscriptions for fractional units in excess of the minimum subscription. The General Partners, collectively, will contribute the sum of l/10th of 1% of the Gross Proceeds to the capital of the Partnership. Rights, Powers and Duties of General Partners. Subject to the right of the Limited Partners to vote on specified matters, the General Partners will have complete charge of the business of the Partnership. The General Partners are not required to devote full time to Partnership affairs but only such time as is required for the conduct of Partnership business. Any one of the General Partners acting alone has the power and authority to act for and bind the Partnership. The General Partners are granted the special power of attorney of each Limited Partner for the purpose of executing any document which the Limited Partners have agreed to execute and deliver. Profits and Losses. Profits and losses of the Partnership will be allocated among the Limited Partners according to their respective outstanding capital accounts on a daily basis. Upon transfer of Units (if permitted under the Limited Partnership Agreement and applicable law), profit and loss will be allocated to the transferee beginning with the next succeeding calendar month. One percent (1%) of all Partnership profit and loss will be allocated to the General Partners. Cash Distributions. Upon his subscription for Units, each Limited Partner will be required to elect either (i) to receive monthly, quarterly or annual distributions ("Periodic Distributions"); or (ii) to acquire additional Units with his allocable share of Earnings. The election to receive Periodic Cash Distributions is irrevocable although an investor may change whether such distributions are received on a monthly, quarterly or annual basis. If a Limited Partner initially elected to receive additional Units, he may, after three (3) years, change his election and receive Periodic Cash Distributions. The General Partners will also receive cash distributions equal to one percent (1%) of total Partnership income. As a result, the relative percentage of Partnership interests of non-electing Partners (including voting rights and shares of future income) will gradually increase due to the compounding effect of crediting income to their capital accounts, while the percentage interests of Partners who receive cash distributions will decrease during the term of the Partnership. Meeting. A General Partner, or Limited Partners representing ten percent (10%) of the Limited Partnership interests, may call a meeting of the Partnership on at least 30 days written notice. Unless the notice otherwise specifies, all meetings will be held at 2:00 P.M. at the office of the Partnership. Limited Partners may vote in person or by proxy at the Partnership meeting. A majority of the outstanding Limited Partnership interests will constitute a quorum at Partnership meetings. There are no regularly scheduled meetings of the Limited Partners. Accounting and Reports. The General Partners will cause to be prepared and furnished to the Limited Partners an annual report of the Partnership's operation, which will be audited by an independent accounting firm. Within 120 days after the close of the year covered by the report, a copy or condensed version will be furnished to the Limited Partners. The Limited Partners shall also be furnished such detailed information as is reasonably necessary to enable them to complete their own tax returns within 90 days after the end of the year. The General Partners presently intend to maintain the Partnership's books and records on the accrual basis for bookkeeping and accounting purposes, and also intend to use the accrual basis method of reporting income and losses for federal income tax purposes. The General Partners reserve the right to change such methods of accounting, upon written notice to Limited Partners. Any Limited Partners may inspect the books and records of the Partnership at all reasonable times. Restrictions on Transfer. The Limited Partnership Agreement places substantial limitations upon transferability of Limited Partnership interests. Any transferee must be a person that would have been qualified to purchase a Limited Partnership Unit in this offering and no transferee may acquire or hold less than 20 Limited Partnership Units. No Limited Partnership Unit may be transferred if, in the judgment of the General Partners, and/or their counsel a transfer would jeopardize the status of the Partnership as a partnership or cause a termination of the Partnership for federal income tax purposes. The written consent of the California Commissioner of Corporations is also required prior to any sale or transfer of Units except as permitted. In addition, no Limited Partner will be permitted to make any transfer or assignment of his Limited Partnership Interest if the General Partners and/or their counsel determine such transfer or assignment would result in the Partnership being classified as a "publicly traded partnership" within the meaning of Section 7704(b) of the Code or any rules, regulations or safe-harbor guidelines promulgated thereunder. A transferee may not become a substituted Limited Partner without the consent of the General Partners. A transferee who does become a substituted Limited Partner has no right to any information regarding the Partnership or to inspect the Partnership's books, but is entitled only to the share of income or return of capital to which the transferor would be entitled. General Partners' Interest. Any General Partner, or all of them, may retire from the Partnership at any time upon six months written notice to all Limited Partners, in which event a retiring General Partner would not be entitled to any termination or severance payment from the Partnership, except for the return of his capital account balance. A General Partner may also sell and transfer his general partner interest in the Partnership (including all powers and authorities associated therewith) for such price as he shall determine in his sole discretion, and neither the Partnership nor the Limited Partners will have any interest in the proceeds of such sale. However, the successor General Partner must be approved by Limited Partners holding a majority of the outstanding Limited Partnership interests. In the event that all or any one of the initial General Partners are removed by the vote of a majority of Limited Partners and a successor General Partner(s) is thereafter designated, prior to becoming a successor or additional General Partner, such designated General Partner shall sign a written document (i) acknowledging that Redwood Mortgage, an affiliate of the initial General Partners, was repaying the Formation Loan with the proceeds it earned from loan brokerage commissions on Mortgage Investments and other fees paid by the Partnership; and (ii) agreeing that in the event such successor General Partner(s) elects to use another loan brokerage firm for the placement of Mortgage Investments, Redwood Mortgage shall immediately be released from all further obligation under the Formation Loan (except for a proportionate share of the principal installment due at the end of that year, prorated according to the days elapsed). If all of the General Partners are removed, no other General Partners are elected, the Partnership is liquidated and Redwood Mortgage is no longer receiving payments for services rendered, the debt on the Formation Loan shall be forgiven by the Partnership and Redwood Mortgage will be immediately released from any further obligation under the Formation Loan. Term of Partnership. The term of the Partnership commenced on the day the Limited Partnership Agreement was executed, and will continue until December 31, 2032. The Partnership will dissolve and terminate if any one of the following occurs: (1) upon the removal, death, retirement, insanity, dissolution or bankruptcy of a General Partner, unless the business of the Partnership is continued by a remaining General Partner, if any, or if there is no remaining General Partner, by a new General Partner elected to continue the business of the Partnership by all the Limited Partners (or by a majority-in-interest of the Limited Partners, in the case of removal); (2) upon the affirmative vote of a majority-in interest of the Limited Partners; (3) upon the sale of all or substantially all (i.e., at least seventy percent (70%)) of the Partnership's assets; or (4) otherwise by operation of law. Winding Up. The Partnership will not terminate immediately upon the occurrence of an event of dissolution, but will continue until its affairs have been wound up. Upon dissolution of the Partnership, the General Partners will wind up the Partnership's affairs by liquidating the Partnership's assets as promptly as is consistent with obtaining the fair current value thereof, either by sale to third parties or by collecting loan payments under the terms of the loan. All funds received by the Partnership shall be applied to satisfy or provide for Partnership debts and the balance shall be distributed to partners in accordance with the terms of the Limited Partnership Agreement. Dissenting Limited Partners' Rights. If the Partnership participates in any acquisition of the Partnership by another entity, any combination of the Partnership with another entity through a merger or consolidation, or any conversion of the Partnership into another form of business entity through (such as a corporation) that requires the approval of the outstanding limited partnership interests, the result of which would cause the other entity to issue securities to the Limited Partners, then each Limited Partner who does not approve such reorganization (the "Dissenting Limited Partner") may require the Partnership to purchase for cash, at its fair market value, his or her interest in accordance with Section 15679.2 of the California Corporations Code. The Partnership, however, may itself convert to another form of business entity (such as a corporation, trust or association) if the conversion will not result in a significant adverse change in (i) the voting rights of the Limited Partners, (ii) the termination date of the Partnership (currently, December 31, 2032, unless terminated earlier in accordance with the Partnership Agreement), (iii) the compensation payable to the General Partners or their Affiliates, or (iv) the Partnership's investment objectives. The General Partners will make the determination as to whether or not any such conversion will result in a significant adverse change in any of the provisions listed in the preceding paragraph based on various factors relevant at the time of the proposed conversion, including an analysis of the historic and projected operations of the Partnership; the tax consequences (from the standpoint of the Limited Partners) of the conversion of the Partnership to another form of business entity and of an investment in a limited partnership as compared to an investment in the type of business entity into which the Partnership would be converted; the historic and projected operating results of the Partnership's Mortgage Investments, and the then-current value and marketability of the Partnership's Mortgage Investments. In general, the General Partners would consider any material limitation on the voting rights of the Limited Partners or any substantial increase in the compensation payable to the General Partners or their Affiliates to be a significant adverse change in the listed provisions. It is anticipated that, under the provisions of the Partnership Agreement, the consummation of any such conversion of the Partnership into another form of business entity (whether or not approved by the General Partners) would require the approval of Limited Partners holding a majority of the Units. TRANSFER OF UNITS Restrictions on the Transfer of Units. There is no public or secondary market for the Units and none is expected to develop. Moreover, a Unit may only be transferred if certain requirements are satisfied, and transferees may become Limited Partners only with the consent of the General Partners. Under Article 7 of the Partnership Agreement, the assignment or other transfer of Units will be subject to compliance with the minimum investment and suitability standards imposed by the Partnership. (See "INVESTOR SUITABILITY STANDARDS"). Under presently applicable state securities law ("Blue Sky") guidelines, except in the case of a transfer by gift or inheritance or upon family dissolution or an intra-family transfer, each transferee of Units of the Partnership must generally satisfy minimum investment and investor suitability standards similar to those which were applicable to the original offering of Units and, following a transfer of less than all of his Units, each transferor must generally retain a sufficient number of Units to satisfy the minimum investment standards applicable to his initial purchase of Units. In the case of a transfer in which a member firm of the National Association of Securities Dealers, Inc., is involved, that firm must be satisfied that a proposed transferee of Units satisfies the suitability requirements as to financial position and net worth specified in Section 3(b) of Appendix F to the NASD's Conduct Rules and must inform the proposed transferee of all pertinent facts relating to the liquidity and marketability of the Units during the term of the investment. Unless the General Partners shall give their express written approval, no Units may be assigned or otherwise transferred (i) to a minor or incompetent (unless a guardian, custodian or conservator has been appointed to handle the affairs of such Person); (ii) to any Person not permitted to be a transferee under applicable law, including, in particular but without limitation, applicable federal and state securities laws; (iii) to any Person if, in the opinion of Tax Counsel, such assignment would result in the termination under the Code of the Partnership's taxable year of its status as a partnership for federal income tax purposes; (iv) to any Person if such assignment would affect the Partnership's existence or qualification as a limited partnership under the California Act or the applicable laws of any other jurisdiction in which the Partnership is then conducting business. Any such attempted assignment without the express written approval of the General Partners shall be void and ineffectual and shall not bind the Partnership. In the case of a proposed assignment, which is prohibited solely under clause (iii) above, however, the Partnership shall be obligated to permit such assignment to become effective if and when, in the opinion of Counsel, such assignment would no longer have either of the adverse consequences under the Code which are specified in that clause. Section 7.03 of the Partnership Agreement provides that so long as there are adverse federal income tax consequences from being treated as a "publicly traded partnership" for federal income tax purposes, the General Partners shall not permit any interest in a Unit to be Assigned on a secondary public market (or a substantial equivalent thereof) as defined under the Code and any regulations promulgated thereunder (a "Secondary Market") and, if the General Partners determine in their sole discretion, that a proposed assignment was affected on a Secondary Market, the Partnership and the General Partners have the right to refuse to recognize any such proposed Assignment and to take any action deemed necessary or appropriate in the General Partners' reasonable discretion so that such assignment is not in fact recognized. For the purposes of Section 7.3 of the Partnership Agreement, any assignment which results in a failure to meet the "safe harbor" provisions of Notice 88-75 (July 5, 1988) issued by the Service or any substitute safe-harbor provisions subsequently established by Treasury Regulations shall be treated as causing the Units to be publicly traded. The Limited Partners agree to provide all information respecting assignments which the General Partners deem necessary in order to determine whether a proposed transfer occurred on a secondary market. The General Partners shall incur no liability to any investor or prospective investor for any action or inaction by them in connection with the foregoing, provided it acted in good faith. Consequently, holders of Units may not be able to liquidate their investments in the event of emergencies or for any other reasons. In addition, Units may not be readily accepted as collateral for loans. Withdrawal from Partnership. A Limited Partner has no right to withdraw from the Partnership or to obtain the return of all or any portion of sums paid for the purchase of Units (or reinvested earnings with respect thereto) for one (1) year after the date such Units are purchased. In order to provide a certain degree of liquidity to the Limited Partners, after the one year period, Limited Partners may withdraw all or part of their Capital Accounts from the Partnership in four equal quarterly installments beginning the calendar quarter following the quarter in which the notice of withdrawal is given, provided notice is given thirty (30) days prior to the end of the preceding quarter subject to a ten percent (10%) early withdrawal penalty. The ten percent (10%) penalty is applicable to the amount withdrawn as stated in the Notice of Withdrawal. The ten percent (10%) penalty will be deducted, pro rata, from the four quarterly installments paid to the Limited Partner. Withdrawal after the one year holding period and before the five year holding period will be permitted only upon the terms set forth above. Limited Partners will also have the right after five years from the date of purchase of the Units to withdraw from the Partnership on an installment basis, generally, over a five-year period (in 20 equal quarterly installments), or over such longer period of time as the Limited Partner may desire or as may be required in light of Partnership cash flow. During this five-year (or longer) period, the Partnership will pay any distributions with respect to Units being liquidated directly to the withdrawing Limited Partner. No penalty will be imposed on withdrawals made in twenty quarterly installments or longer. Notwithstanding the five-year (or longer) withdrawal period, the General Partners may liquidate all or part of a Limited Partners Capital Account in four quarterly installments beginning the calendar quarter following the quarter in which the notice of withdrawal is given, provided that such notice was received thirty (30) days prior to the end of the preceding quarter. Such liquidations shall, however, be subject to a ten percent (10%) early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn pursuant to the five year (or longer) withdrawal period. The ten percent (10%) penalty will be deducted from the Limited Partners' Capital Account. The ten percent (10%) early withdrawal penalty will be received by the Partnership, and a portion of the sums collected as such penalty will be applied toward the next installment(s) of principal, under the Formation Loan owed to the Partnership by Redwood Mortgage thereby reducing the amount owed to the Partnership from Redwood Mortgage. Such portion shall be determined by the ratio between the initial amount of the Formation Loan and the total amount of organization and syndication costs incurred by the Partnership in this offering. After the Formation Loan has been paid, any withdrawal penalties will be used to pay Continuing Servicing Fee, and the balance will be retained by the Partnership for its own account. (See "PLAN OF DISTRIBUTION"). Limited Partners may commence withdrawal (or partial withdrawal) from the Partnership in installments by surrendering Units as of the end of any calendar quarter. The amount that a withdrawing Limited Partner will receive from the Partnership is based on the withdrawing Limited Partner's capital account. A capital account is a sum calculated for tax and accounting purposes, and may be greater than or less than the fair market value of such investor's Limited Partnership Interest in the Partnership. The fair market value of a Limited Partner's interest in the Partnership will generally be irrelevant in determining amounts to be paid upon withdrawal, except to the extent that the current fair market value of the Partnership's loan portfolio is realized by sales of existing Mortgage Investments (which sales are not required to be made). The Partnership will not establish a reserve from which to fund withdrawals and, accordingly, the Partnership's capacity to return a Limited Partner's capital account is restricted to the availability of Partnership cash flow. For this purpose, cash flow is considered to be available only after all current Partnership expenses have been paid (including compensation to the General Partners and affiliates) and adequate provision has been made for the payment of all periodic cash distributions on a pro rata basis which must be paid to Limited Partners who elected to receive such distributions upon subscription for Units. Furthermore, no more than twenty percent (20%) of the total Limited Partners' Capital Accounts outstanding for the beginning of any calendar year shall be liquidated during any calendar year. Notwithstanding the twenty percent (20%) limitation, the General Partners shall have the discretion to further limit the percentage of the total Limited Partners' Capital Accounts that may be withdrawn in order to comply with any regulation to be enacted by the IRS pursuant to Section 7704 of the Code and the safe harbor provisions set forth in Notice 88-75 to avoid the Partnership being taxed as a corporation. If Notices of Withdrawal in excess of these limitations are received by the General Partners, the priority of distributions among Limited Partners shall be determined as follows: first to those Limited Partners withdrawing Capital Accounts according to the 20 quarter or longer installment liquidation period, then ERISA plan Limited Partners withdrawing Capital Accounts after five (5) years, over four (4) quarterly installments (which need such sums to pay retirement benefits), then to Limited Partners withdrawing after one (1) year over four (4) quarterly installments. Except as provided above, withdrawal requests will be considered by the General Partners in the order received. Upon dissolution and termination of the Partnership, a five-year winding-up period is provided for liquidating the Partnership's loan portfolio and distributing cash to Limited Partners. Due to high prevailing interest rates or other factors, the Partnership could suffer reduced earnings (or losses) if a substantial portion of its loan portfolio remains and must be liquidated quickly at the end of such winding-up period. Limited Partners who complete a withdrawal from the Partnership prior to any such liquidation will not be exposed to this risk. Conversely, if prevailing interest rates have declined at a time when the loan portfolio must be liquidated, unanticipated profits could be realized by those Limited Partners who remained in the Partnership until its termination. DISTRIBUTION POLICIES Distributions to the Limited Partners. The Partnership will make monthly, quarterly or annual distributions of all Earnings to those Limited Partners affirmatively electing to receive cash distributions upon subscription. All other Limited Partners will not receive current Distributions of Earnings. Rather, they will acquire additional Units with their pro rata portion of Earnings the value of which will be credited to their Capital Accounts and will be applied to Partnership Operations. For every $100 of cash available for distribution, such Investor will acquire an additional Unit or fraction thereof. However, there is no assurance as to the timing or amount of any Distribution to the holders of the Units. Cash Available for Distribution will be allocated to the Limited Partners and their assignees in the ratio which the capital accounts of the number of Units owned by each of them bears to the capital accounts of the total number of Units then outstanding, subject to adjustment with respect to Units issued by the Partnership during the quarter. For such purposes, a transferee of Units will be deemed to be the owner thereof as of the first day following the day the transfer is completed and will therefore not participate in distributions for the period prior to which the transfer occurs. Earnings means cash funds available from operations from interest payments, early withdrawal penalties not applied to the Formation Loan, late and prepayment charges, interest on short-term investments and Working Capital Reserve, after deducting funds used to pay or provide for the payment of Partnership expenses and appropriate reserves. Subject to the right of the General Partners to terminate the right of Investors to acquire additional Units in lieu of receipt of Periodic Cash Distributions, such option to acquire additional Units will continue unless prohibited by applicable federal or state law. Units acquired in lieu of Periodic Cash Distributions will have the same rights and obligations of Units acquired initially. Cash Distributions. Cash Available for Distribution will be determined by computing the net income during the calendar month on an accrual basis and in accordance with generally accepted accounting principles. The term "Cash Available for Distribution" means an amount of cash equal to the excess of accrued income from operations and investment of, or the sale or refinancing or other disposition of, Partnership assets during any calendar month over the accrued operating expenses of the Partnership during such month, including any adjustments for bad debt reserves or deductions as the General Partners may deem appropriate, all determined in accordance with generally accepted accounting principles; provided, that such operating expenses shall not include any general overhead expenses of the General Partners not specifically related to, billed to or reimbursable by the Partnership as specified in Sections 10.15 through 10.17 of the Limited Partnership Agreement. All Cash Available for Distribution will be allocated one percent (1%) to the General Partners and ninety-nine percent (99%) to the Limited Partners. Allocation of Net Income and Net Losses. Net Income and Net Loss for accounting purposes for each fiscal quarter and all items of net profits or net losses and credits for tax purposes for each quarter shall be allocated to the Partners as set forth in Article V of the Limited Partnership Agreement. Net Income and Net Loss will be allocated one percent (1%) to the General Partner and ninety-nine percent (99%) to the Limited Partners. REPORTS TO LIMITED PARTNERS Within 90 days after the end of each fiscal year of the Partnership, the General Partners will deliver to each Limited Partner such information as is necessary for the preparation by such Limited Partner of his federal income tax return, and state income or other tax returns. Within 120 days after the end of each Partnership fiscal year, the General Partners will deliver to each Limited Partner an annual report which includes audited financial statements of the Partnership prepared in accordance with generally accepted accounting principles, and which contains a reconciliation of amounts shown therein with amounts shown on the method of accounting used for tax reporting purposes. Such financial statements include a profit and loss statement, a balance sheet of the Partnership, a Cash Flow statement and a statement of changes in financial position. The annual report for each year reports on the Partnership's activities for that year, identifies the source of Partnership Distributions, sets forth the compensation paid to the General Partners and their Affiliates and a statement of the services performed in consideration therefor and contains such other information as is deemed reasonably necessary by the General Partners to advise the Limited Partners of the affairs of the Partnership. For as long as the Partnership is required to file quarterly reports on Form 10-Q with the Securities and Exchange Commission, the information contained in each such report for a quarter shall be sent to the Limited Partners within 60 days after the end of such quarter. If and when such reports are not required to be filed, each Limited Partner will be furnished, within 60 days after the end of each of the first three quarters of each Partnership fiscal year, an unaudited financial report for that period including a profit and loss statement, a balance sheet and a Cash Flow statement. The foregoing reports for any period in which fees are paid to the General Partners or their Affiliates for services shall set forth the fees paid and the services rendered. PLAN OF DISTRIBUTION Subject to the conditions set forth in this Prospectus and in accordance with the terms and conditions of the Partnership Agreement, the Partnership offers through qualified broker dealers on a best efforts basis, a maximum of 300,000 Units ($30,000,000) of Limited Partnership Interest at $100 per Unit. The minimum subscription is twenty (20) Units ($2,000). Participating Broker Dealers will receive sales commissions of five percent (5%) of Gross Proceeds for subscriptions where investors elect to receive cash distributions and sales commissions of nine percent (9%) of Gross Proceeds will be paid for subscriptions where investors elect to reinvest their Earnings in the Partnership. Alternatively, Participating Broker Dealers may elect to receive four percent (4%) of Gross Proceeds on their sales where investors elect to receive cash distributions or seven percent (7%) of Gross Proceeds where investors elect to reinvest their distributions and receive a continuing servicing fee equal to one quarter of one percent (0.25%) of the Limited Partner's Capital Account payable annually in quarterly installments (the "Continuing Servicing Fee"). Additionally, Participating Broker Dealers may be entitled to receive up to one-half of one percent (.5%) of the Gross Proceeds for bona fide due diligence expenses, and certain other expense reimbursements and sales seminar expenses payable by the Partnership. All compensation to be paid shall be in accordance with and subject to Rule 2810 of the NASD Conduct Rules. The Partnership anticipates that the total sales commissions payable will not exceed 7.3%. This number is based upon the General Partners' assumption that sixty-five percent (65%) of investors will elect to compound Earnings, thirty-five percent (35%) of investors will elect to receive distributions and twenty percent (20%) of the Participating Broker Dealers will elect to receive the Continuing Servicing Fee. However, in no event will the total compensation payable to Participating Broker Dealers, including sales commissions, expense reimbursements and sales seminar expenses, exceed the ten percent (10%) limitation underwriting compensation, or, in the event the Participating Broker Dealer elects to receive the Continuing Servicing Fee three percent (3%) for each one percentage point that the total of sales commissions received falls below nine percent (9%) (collectively, "Compensation Limitation") as set forth in Rule 2810 of the NASD Conduct Rules. The total underwriting compensation paid to all Participating Broker Dealers in connection with the Offering, whether paid by Redwood Mortgage or the Partnership, including sales commissions, expense reimbursements and sales seminar expenses, will not exceed the Compensation Limitation plus one-half of one percent (.5%) of the Gross Proceeds for bona fide accountable due diligence expenses as set forth in the NASD Conduct Rules. Units may also be offered or sold directly by the General Partners for which they will receive no sales commissions. No commissions will be paid on any Units acquired by Partners in lieu of Periodic Cash Distributions. In the event that the Partnership receives any unsolicited orders directly from an investor who did not utilize the services of a Participating Broker Dealer, Redwood Mortgage will pay to the Partnership an amount equal to the amount of sales commissions otherwise attributable to a sale of Unit through a Participating Broker Dealer. The Partnership in turn will credit such amounts received by Redwood Mortgage to the account of the Investor who placed the unsolicited order. The Partnership will not pay referral or similar fees to any accountants, attorneys or other persons in connection with the distribution of the Units. Participating Broker Dealers are not obligated to obtain any subscriptions, and there is no assurance that any Units will be sold. The Participating Broker Dealers shall not directly or indirectly finance or arrange for the financing of, purchase of any Units, nor shall the proceeds of this Offering be used either directly or indirectly to finance the purchase of any Units. The Selling Agreement provides that with respect to any liabilities arising out of the Securities Act of 1933, as amended, the General Partners shall indemnify the Participating Broker Dealer. To the extent that indemnification provisions purport to include indemnification for liabilities arising under the Securities Act of 1933, such indemnification, in the opinion of the Securities and Exchange Commission is contrary to public policy and therefore unenforceable. Each subscriber will be required to comply with (i) the minimum purchase requirement and investor suitability standard of his state of residence or (ii) the investor suitability standard imposed by the Partnership in the event that his state of residence does not impose such a standard (See "INVESTOR SUITABILITY STANDARDS"). In order to purchase any Units, the subscriber must complete and execute the Signature Page for the Subscription Agreement. Any subscription for Units must be accompanied by tender of the sum of $100 per Unit. The Signature Page is set forth at the end of this Prospectus at Exhibit B-l. By executing the Signature Page for the Subscription Agreement, the subscriber agrees to all of the terms of the Partnership Agreement including the grant of a power of attorney under certain circumstances. Limited Partnership Interests will be evidenced by a written Partnership Agreement and each Limited Partner will receive a Certificate of Limited Partnership Interest indicating the extent of his interest in the Partnership. Subscription Agreements from prospective investors will be accepted or rejected by the General Partners within thirty (30) days after their receipt. Subscriptions will be effective only on acceptance by the General Partners and the right is reserved to reject any subscription in whole or in part" for any reason. The General Partners and their Affiliates may, in their discretion, purchase Units for their own account, and any Units so purchased will be counted for the purpose of obtaining the required maximum subscriptions and will not be included in reaching the minimum subscriptions. The maximum amount of Units that may be purchased by the General Partners or their Affiliates is $50,000 (500 Units). Purchases of such Units by the General Partners or their Affiliates will be made for investment purposes only on the same terms, conditions and prices as to unaffiliated parties. It is not anticipated that the General Partners or their Affiliates will purchase Units for their own accounts. Formation Loan. All selling commissions incurred in connection with the offer and sale of Units and all amounts paid in connection with unsolicited orders will be paid by Redwood Mortgage Initially, upon the formation of the Partnership, approximately 86.7% of each dollar invested will be available for Mortgage Investments if 300,000 Units ($30,000,000) are sold. However, as Redwood Mortgage repays the Formation Loan, and if working capital reserves are applied to Mortgage Investments, as has occurred in prior programs, approximately ninety-seven percent (97%) if 300,000 Units ($30,000,000) are sold will be available for investment in Mortgage Investments. One of the Partnership's loans will be made to Redwood Mortgage, to be used exclusively to pay certain selling expenses of the Partnership. The amount of this loan (the "Formation Loan") will average approximately 7.3% of the Gross Proceeds. The Formation Loan will not exceed 7.3% of the total Gross Proceeds of this Offering for the maximum offering amount assuming, based upon the General Partners' historical experience and knowledge of professionals in the industry, that sixty-five percent (65%) of the investors elect to compound their Earnings, thirty-five percent (35%) elect to receive distributions and twenty percent (20%) of the Participating Broker Dealers elect to receive the Continuing Servicing Fees, or the actual amount of selling commissions incurred by Redwood Mortgage, whichever is less. The Formation Loan will be unsecured, will not bear interest and will be repaid in annual installments. Upon commencement of this Offering, Redwood Mortgage shall make annual installments of one-tenth of the principal balance of the Formation Loan as of December 31 of each year. Such payment shall be due and payable by December 31 of the following year with the first payment due by December 31, 1997 assuming this Offering commences in 1996. The principal balance of the Formation Loan will increase as additional sales of Units are made each year. The amount of the annual installment payment to be made by Redwood Mortgage, during the offering stage, will be determined by the principal balance of the Formation Loan on December 31 of each year. Upon the completion of the offering the balance of the Formation Loan will be repaid in ten (10) equal annual installments of principal, without interest, commencing on December 31 of the year following the year the offering terminates. Redwood Mortgage at its option may prepay all or any part of the Formation Loan. Redwood Mortgage intends to repay the Formation Loan principally from loan brokerage commissions earned on Mortgage Investments, and the receipt of a portion of the early withdrawal penalties and other fees paid by the Partnership. Since Redwood Mortgage will use the proceeds from loan brokerage commissions on Mortgage Investments to repay the Formation Loan, if all or any one of the initial General Partners is removed as a General Partner by the vote of a majority of Limited Partners and a successor or additional General Partner(s) is thereafter designated, and if such successor or additional General Partner(s) begins using any other loan brokerage firm for the placement of Mortgage Investments, Redwood Mortgage will be immediately released from any further obligation under the Formation Loan (except for a proportionate share of the principal installment due at the end of that year, pro rated according to the days elapsed). In addition, if all of the General Partners are removed, no successor General Partners are elected, the Partnership is liquidated and Redwood Mortgage is no longer receiving any payments for services rendered, the debt on the formation Loan shall be forgiven and Redwood Mortgage will be immediately released from any further obligation under the Formation Loan. The Formation Loan will not bear interest. Thus, the Formation Loan will have the effect of slightly diluting the rate of return to Limited Partners, but to a much lesser extent than if the Partnership were required to bear all of its own syndication expenses as is the case with certain other publicly offered mortgage pools. Escrow Arrangements Commencing on the effective date of this Prospectus, funds received by the Participating Broker Dealers from subscriptions for Units will be immediately available to the Partnership for investment. As this is not the Partnership's first offering, no escrow will be established. Subscription Proceeds will be released to the Partnership and deposited into the Partnership's operating account. The Offering will terminate one (1) year from the effective date of the Prospectus unless terminated earlier by the General Partners, or unless extended by the General Partners for additional one year periods. Upon acceptance of subscription agreements, the subscribers will be admitted promptly as Limited Partners and Certificates of Limited Partnership Interests will be delivered to such Limited Partners. In addition, the Formation Loan will be made to Redwood Mortgage, the Organization and Offering Expenses incurred by the Partnership will be paid and the General Partners will be reimbursed for any Organizational and Offering Expenses previously paid on behalf of the Partnership. Subscription Account. Subscriptions will be deposited into a subscription account at a federally insured commercial bank or depository and invested in short-term certificates of deposit, a money market or other liquid asset account. Prospective investors whose subscriptions are accepted will be admitted into the Partnership only when their subscription funds are required by the Partnership to fund a mortgage loan, or the Formation Loan, to create appropriate reserves or to pay organizational expenses (See "ESTIMATED USE OF PROCEEDS"). During the period prior to admittance of investors as Limited Partners, proceeds from the sale of Units are irrevocable, and will be held by the General Partners for the account of Limited Partners in the subscription account. Investors funds will be transferred from the subscription account into the Partnership on a first-in, first-out basis. Upon admission to the Partnership, subscription funds will be released to the Partnership and Units will be issued at the rate of $100 per Unit or fraction thereon. Interest earned on subscription funds while in the subscription account will be returned to the subscriber, or if the subscriber elects to compound earnings (see below), the amount equal to such interest will be added to his investment in the Partnership, and the number of Units actually issued shall be increased accordingly. By executing the Subscription Agreement, a subscriber agrees to purchase the number of Units shown thereon on a "when issued basis." Accordingly, when he executes the Subscription Agreement, he is not yet an owner of the Units for which he has subscribed. Units will be issued when the subscriber is admitted to the Partnership, i.e., when the sums representing the purchase for such Units are transferred from the subscription account into the Partnership. The General Partners anticipate that the delay between delivery of a Subscription Agreement and admission to the Partnership will be approximately 90 days, during which time investors will earn interest at pass book savings account rates. Subscription Agreements are non-cancelable and subscription funds are non-refundable for any reason. After having subscribed for at least 20 Units ($2,000), a subscriber may at any time, and from time to time subscribe to purchase additional Units in the Partnership so long as the offering is open. Each purchaser is liable for the payment of the full purchase price of all Units for which he has subscribed. SUPPLEMENTAL SALES MATERIAL Sales material in addition to this Prospectus which may be used in connection with this offering include a sales brochure which will highlight and simplify certain information contained herein. If additional sales material is prepared for use in connection with the Offering, use of such material will be conditioned on filing with and, if required, clearance by appropriate regulatory authorities. As of the date of this Prospectus, it is anticipated that the following sales material will be authorized for use by the Partnership in connection with this Offering: (i) a brochure entitled Redwood Mortgage Investors VIII; (ii) a brochure describing Redwood Mortgage Company and its affiliated entities; (iii) a fact sheet describing the general features of Redwood Mortgage Investors VIII; (iv) a cover letter transmitting the Prospectus; (v) a summary description of the Offering; (vi) a slide presentation; (vii) broker updates; (viii) an audio cassette presentation; (ix) a video presentation; (x) seminar advertisements and invitations; and (xi) certain third-party articles. The General Partners and their Affiliates may also respond to specific questions from Participating Broker Dealers and prospective investors. Business reply cards, introductory letters or similar materials may be sent to Participating Broker Dealers for customer use, and other information relating to the offering may be made available to Participating Broker Dealers for their internal use. However, the Offering is made only by means of this Prospectus. Except as described herein or in Supplements hereto, the Partnership has not authorized the use of other sales materials in connection with the Offering. Although the information contained in such material does not conflict with any of the information contained in this Prospectus, such material does not purport to be complete and should not be considered as a part of this Prospectus or the Registration Statement of which this Prospectus is a part, or as incorporated in this Prospectus or the Registration Statement by reference or as forming the basis of the Offering of the Units described herein. No dealer, salesman or other person has been authorized to give any information or to make any representations other than those contained in this Prospectus or in Supplements hereto or in supplemental sales literature issued by the Partnership and referred to in this Prospectus or in Supplements thereto, and, if given or made, such information or representations must not be relied upon. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities other than the Units to which it relates or any of such Units to any person in any jurisdiction in which such offeror solicitation is unlawful. The delivery of this Prospectus at any time does not imply that the information contained herein is correct as of any time subsequent to its date. LEGAL PROCEEDINGS In the normal course of business the Partnership may become involved in various types of legal proceedings such as assignments of rents, bankruptcy proceedings, appointments of receivers, unlawful detainers, judicial foreclosures, etc, to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes or to protect/recoup its investment from the real property secured by the deeds. None of these actions would typically be of any material importance. As of the date hereof, the Partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business. LEGAL OPINION Legal matters in connection with the Units offered hereby will be passed upon for the Partnership by Wilson, Ryan & Campilongo, 115 Sansome Street, Suite 400, San Francisco, California 94104, counsel for the Partnership and the General Partners. Such counsel has not represented the Limited Partners in connection with the Units offered hereby. EXPERTS The balance sheet of the Partnership and the balance sheet at June 30, 1995 and 1996 of Gymno Corporation, a General Partner, included in this Prospectus have been examined by Parodi & Cropper, independent certified public accountants, as set forth in their report thereon appearing elsewhere herein and have been included herein in reliance on such reports and the authority of such firm as experts in accounting and auditing. The statements under the caption "FEDERAL INCOME TAX CONSEQUENCES" and "ERISA CONSIDERATIONS" as they relate to the matters referenced therein have been reviewed by Wilson, Ryan & Campilongo, and are included herein in reliance upon the authority of that firm as experts thereon. ADDITIONAL INFORMATION The Partnership has filed with the Securities and Exchange Commission, Washington, D.C. 20549, a Registration Statement under the Securities Act of 1933, as amended, with respect to the Units offered pursuant to this Prospectus. For further information, reference is made to the Registration Statement and to the Exhibits thereto which are available for inspection at no fee in the office of the Commission in Washington, D.C., 450 Fifth Street, N.W., Washington, D.C. 20549. Photostatic copies of the material containing this information may be obtained from the Commission upon paying of the fees prescribed by the rules and regulations at the Washington office only. TABULAR INFORMATION CONCERNING PRIOR PROGRAMS Appendix I contains prior performance and investment information for the General Partners' previous programs. Tables I through III of Appendix I contain unaudited information relating to the prior programs and their experience in raising and investing funds, compensation of the General Partners and their Affiliates and operating results of prior programs. Table V of Appendix I contains unaudited information relating to the prior programs' payment of mortgage loans. Table IV is not included because none of the partnerships has completed its operations or disposed of all of its loans. PURCHASERS OF THE UNITS OFFERED BY THIS PROSPECTUS WILL NOT ACQUIRE ANY OWNERSHIP IN INTEREST IN ANY PRIOR PROGRAM AND SHOULD NOT ASSUME THAT THE RESULTS OF THE PRIOR PROGRAMS WILL BE INDICATIVE OF THE FUTURE RESULTS OF THIS PARTNERSHIP. MOREOVER, THE OPERATING RESULTS FOR THE PRIOR PROGRAMS SHOULD NOT BE CONSIDERED INDICATIVE OF FUTURE RESULTS OF THE PRIOR PROGRAMS OR WHETHER THE PRIOR PROGRAMS WILL ACHIEVE THEIR INVESTMENT OBJECTIVES WHICH WILL IN LARGE PART DEPEND ON FACTS WHICH CANNOT NOW BE DETERMINED. GLOSSARY The following are definitions of certain terms used in the Prospectus and not otherwise defined herein: Affiliate. The term "Affiliate" means (a) any person directly or indirectly controlling, controlled by or under common control with another person, (b) any person owning or controlling ten percent (10%) or more of the outstanding voting securities of such other person, (c) any officer, director or partner of such person, and (d) if such other person is an officer, director or partner, any company for which such person acts in any such capacity. Assignee. The term "Assignee" shall mean a person who has acquire a beneficial interest in one or more Units but who is neither a Limited Partner nor an Assignee of Record. Capital Account. The term "Capital Account, means, with respect to any Partner, the Capital Account maintained for such Partner in accordance with the following provisions: (a) To each Partner's Capital Account there shall be credited such Partner's Capital Contributions, such Partner's distributive share of Profits, and any items in the nature of income or gain (from unexpected adjustments, allocations or distributions) that are specially allocated to a Partner and the amount of any partial repayments received in connection with Mortgage Investments or the sale of a property underlying the Mortgage Investment at a foreclosure sale, less the Partnership's costs associated with such sale. Closing Date. The term "Closing Date" means the date designated by the General Partners but not later than one year from the date of the Prospectus, unless extended for additional one (1) year period at the General Partners' election. Code. The term "Code" means the Internal Revenue Code of 1986, as amended to the date of this Prospectus. Continuing Servicing Fee. The term "Continuing Servicing Fee" means an amount equal to approximately 0.25 percent of the Limited Partner's capital account which amount shall be paid to certain Participating Broker Dealers as compensation in connection with the offer and sale of units. Deed of Trust. The term "Deed of Trust" means the lien or liens created on the real property or properties of the borrower securing the borrower's obligation to the Partnership to repay the Loan. Distributions. The term "Distributions" means any cash or other property distributed to Holders and the General Partners arising from their interests in the Partnership, but shall not include any payments to the General Partners under the provisions of Article 10 of the Partnership Agreement. Earnings.The term "Earnings" means all revenues earned by the Partnership less all expenses incurred by the Partnership. Formation Loan. The term "Formation Loan" means a loan to Redwood Mortgage, an affiliate of the General Partners, equal to the amount of the sales commissions and the amounts payable in connection with unsolicited sales. Redwood Mortgage will pay all sales commissions and amounts due in connection with unsolicited sales from the Formation Loan. The Formation Loan will be unsecured, will not bear interest and will be repaid in annual installments. General Partners. The term "General Partners" means D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation, the General Partners of Redwood Mortgage Investors VIII, a limited partnership formed under the California Revised Limited Partnership Act. Gross Proceeds. The term "Gross Proceeds" shall be deemed to mean the sum of $100 for each Unit subscribed and paid for during the Offering. Guaranteed Payment for Offering Period. The term "Guaranteed Payment for Offering for Period" means the interest rate guaranteed to Limited Partners by the General Partners during the Guaranteed Payment Period. The Guaranteed Payment Offering Period, calculated on a monthly basis, shall be equal to the greater of (i) the Partnership's Earnings or (ii) the interest rate established by the Monthly Weighted Average Cost of Funds for the 11th District Savings Institutions, as announced by the Federal Home Loan Bank of San Francisco during the last week of the preceding month, plus two points, up to a maximum interest rate of twelve percent (12%). The Guaranteed Payment Period is the period commencing on the day a Limited Partner is admitted to the Partnership and ending three months after the Offering Termination Date. To the extent the return to be paid is in excess of the Partnership's Earnings, the Guaranteed Payment for Offering Period shall be payable by the General Partners out of a Capital Contribution to the Partnership and/or fees payable to the General Partners or Redwood Mortgage which are lowered or waived. Holders. The term "Holders" means the owners of Units who are either Partners or Assignees of Record, and reference to a "Holder" shall be to any one of them. Initial Closing Date. The term "Initial Closing Date" means the date on which subscribers for Units offered pursuant to this Prospectus are first admitted to the Partnership as Limited Partners. Initial Limited Partner. The term "Initial Limited Partner" means Gymno Corporation. Limited Partners. The term "Limited Partners" means the purchasers of Units in Redwood Mortgage Investors VIII who are admitted thereto and whose names are included on the Certificate and Agreement of Limited Partnership of Redwood Mortgage Investors VIII. Limited Partnership Interest. The term "Limited Partnership Interest" means a limited partnership interest in Redwood Mortgage Investors VIII, acquired pursuant to the purchase of a Unit and thereafter means the percentage ownership interest of any Limited Partner in the Partnership determined at any time by dividing a Limited Partner's current Capital Account by the total outstanding Capital Accounts of all Limited Partners. Mortgage Investment(s). The term "Mortgage Investment(s)" means the loan(s) and/or an undivided interest in the loans the Partnership intends to extend to the general public secured by real property deeds of trust. NASD. The acronym "NASD" means the National Association of Securities Dealers, Inc. Net Asset Value. The term "Net Asset Value" means the Partnership's total assets less its total liabilities. Net Income or Net Loss. The term "Net Income or Net Loss" means for each Fiscal Year or any other period, an amount equal to the Partnership's taxable income or loss for such Fiscal Year or other given period, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (a) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses shall be added to such taxable income or loss; (b) Any expenditures of the Partnership described in Section 105(a)(2)(B) of the Code or treated as Section 105(a)(2)(B) expenditures pursuant to Treasury Regulation Section 1.7041(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to Section 10.16 of the Partnership Agreement, shall be subtracted from such taxable income or loss; (c) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (d) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account depreciation, amortization or other cost recovery deductions for such Fiscal Year or other period, computed such that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of a Fiscal Year or other period, depreciation, amortization or other cost recovery deductions shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deductions for such Fiscal Year or other period bears to such beginning adjusted tax basis; and (e) Notwithstanding any other provision of Section 10.16 of the Partnership Agreement, any items in the nature of income or gain or expenses or losses, which are specially allocated, shall not be taken into account in computing Profits or Losses. Net Proceeds. The term "Net Proceeds" means the total Gross Proceeds less expenses incurred and to be paid by the Partnership in organizing the Partnership and in offering Units to the public. Organizational and Offering Expenses. The term "Organizational and Offering Expenses" means the expenses incurred in connection with the organization of Redwood Mortgage Investors VIII and the offer and sale of Units therein, including all expenses and fees for qualifying such Units and Limited Partnership interests under federal and state laws, all legal and accounting fees, all printing and mailing expenses, all escrow and depositary fees and charges, and all other expenses, fees, and charges incurred and related to the offer and sale of such Units and Limited Partnership interests, but excluding all sales commissions paid in connection with this Offering. Participating Broker Dealers. The term Participating Broker Dealers means broker dealer member firms of the NASD which enter into selling agreements with the Partnership. Partners. The term "Partners" means the General Partners and the Limited Partners, and reference to a "Partner" shall be to any one of the Partners. Partnership. The term "Partnership" means Redwood Mortgage Investors VIII, a limited partnership formed pursuant to the California Revised Limited Partnership Act. Partnership Agreement. The term "Partnership Agreement" means the Agreement of Limited Partnership of Redwood Mortgage Investors VIII, attached to this Prospectus as Exhibit A. Prospectus. The term "Prospectus" means the final prospectus in the registration of Units filed with the Securities and Exchange Commission on Form S-11, as amended. Sales Commissions. The term "Sales Commissions" means the amount of compensation, which may be paid under one of two options, to be paid to Participating Broker Dealers in connection with the sale of Units. Special-Use Properties. The term "Special-Use Properties" shall mean bowling alleys, churches and gas stations. Subscription Agreement. The term "Subscription Agreement" means the agreement, attached to this Prospectus as Exhibit B, in which a prospective investor agrees to purchase Units in Redwood Mortgage Investors VIII. Tax-Exempt Investors. The term "Tax-Exempt Investor(s)" means qualified pension, profit sharing and other private retirement trusts, bank funds for such trusts, government pension and retirement trusts, HR-10 (Keogh) plans and Individual Retirement Accounts (IRAs). UBTI. The acronym "UBTI" means Unrelated Business Taxable Income as defined in the Code. Unit. The term "Unit" means a Capital Contribution of $100 to the Partnership which shall entitle the Holder thereof to an interest in the Net Income, Net Loss, and Distributions of the Partnership without regard to capital accounts. Working Capital Reserve. The term "Working Capital Reserve" shall mean a portion of the Invested Capital which the General Partners, in their discretion, determine is prudent to be maintained by the Partnership to pay for operating, and other costs and expenses the Partnership may incur with respect to its activities. INDEX TO THE FINANCIAL STATEMENTS Page Redwood Mortgage Investors VIII Independent Auditor's Report...................................... 79 Balance Sheet,December 31,1995 and Notes Thereto.................. 81 GYMNO Corportion Independent Auditor's Report...................................... 89 Balance Sheets,June 30,1995 and 1996 and Notes Thereto............ 91 REDWOOD MORTGAGE INVESTORS VIII (A Calilfornia Limited Partnership) FINANCIAL STATEMENTS DECEMBER 31, 1995 (With Auditor's Report Theron) PARODI & CROPPER CERTIFIED PUBLIC ACCOUNTANTS 3658 Mount Diablo Blvd., Suite #205 Lafayette CA 94549 (510) 284-3590 Fax (510-284-3593) INDEPENDENT AUDITORS REPORT THE PARTNERS REDWOOD MORTGAGE INVESTORS VIII We have audited the financial statements and related schedules of REDWOOD MORTGAGE INVESTORS VIII (A California Limited Partnership) listed in Item 8 on Form 10-K including balance sheets as of December 31, 1995 and 1994 and the statements of income, changes in partners capital and cash flows for the period from inception, April 14, 1993, to December 31, 1993 and the two years ended December 31, 1995 and 1994. These financial statements are the responsibility of the Partnerships management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provided a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of REDWOOD MORTGAGE INVESTORS VIII as of December 31, 1995 and 1994, and the results of its operations and cash flows for the two years and period then ended in conformity with generally accepted accounting principles. Further, it is our opinion that the schedules referred to above present fairly the information set forth therein in compliance with the applicable accounting regulations of the Securities and Exchange Commission. PARODI & CROPPER Lafayette, California February 28, 1996 REDWOOD MORTGAGE INVESTORS VIII (A California Limited Partnership) BALANCE SHEETS DECEMBER 31, 1995 AND 1994 ASSETS
1995 1994 ----------- ----------- Cash ................................................$ 380,318 $ 397,176 ----------- ----------- Accounts receivable: Mortgage loans, secured by deeds of trust ......... 12,047,252 6,484,707 Accrued Interest on mortgage loans ................ 113,301 75,345 Advances on mortgage loans ........................ 8,431 1,053 Accounts receivable, unsecured .................... 71,316 0 ----------- ---------- 12,240,300 6,561,105 Less allowance for doubtful accounts .............. 39,152 13,120 ----------- ----------- 12,201,148 6,547,985 ----------- ----------- Formation loan due from Redwood Home Loan Co. ........................................... 775,229 525,256 Organization costs, net of accumulated amortization of $5,625 and $3,125 respectively ..... 6,875 9,375 Due from related companies ......................... 3,049 0 Prepaid expense-deferred loan fee .................. 17,718 0 ----------- ----------- $13,384,337 $ 7,479,792 =========== =========== LIABILITIES AND PARTNERS CAPITAL Liabilities: Accounts payable and accrued expenses ............ $ 4,010 $ 0 Notes payable - Pacific Bank ..................... 1,910,000 0 Subscriptions to partnership in applicant status .. 0 189,300 ----------- ----------- 1,914,010 189,300 Partners Capital .................................. 11,470,327 7,290,492 ----------- ----------- $13,384,337 $ 7,479,792 =========== =========== See accompanying notes to financial statements.
REDWOOD MORTGAGE INVESTORS VIII (A California Limited Partnership) STATEMENT OF INCOME FOR THE PERIOD FROM INCEPTION, APRIL 14, 1993, THROUGH DECEMBER 31, 1993 AND THE TWO YEARS ENDED DECEMBER 31, 1995
1995 1994 1993 ---------------- -------------- -------------- Revenues: Interest on mortgage loans .......................................... $945,573 $450,983 $107,129 Interest on bank deposits ........................................... 13,120 15,739 5,690 Late charges ......................................................... 3,876 1,704 606 Miscellaneous ....................................................... 2,211 120 51 -------- -------- -------- -------- -------- -------- 964,780 468,546 113,476 -------- -------- -------- Expenses: Interest on note payable ............................................ 25,889 0 0 Amortization of loan origination fees ............................... 2,531 0 0 Provision for doubtful accounts ..................................... 26,032 13,120 0 Asset management fee - General Partners ............................. 11,587 5,906 192 Amortization of organization costs .................................. 2,500 2,500 625 Clerical costs through Redwood Home Loan Co. ........................ 22,769 10,664 2,692 Professional fees ................................................... 16,178 10,244 200 Printing, supplies and postage ...................................... 92 917 34 Other ............................................................... 1,461 883 77 -------- -------- -------- 109,039 44,234 3,820 -------- -------- -------- Income before interest credited to partners in applicant status .................................................... 855,741 424,312 109,656 Interest credited to partners in applicant status ...................... 18,908 14,443 4,641 -------- -------- -------- Net Income ...................................................... $836,833 $409,869 $105,015 ======== ======== ======== Net income: To General Partners(1%) ................................... $ 8,368 $ 4,099 $ 1,050 To Limited Partners (99%) ......................... 828,465 405,770 103,965 -------- -------- -------- Total- net income ............................................. $836,833 $409,869 $105,015 ======== ======== ======== Net income per $1,000 invested by Limited Partners for entire period after admission to partnership: -Where income is reinvested and compounded ........................... $ 83 $ 81 $ 85 ======== ======== ======== -Where partner receives income in monthly distributions ....................................................... $ 80 $ 79 $ 83 ======== ======== ======== See accompanying notes to financial statements.
REDWOOD MORTGAGE INVESTORS VIII (A California Limited Partnership) STATEMENT OF CHANGES IN PARTNERS CAPITAL FOR THE PERIOD FROM INCEPTION, APRIL 14, 1993, THROUGH DECEMBER 31, 1993 AND THE TWO YEARS ENDED DECEMBER 31, 1995
PARTNERS CAPITAL --------------------------------------------------------------------------- PARTNERS IN UNALLOCATED APPLICANT GENERAL LIMITED SYNDICATION STATUS PARTNERS PARTNERS COSTS TOTAL --------------- ------------- -------------- ---------------- ---------------- Contributions on application .... $2,890,530 0 0 0 0 Interest credited to Partners in applicant status.............. 4,641 0 0 0 0 Upon admission to partnership: Interest withdrawn .............( 1,956) 0 0 0 0 Transfers to Partners capital....(2,764,443) 2,887 2,761,556 0 2,764,443 Net income ...................... 0 1,050 103,965 0 105,015 Syndication costs incurred ..... 0 0 0 (199,564) ( 199,564) Allocation of syndication costs . 0 ( 92) ( 9,130) 9,222 0 Partners withdrawals ............ 0 ( 958) ( 46,856) 0 ( 47,814) Balances at December 31, 1993 .. 128,772 2,887 2,809,535 ( 190,342) 2,622,080 Contributions on application ... 4,560,683 0 0 0 0 Interest credited to partners in applicant status............. 14,443 0 0 0 0 Upon admission to partnership: Interest withdrawn .......... ( 5,774) 0 0 0 0 Transfers to Partners capital... (4,508,824) 4,542 4,504,282 0 4,508,824 Net income ..................... 0 4,099 405,770 0 409,869 Syndication costs incurred .... 0 0 0 ( 81,023) ( 81,023) Allocation of syndication costs 0 ( 347) ( 34,349) 34,696 0 Partners withdrawals .......... 0 ( 3,444) ( 165,814) 0 ( 169,258) ---------- ---------- ---------- ----------- ---------- Balances at December 31, 1994 . 189,300 7,737 7,519,424 ( 236,669) 7,290,492 Contributions on application .. 3,634,264 0 0 0 0 Interest credited to partners in applicant status............ 18,908 0 0 0 0 Upon admission to Partnership: Interest withdrawn ......... ( 7,673) 0 0 0 0 Transfers to Partners capital. (3,834,799) 3,588 3,831,211 0 3,834,799 Net income ..................... 0 8,368 828,465 0 836,833 Syndication costs incurred .... 0 0 0 ( 175,334) ( 175,334) Allocation of syndication costs . 0 ( 859) ( 85,045) 85,904 0 Partners withdrawals ........... 0 ( 7,509) ( 308,554) 0 ( 316,063) Early withdrawal penalties .... 0 0 ( 564) 164 ( 400) ---------- ---------- ---------- ----------- ---------- Balances at December 31, 1995 . $ 0 11,325 11,784,937 ( 325,935) 11,470,327 ========== ========== ========== =========== ========== See accompanying notes to Financial Statements
REDWOOD MORTGAGE INVESTORS VIII (A California Limited Partnership) STATEMENT OF CASH FLOWS FOR THE PERIOD FROM INCEPTION, APRIL 14, 1993, THROUGH DECEMBER 31, 1993 AND THE TWO YEARS ENDED DECEMBER 31, 1995
1995 1994 1993 ---------- --------- ---------- Cash flows from operating activities: Net income ...................................... $ 836,833 $ 409,869 $ 105,015 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of organization costs ............ 2,500 2,500 625 Increase in allowance for doubtful accounts ... 26,032 13,120 0 Increase in accounts payable .................. 4,010 0 0 (Increase) in accrued interest and advances ... ( 45,334) ( 63,008) ( 13,390) (Increase) decrease in amount due from related companies ......................... ( 3,049) 2,493 ( 2,493) (Increase) in deferred loan fee ............... ( 17,718) 0 0 Organization costs incurred ................... 0 0 ( 12,500) ---------- ------- -------- Net cash provided by operating activities 803,274 364,974 77,257 --------- - ---------- -------- Cash flows from investing activities: Net (increase) in: Mortgage loans ............................. (5,562,545) (4,148,033) ( 2,336,674) Formation loan ............................. ( 249,973) ( 319,302) ( 205,954) Accounts receivable, unsecured ............. ( 71,316) 0 0 ---------- ---------- --------- Net cash used in investing activities ... (5,883,834) (4,467,335) ( 2,542,628) Cash flows from financing activities: Increase in notes payable bank .................. 1,910,000 0 0 Contributions by partner applicants ............. 3,634,264 4,560,683 2,890,530 Interest credited to partners in applicant status 18,908 14,443 4,641 Interest withdrawn by partners in applicant status ( 7,673) ( 5,774) ( 1,956) Partners withdrawals ............................ ( 316,063) ( 169,258) ( 47,814) Early withdrawal penalties, net ................. ( 400) 0 0 Syndication costs incurred ...................... ( 175,334) ( 81,023) ( 199,564) ---------- ---------- --------- Net cash provided by financing activities ... 5,063,702 4,319,071 2,645,837 ---------- ---------- ---------- Net increase in cash and cash equivalents .........( 16,858) 216,710 180,466 Cash - beginning of period ........................ 397,176 180,466 0 ---------- ---------- ---------- Cash - end of period .............................. $ 380,318 $ 397,176 $ 180,466 ========== ========== ========== See accompanying notes to financial statements.
REDWOOD MORTGAGE INVESTORS VIII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE 1 - ORGANIZATION AND GENERAL Redwood Mortgage Investors VIII, (the Partnership) is a California Limited Partnership, of which the General Partners are D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation owned and operated by the individual General Partners. The partnership was organized to engage in business as a mortgage lender for the primary purpose of making loans secured by Deeds of Trust on California real estate. Partnership loans are being arranged and serviced by Redwood Home Loan Co. (RHL C0.), dba Redwood Mortgage, an affiliate of the General Partners. At December 31, 1995, the Partnership was in the offering stage, wherein contributed capital totalled $11,074,460 in limited partner contributions of an approved $15,000,000 issue, in units of $100 each. All applicants had been admitted to the partnership at December 31, 1995. A minimum of 2,500 units ($250,000) and a maximum of 150,000 units ($15,000,000) were offered through qualified broker-dealers. As mortgage loans are identified, partners are transferred from applicant status to admitted partners participating in mortgage loan operations. Each months income is distributed to partners based upon their proportionate share of partners capital. Some partners have elected to withdraw income on a monthly, quarterly or annual basis. A. Sales Commission - Formation Loan Sales commissions ranging from 0% (units sold by General Partners) to 10% of the gross proceeds are being paid by RHL Co., an affiliate of the General Partners that arranges and services the mortgage loans. To finance the sales commissions, the Partnership will loan to RHL Co. an amount not to exceed 9.1% gross proceeds provided that the Formation Loan for the minimum offering period(which has lapsed) could have been 10% of the gross proceeds The General Partners have estimated that the Formation Loan will approximate 7.1% of the gross proceeds. The Formation Loan will be unsecured, and will be repaid, without interest, in ten annual installments of principal, which will commence on January 1, following the year the offering closes. At December 31, 1995, RHL Co. had borrowed $775,229 from the Partnership to cover sales commissions relating to $11,074,460 limited partner contributions to date. B. Other Organizational and Offering Expenses Organizational and offering expenses, other than sales commissions, (including printing costs, attorney and accountant fees, registration and filing fees, and other costs), will be paid by the Partnership up to 10% of the gross proceeds of the offering or $600,000 whichever is less. The General Partners will pay any amount of such expenses in excess of 10% of the gross proceeds or $600,000. At December 31, 1995, organization costs of $12,500 and syndication costs of approximately $455,921 had been incurred by the Partnership, which is less than the 10% of the gross proceeds limitation indicated above. It is anticipated that ultimately the sum of organization and syndication costs will be less than 4.00% of the gross proceeds contributed by the Partners. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenues and expenses are accounted for on the accrual basis of accounting. The Partnership bears its own organization and syndication costs (other than certain sales commissions and fees described above) including legal and accounting expenses, printing costs, selling expenses, and filing fees. Organizational costs have been capitalized and will be amortized over a five year period. Syndication costs were charged against partners capital and will be allocated to individual partners consistent with the partnership agreement. REDWOOD MORTGAGE INVESTORS VIII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 If property is acquired through foreclosure, it will be held for prompt sale to return the funds to the loan portfolio. Such property will be recorded at cost, which includes the principal balance of the former loan made by the Partnership, plus accrued interest, payments made to keep the senior loans current, costs of obtaining title and possession, less rental income, or at estimated net realizable value, if less. The difference between such costs and estimated net realizable value will be included in an allowance for losses and deducted from cost in the Balance Sheet to arrive at the carrying value of such property. At December 31, 1995, there was no property acquired through foreclosure. Mortgage loans and the related accrued interest, fees and advances are analyzed on a continuous basis for recoverability. Delinquencies are identified and followed as part of the mortgage loan system. A provision is made for doubtful accounts to adjust the allowance for doubtful accounts to an amount considered by management to be adequate to provide for unrecoverable accounts receivable. In preparing the financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the related periods. Such estimates relate principally to the determination of the allowance for doubtful accounts and the valuation of real estate acquired through foreclosure. Actual results could differ significantly from these estimates. No provision for Federal and State income taxes will be made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply. Amounts reflected in the statement of income as net income per $1,000 invested by Limited Partners for the entire period are actual amounts allocated to Limited Partners who have their investment throughout the period and have elected to either leave their earnings to compound or have elected to receive monthly distributions of their net income. Individual income is allocated each month based on the Limited partners pro rata share of Partners capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or select other options. However, the net income per $1,000 average invested has approximated those reflected for those whose investments and options have remained constant. NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES The following are commissions and/or fees which will be paid to the General Partners and/or related parties. A. Loan Brokerage Commissions For fees in connection with the review, selection, evaluation, negotiation and extension of Partnership loans in an amount up to 12% of loans until 6 months after the termination date of the offering. Thereafter, loan brokerage commissions will be limited to an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers, and thus, not an expense of the partnership. B. Loan Servicing Fees Monthly loan servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal is paid to Redwood Home Loan Co., or such lesser amount as is reasonable and customary in the geographic area where the property securing the loan is located. Currently, such servicing fees are at 1/12 of 1% per month (1% annually). Amounts remitted to the Partnership and recorded as interest on mortgage loans is net of such fees. In 1993, $3,028 of the total loan servicing fees of $8,528 were waived by Redwood Home Loan Co. In 1994, $15,278 of the total loan servicing fees of $44,405 were waived. In 1995, RHL received the total loan servicing fees earned of $85,456. REDWOOD MORTGAGE INVESTORS VIII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 C. Asset Management Fee The General Partners will receive a monthly fee for managing the Partnerships loan portfolio and operations equal to 1/32 of 1% of the net asset value (3/8 of 1% per year). Such fees were reduced from $4,331 to $192 in 1993 with the difference being waived by the General Partners. Fees were reduced from $17,718 to $5,906 in 1994 with the difference being waived. In 1995, fees were reduced from $34,773 to $11,587 with the difference being waived by the General Partners. D. Other Fees The Partnership Agreement provides for other fees such as reconveyance, loan assumption and loan extension fees. Such fees are incurred by the borrowers and are paid to parties related to the General Partners. E. Income and Losses All income will be credited or charged to partners in relation to their respective partnership interests. The partnership interest of the General Partners (combined) shall be a total of 1%. F. Operating Expenses The General Partners or their affiliate (Redwood Home Loan Co.) are reimbursed by the Partnership for all operating expenses actually incurred by them on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to Limited Partners. Such reimbursements are reflected as expenses in the Statement of Income. The General Partners collectively or severally are to contribute 1/10 of 1% in cash contributions as proceeds from the offering are admitted to Limited Partner capital. As of December 31, 1995 a General Partner, GYMNO Corporation, had contributed $11,017 as capital in accordance with Section 4.02(a) of the Partnership Agreement. NOTE 4 - OTHER PARTNERSHIP PROVISIONS A. Applicant Status Subscription funds received from purchasers of units are not admitted to the Partnership until appropriate lending opportunities are available. During the period prior to the time of admission, which is anticipated to be between 1 and 120 days in most cases, purchasers subscriptions will remain irrevocable and will earn interest at money market rates, which are lower than the anticipated return on the Partnerships loan portfolio. During the periods ending December 31, 1995, 1994, and 1993, interest totalling $18,908, $14,443 and $4,641, respectively, was credited to partners in applicant status.. As loans were made and partners were transferred to regular status to begin sharing in income from loans secured by deeds of trust, the interest credited was either paid to the investors or transferred to partners capital along with the original investment. B. Term of the Partnership The term of the Partnership is approximately 40 years, unless sooner terminated as provided. The provisions provide for no capital withdrawal for the first five years, subject to the penalty provision set forth in (E) below. Thereafter, investors have the right to withdraw over a five-year period, or longer. C. Election to Receive Monthly, Quarterly or Annual Distributions Upon subscriptions, investors elect either to receive monthly, quarterly or annual distributions of earnings allocations, or to allow earnings to compound. Subject to certain limitations, an investor may subsequently change his election.. REDWOOD MORTGAGE INVESTORS VIII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 D. Profits and Losses Profits and losses are allocated among the Limited Partners according to their respective capital accounts after 1% is allocated to the General Partners. E. Liquidity, Capital Withdrawals and Early Withdrawals There are substantial restrictions on transferability of Units and accordingly an investment in the Partnership is illiquid. Limited Partners have no right to withdraw from the partnership or to obtain the return of their capital account for at least one year from the date of purchase of Units. In order to provide a certain degree of liquidity to the Limited Partners after the one-year period, Limited Partners may withdraw all or part of their Capital Accounts from the Partnership in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, (30 days notice is required), subject to a 10% early withdrawal penalty. The 10% penalty is applicable to the amount withdrawn and will be deducted from the Capital Account and the balance distributed in four quarterly installments. Withdrawal after the one-year holding period and before the five-year holding period will be permitted only upon the terms set forth above. Limited Partners will also have the right after five years from the date of purchase of the Units to withdraw from the partnership on an installment basis, generally over a five year period in twenty (20) quarterly installments or longer. No penalty will be imposed if withdrawal is made in twenty (20) quarterly installments or longer. Notwithstanding the five-year (or longer) withdrawal period, the General Partners will liquidate all or part of a Limited Partners capital account in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal in given, subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn pursuant to the five-year (or longer) withdrawal period. The Partnership will not establish a reserve from which to fund withdrawals and, accordingly, the Partnerships capacity to return a Limited Partners capital is restricted to the availability of Partnership cash flow. F. Guaranteed Interest Rate For Offering Period During the period commencing with the day a Limited Partner is admitted to the Partnership and ending 3 months after the offering termination date, the General Partners shall guarantee an earnings rate equal to the greater of actual earnings from mortgage operations or 2% above The Weighted Average Cost of Funds Index for the Eleventh District Savings Institutions (Savings & Loan & Thrift Institutions) as computed by the Federal Home Loan Bank of San Francisco, up to a maximum interest rate of 12%. In 1993, 1994 and 1995, actual realization exceeded the guaranteed amount each month. NOTE 5 - LEGAL PROCEEDINGS The Partnership is not a defendant in any legal actions. REDWOOD MORTGAGE INVESTORS VIII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE 6 - ASSET CONCENTRATIONS AND CHARACTERISTICS The mortgage loans are secured by recorded deeds of trust. At December 31, 1995, there were 52 loans outstanding with the following characteristics: Number of loans outstanding 52 Total loans outstanding $12,047,252 Average loan outstanding $ 231,677 Average loan as percent of total 1.92% Average loan as percent of Partners Capital 2.02% Largest loan outstanding $1,073,721 Largest loan as percent of total 8.91% Largest loan as percent of Partners Capital 9.36% Number of counties where security is located (all California) 15 Largest percentage of loans in one county 23.47% Average loan to appraised value at time loan was consummated 63.59% Number of loans in foreclosure status 0 Amount of loans in foreclosure 0 The cash balance at December 31, 1995 of $380,318 was in four banks with interest bearing balances totalling $372,262. The balances exceeded FDIC insurance limits (up to $100,000 per bank) by $279,653. PARODI & CROPPER CERTIFIED PUBLIC ACCOUNTANTS 3658 MOUNT DIABLO BOULEVARD, SUITE #205 LAFAYETTE, CALIFORNIA 94549 ----------------- (510) 284-3590 FAX (510) 284-3593 INDEPENDENT AUDITORS REPORT BOARD OF DIRECTORS GYMNO CORPORATION We have audited the accompanying balance sheets of GYMNO Corporation as of June 30, 1996 and 1995 and the related statements of income, stockholders equity and cash flows for the two years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentations. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GYMNO Corporation as of June 30, 1996 and 1995, and the results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles. PARODI & CROPPER Lafayette, California July 31, 1996 GYMNO CORPORATION BALANCE SHEETS JUNE 30, 1996 AND 1995 ASSETS
1996 1995 ------------ -------- Cash and equivalents ..............................$ 398 $ 1,376 Deferred income tax benefits ..................... 120 120 Recoverable income taxes ......................... 0 922 ------- ------- Total current assets .......................... 518 2,418 ------- ------- Investment in partnerships, at net equity: Redwood Mortgage Investors IV ................... 7,500 8,281 Redwood Mortgage Investors V .................... 5,000 5,000 Redwood Mortgage Investors VI ................... 9,773 9,773 Redwood Mortgage Investors VII .................. 12,748 12,998 Redwood Mortgage Investors VIII ................. 12,270 7,429 ------- ------- 47,291 43,481 ====== ======= $47,809 $45,899 ======= ======= LIABILITIES AND STOCKHOLDERS EQUITY Liabilities: Accounts payable - Stockholders .................$ 436 $ 436 Accounts payable ................................ 1,000 1,000 Accrued income taxes ............................ 357 0 Loan from Redwood Home Loan Co., at 8% interest . 4,000 4,000 ------- ------- Total current liabilities: .................... 5,793 5,436 ------- ------- Stockholders Equity: Common Stock at stated value: Authorized 1,000,000 shares of no par value issued and outstanding 500 shares ............. 5,000 5,000 Paid-in surplus .................................. 7,500 7,500 Retained earnings ................................29,516 27,963 ------ ------- Total stockholders equity ..................... 42,016 40,463 ======= ======= $47,809 $45,899 ======= ======= See accompanying notes to financial statements.
GYMNO CORPORATION STATEMENTS OF INCOME YEARS ENDED JUNE 30, 1996 AND 1995
1996 1995 ------- ------- REVENUE Partnership earnings - ........................... $11,275 $10,347 as General Partner Reconveyance fees ................................ 3,360 3,990 Other partnership earnings ....................... 74 355 ------- ------- 14,709 14,692 ------- ------- EXPENSES Management services - Stockholders ............... 7,516 6,898 Contracted services - ............................ 672 798 Redwood Home Loan Co. .......................... Professional Services ............................ 3,421 4,015 Interest expense ................................. 320 321 Other ............................................ 10 247 ------- ------- 11,939 12,279 ------- ------- Income before provision for income taxes ........... 2,770 2,413 ------- ------- Provision for income taxes: California ....................................... 800 800 Federal .......................................... 417 58 ------- ------- 1,217 858 ------- ------- Net income ......................................... $ 1,553 $ 1,555 ======= ======= Per share (500 shares) ............................. $ 3.11 $ 3.11 ======= ======= See accompanying notes to financial statements.
GYMNO CORPORATION STATEMENTS OF STOCKHOLDERS EQUITY YEARS ENDED JUNE 30, 1996 AND 1995
COMMON STOCK PAID-IN RETAINED ---------------------- SHARES AMOUNT SURPLUS EARNINGS TOTAL Balances - June 30, 1994 ................................... 500# $ 5,000 $ 7,500 $26,408 $38,908 Net income for the year ended June 30, ..................... 0 0 0 1,555 1,555 1995 ---- ------- ------- ------- ------- Balances - June 30, 1995 ................................... 500# $ 5,000 $ 7,500 $27,963 $40,463 Net income for the year ended June 30, ..................... 0 0 0 1,553 1,553 1996 ---- ------- ------- ------- ------- Balances - June 30, 1996 ................................... 500# $ 5,000 $ 7,500 $29,516 $42,016 ==== ======= ======= ======= ======= See accompanying notes to financial statements.
GYMNO CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1996 AND 1995
1996 1995 Cash flows from operating activities: Net income ......................................... $ 1,553 $ 1,555 Adjustments to reconcile net income to net cash provided by operating activities: (Increase) decrease in recoverable income taxes................................... 922 (922) Mark investment to current value ................ 0 (100) Increase (decrease) in accounts payable and accrued liabilities ........................ 357 746 ------- ------- 2,832 1,279 ------- ------- Cash flows from investing activities: (Increase) decrease in: Cash invested in partnership .................... (3,810) (1,563) ------- ------- Net increase (decrease) in cash equivalents .......... (978) (284) Cash equivalents at beginning of year ................ 1,376 1,660 ------- ------- Cash equivalents at end of year (consisting of cash in banks) ...................... $ 398 $ 1,376 ======= ======= See accompanying notes to financial statements.
GYMNO CORPORATION NOTES TO BALANCE SHEETS JUNE 30, 1996 AND 1995 NOTE 1 - ORGANIZATION GYMNO Corporation (the Company) was formed in July, 1986 by D. Russell Burwell and Michael R. Burwell, each owning 250 shares, for the purpose of serving as corporate General Partner of Califonira limited partnerships, (presently Redwood Mortgage Investors I, II, III, IV, V, VI, VII and VIII) which invest in high-yield debt instruments, primarily promissory notes secured by deeds of trust on California real estate. As corporate General Partner, the Company receives management fees and/or a small percentage of income for its services which are performed by the stockholders. In addition, the Company receives reconveyance fees for which it contracts with Redwood Home Loan Company. (RHL C0.) at 20% of such fees. RHL Co. is controlled by D. Russell Burwell. The Company has also acquired limited partnership interest in Redwood Mortgage Investors IV and VII. The Company receives investment income from such limited partnership interests. At June 30, 1996, the limited partnership interest in Redwood Mortgage Investors IV had been liquidated. NOTE 2 - SUMMARY OF ACCOUNTING POLICIES The accompanying financial statements were prepared on the accrual basis of accounting wherein revenue is recognized when earned and expenses are recognized when incurred. Earnings per share, included in the statements of income, were calculated by dividing net income by the weighted average of common stock shares outstanding during the period. There is only one class of shares (common stock) and there are no provisions or agreements which could dilute earnings per share. NOTE 3 - INCOME TAXES The following reflects the income taxes for the two years ending June 30, 1996 and 1995: GYMNO CORPORATION NOTES TO BALANCE SHEETS YEARS 1996 AND 1995
1996 1995 CALIFORNIA FEDERAL CALIFORNIA FEDERAL Income before provision for income taxes ................... $ 2,770 $ 2,770 $ 2,413 $ 2,413 Nondeductible expenses ..................................... 0 0 1 1 State Tax Deduction: Prior fiscal year tax ................................... 0 (800) 0 (800) Taxable income differential-partnerships ................... 832 812 (1,227) (1,227) ------- ------- ------ ------- Taxable income ............................................. 3,602 2,782 1,187 387 ------- ------- ------ ------- Tax rate (California $800 minimum) ......................... 9.3% 15% 9.3% 15% ------- -------- ------ ------- Income tax expense ......................................... $ 800 417 $ 800 $ 58 ======= ======= ====== ======= Above tax liability ........................................ $ 800 417 $ 800 $ 58 Estimated tax payments ..................................... 800 60 800 980 -------- ------- ------ ------- Income tax liability (recoverable) ......................... $ 0 357 $ 0 $ (922) ======= ======= ====== ======= Total liability (recoverable) .............................. $ 357 $ (922) ======= =======
California income taxes were determined at the greater of 9.3% of taxable income or the minimum tax ($800) and Federal income taxes were determined at the applicable Federal rate (15%). Deferred income taxes are based on timing differences in deductions for California income taxes which are deductible in the year after they apply (i.e. - - fiscal year 1996 taxes are deductible in 1997). At both June 30, 1996 and 1995 there were deferred income tax benefits of $120 relating to the $800 California Franchise Tax deductible in the following year. PRIOR PERFORMANCE TABLES The prior performance tables as referenced in the Prior Performance Summary of the Prospectus present information on programs previously sponsored by the General Partners. The purpose of the tables is to provide information on the performance of these partnerships to assist prospective investors in evaluating the experience of the General Partners as sponsors of such partnerships. While none of the information represents activities of an entity whose investment objectives and criteria are identical to the Partnership, in the opinion of the General Partners, all of the partnerships included in the tables had investment objectives which were similar to those of the Partnership. Factors considered in making such determination included the type of investments, expected benefits from investment and structure of the programs. Each of such prior programs had the following objectives: (i) annual distributions of cash or credits to a Partner's capital account for additional Mortgage Investments; and (ii) preservation of the Partnership's capital. Redwood Mortgage Investors VI, Redwood Mortgage Investors VII and the Partnership differ from the prior programs in that they will amortize organizational costs over a five (5) year period instead of a ten (10) year period and will invest in a greater percentage of first deeds of trust. In addition, the Partnership's Loan Servicing Fees may be slightly higher and interest earned on the loans made by the Partnership will differ due to economic considerations and other factors at the present time. Accordingly, such prior programs differed in certain respects from the Partnership, and inclusion of these tables does not imply that investors of the Partnership will experience results comparable to those experienced in the partnerships referred to in the tables. The tables consist of: Table I Experience in Raising and Investing Funds. Table II Compensation to General Partners and Affiliates. Table III Operating Results of Prior Limited Partnerships. Table V Payment of Mortgage Investments. Persons who purchase Interests in the Partnership will not thereby acquire any ownership interest in any of the partnerships to which these tables relate. The inclusion of the following tables in the Prospectus does not imply that the Partnership will make investments comparable to those reflected in the tables with respect to cash flow, income tax consequences available to investors, or other factors, nor does it imply that they will experience returns, if any, comparable to those experienced by investors in the partnerships referred to below. The General Partners have sponsored only two (2) other public programs registered with the Securities and Exchange Commission. Therefore, the following tables include information about prior non-public programs whose investment objectives are similar to those of the Partnership. These partnerships were offered without registration under the Securities Act of 1933 in reliance upon the intrastate offering exemption from the registration requirements thereunder and/or the exemption for transactions not involving a public offering. Additional information regarding the Description of Open Mortgage Investments of Prior Limited Partnerships is provided in Table VI in Part II of this Registration Statement. The Partnership will furnish without charge to each person to whom this Prospectus is delivered, upon request, a copy of Table VI. Definitions and Glossary of Terms The following terms used in the Tables have the following meanings: "Cash Generated From Operations" shall mean excess or deficiency of operating cash receipts over operating cash expenditures. "GAAP" shall mean generally accepted accounting principles. Months To Invest 90% Of Amount Available For Investment" shall mean the time period from commencement of the offering to date of close of escrow of initial Mortgage Investments. The following is a brief description of the Tables: TABLE I - EXPERIENCE IN RAISING AND INVESTING FUNDS Table I summarizes, as a percentage basis, all funds through June 30, 1996, for partnerships which completed funding during the three (3) years ending on such date and RMI VII, which was in progress as of June 30, 1996. TABLE II - COMPENSATION TO GENERAL PARTNERS AND AFFILIATES Table II summarizes the compensation paid the General Partners and Affiliates by those partnerships which completed funding during the three (3) years ended June 30, 1996, and RMI VII, which was in progress as of June 30, 1996. TABLE III - OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS Table III summarizes the annual operating results through December 31, 1995 for partnerships which closed their offering during the seven (7) years ending June 30, 1996, and RMI VII, which was in progress as of June 30, 1996. TABLE V - PAYMENT OF MORTGAGE INVESTMENTS Table V presents information on the payment of the partnerships' mortgages within the three (3) years ending June 30, 1996. About one-third of the loans to the partnerships are fractionalized loans and held as undivided interests with other partnerships and third parties. The information presented in Table V as to fractionalized loans represents only that partnership's interest in a certain loan. TABLE I EXPERIENCE IN RAISING AND INVESTING FUNDS (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
RMI VII ------------------------ Dollar Amount Offered ................................... $ 12,000,000 Dollar Amount Raised .................................... $ 11,998,359 Percentage of Amount Raised ............................. 100.0% Less Offering Expenses: Organization Expense ............................... 3.55% Percentage Available for Investment Net of Offering Expenses ......................... 96.45% Loans Funded from Offering Proceeds Secured by Mortgage .............................. 86.85% Formation Loan (1): ................................ 7.62% Selling Commissions Paid to Non-Affiliates ................................... 1.00% Selling Commissions Paid to Affiliates ....................................... -0- Loan Commitments (2): .............................. -0- Loan Application or Loan Processing Fees .................................. -0- Funds Available for Future Commitments ...................................... -0- Reserve ............................................ 0.98% ============== Total.................................................... 96.45% ============== Date Offering Commenced ................................. 10/20/89 Length of Offering ...................................... 36 months Months to Commit 90% of Amount Available for Investment (Measured from Beginning of Offering) .......................................... 38 months
TABLE I EXPERIENCE IN RAISING AND INVESTING FUNDS (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)~
RMI VI ------------------------ Dollar Amount Offered ................................... $ 12,000,000 Dollar Amount Raised .................................... $ 9,772,594 Percentage of Amount Raised ............................. 100.0% Less Offering Expenses: Organization Expense ............................... 2.63% Selling Commissions Paid to Non-Affiliates ................................... 1.0% Selling Commissions Paid to Affiliates ....................................... -0- Percentage Available for Investment, Net of Offering Expenses ......................... 96.37% Loans Funded from Offering Proceeds Secured by Mortgage .............................. 86.04% Formation Loan (1): ................................ 6.27% Loan Commitments ................................... -0- Loan Application or Loan Processing Fees .................................. -0- Funds Available for Future Commitments ...................................... 1.06% Reserve ............................................ 3.00% ============= Total ................................................... 96.37% ============== Date Offering Commenced ................................. 09/03/87 Length of Offering ...................................... 24 months Months to Commit 90% of Amount Available for Investment (Measured from Beginning of Offering) ........................................ 25 months
TABLE II COMPENSATION TO GENERAL PARTNERS AND AFFILIATES (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS)
RMI VII ----------------------- Date Offering Commenced .................................... 10/20/89 Dollar Amount Raised ....................................... $11,998,359 Amount Paid to General Partners and Affiliates from: Offering Proceeds ................................... -0- Selling Commissions ................................. -0- Loan Application or Loan Processing Fees ................................... -0- Reimbursement of Expenses, at Cost .................. 86,082 Acquisition Fees .................................... -0- Advisory Fees ....................................... -0- Other ............................................... -0- Loan Points, Processing and Other Fees Paid by the Borrowers to Affiliates: Points (1) ....................................... $ 1,197,309 Processing Fees (1) .............................. 39,777 Other (1) ........................................ 6,181 Dollar Amount of Cash Generated from Operations Before Deducting Payments to General Partners and Affiliates: ......................................... $ 7,918,165 Amount Paid to General Partners and Affiliates from Operations: Partnership Management Fees ......................... $ 53,246 Earnings Distribution ............................... 49,331 Mortgage Servicing Fee .............................. 234,906 Late Charges .......................................... -0- Reimbursement of Expenses, at Cost .................. 127,090 Prepayment Fee ........................................ -0- (1) These sums were paid by borrowers of partnership funds, and were not expenses of the partnership.
TABLE II COMPENSATION TO GENERAL PARTNERS AND AFFILIATES (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
RMI VI ----------------------- Date Offering Commenced .................................... 9/03/87 Dollar Amount Raised ....................................... $ 9,772,594 Amount Paid to General Partners and Affiliates from: Offering Proceeds ................................... -0- Selling Commissions ................................. -0- Loan Application or Loan Processing Fees ................................... -0- Reimbursement of Expenses, at Cost .................. 103,708 Acquisition Fees .................................... -0- Advisory Fees ....................................... -0- Other ............................................... -0- Loan Points, Processing and Other Fees Paid by the Borrowers to Affiliates: Points (1) ............................................ $ 1,451,286 Processing Fees (1) ................................... 58,376 Other (1) ............................................. 7,985 Dollar Amount of Cash Generated from Operations Before Deducting Payments to General Partners and Affiliates: ......................................... $11,676,002 Amount Paid to General Partners and Affiliates from Operations: Partnership Management Fees ......................... $ 74,296 Earnings Fee .......................................... 70,076 Mortgage Servicing Fee ................................ 543,892 Reimbursement of Expenses, at Cost .................... 202,043 (1) These sums were paid by borrowers of partnership funds, and were not expenses of the partnerships.
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI VII (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1989 1990 1991 ----------- ------------ ------------ 5 days in December 1989 Gross Revenues ........................................................... $ 1,682 $ 238,949 $ 759,828 Less: General Partners' Mgmt Fee ......................................... -0- 4,795 7,506 Mortgage Servicing Fee ................................................. -0- 14,172 42,177 Administrative Expenses ................................................ 191 5,304 36,595 Provision for Uncollected Accts ........................................ -0- 3,000 19,398 Amortization of Organization and Syndication Costs ..................... 3 773 894 Offering Period Interest Expense to Limited Partners ................... 1,241 14,616 23,114 Interest Expense (University National Bank) ............................ -0- -0- -0- ----------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ........................ $ 247 $ 196,289 $ 630,144 ----------- ----------- ----------- Sources of Funds - Net Income ............................................ $ 247 $ 196,289 $ 630,144 Reduction in Assets ...................................................... -0- -0- -0- Increase in Liabilities .................................................. 28,696 -0- 13,531 Early Withdrawal Penalties Applied to Synd. Costs ........................ -0- -0- 370 Increase in Applicant's Deposit .......................................... 163,632 27,290 134,278 Increase in Partners' Capital ............................................ 135,743 2,866,189 4,957,724 ----------- ----------- ----------- Cash generated from Operations ........................................... $ 328,318 $ 3,089,768 $ 5,736,047 Use of Funds-Increase in Assets .......................................... $ 287,117 $ 2,720,557 $ 5,549,077 Reduction in Liabilities ................................................. -0- 27,876 -0- Decrease in Applicant's Deposit .......................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ..................... 188 5,094 9,379 Investment Income Pd to LP's ........................................... 52 58,001 228,039 Return of Capital to LP's .............................................. -0- -0- 10,893 ----------- ----------- ----------- Net Increase (Decrease) in Cash .......................................... $ 40,961 $ 278,240 $ (61,341) Cash at the beginning of the year ........................................ -0- $ 40,961 $ 319,201 Cash at the end of the year .............................................. $ 40,961 $ 319,201 $ 257,860 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ............................ $ 1.46 $ 108.02 $ 102.02 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) .............................. $ 1.46 $ 102.99 $ 97.51 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................. $ 0.38 $ 35.41(1) $ 39.22(1) Capital (1) ............................................................ -0- -0- $ 1.87 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ......................................... $ 9.10 $ 119.03 $ 109.67 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ....................... $ 8.33 $ 113.40 $ 104.83 NOTES: (1) Based upon year's average capital balances.
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI VII (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1992 1993 1994 ------------ ------------ ------------ Gross Revenues ....................................................... $ 1,468,593 $ 1,711,092 $ 1,489,882 Less: General Partners' Mgmt Fee ..................................... 14,202 16,735 10,008 Mortgage Servicing Fee ............................................. 53,628 58,802 -0- Administrative Expenses ............................................ 95,526 152,782 78,822 Provision for Uncollected Accts .................................... 125,618 235,423 335,955 Amortization of Organization and Syndication Costs ................. 2,016 2,016 2,016 Offering Period Interest Expense to Limited Partners ............... 13,361 -0- -0- Interest Expense (University National Bank) ........................ 68,226 119,351 135,790 ----------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners .................... $ 1,096,016 $ 1,125,983 927,291 ----------- ----------- ----------- Sources of Funds - Net Income ........................................ $ 1,096,016 $ 1,125,983 $ 927,291 Reduction in Assets .................................................. -0- 883,182 -0- Increase in Liabilities .............................................. 1,999,649 -0- 956,846 Early Withdrawal Penalties Applied to Synd. Costs .................... 1,173 7,195 10,635 Increase in Applicant's Deposit ...................................... -0- -0- -0- Increase in Partners' Capital ........................................ 4,091,481 -0- -0- ----------- ----------- ----------- Cash generated from Operations ....................................... $ 7,188,319 $ 2,016,360 $ 1,894,772 Use of Funds-Increase in Assets ...................................... $ 6,239,730 -0- $ 1,316,184 Reduction in Liabilities ............................................. -0- 1,032,580 -0- Decrease in Applicant's Deposit ...................................... 310,539 -0- -0- Offering Period Interest Expense to Limited Partners ................. 5,202 -0- -0- Investment Income Pd to LP's ....................................... 360,641 339,746 263,206 Return of Capital to LP's .......................................... 456,787 230,004 340,011 ----------- ----------- ----------- Net Increase (Decrease) in Cash ...................................... $ (184,580) $ 414,030 $ (24,629) Cash at the beginning of the year .................................... $ 257,860 $ 73,280 $ 487,310 Cash at the end of the year .......................................... $ 73,280 $ 487,310 $ 462,681 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ........................ $ 93.03 $ 80.06 $ 62.85 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) .......................... $ 89.27 $ 77.76 $ 61.09 Cash Distribution to Investors for $1,000 Invested Income (1) ......................................................... $ 42.48 $ 26.43 $ 19.61 Capital (1) ........................................................ $ 53.80 $ 17.89 $ 25.34 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ..................................... $ 100.70 $ 92.76 $ 76.88 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ................... $ 96.64 $ 89.52 $ 74.67 NOTES: (1) Based upon year's average capital balances.
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI VII (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1995 06/30/96 ------------ ------------ Gross Revenues ....................................................................... $1,483,881 $ 764,258 Less: General Partners' Mgmt Fee ..................................................... -0- -0- Mortgage Servicing Fee ............................................................. 33,394 32,733 Administrative Expenses ............................................................ 66,371 48,562 Provision for Uncollected Accts .................................................... 306,779 157,661 Amortization of Organization and Syndication Costs ................................. 2,016 368 Offering Period Interest Expense to Limited Partners ............................... -0- -0- Interest Expense (University National Bank) ........................................ 163,361 88,659 ---------- ---------- Net Income (GAAP Basis) dist. to Limited Partners .................................... $ 911,960 $ 436,275 ---------- ---------- Sources of Funds - Net Income ........................................................ $ 911,960 $ 436,275 Reduction in Assets .................................................................. -0- 151,779 Increase in Liabilities .............................................................. 63,206 -0- Early Withdrawal Penalties Applied to Synd. Costs .................................... 3,344 -0- Increase in Applicant's Deposit ...................................................... -0- -0- Increase in Partners' Capital ........................................................ -0- -0- ---------- ---------- Cash generated from Operations ....................................................... $ 978,510 $ 588,054 Use of Funds-Increase in Assets ...................................................... $ 471,434 -0- Reduction in Liabilities ............................................................. -0- 500 Decrease in Applicant's Deposit ...................................................... -0- -0- Offering Period Interest Expense to Limited Partners ................................. -0- -0- Investment Income Pd to LP's ....................................................... 270,760 148,420 Return of Capital to LP's .......................................................... 184,157 245,910 ---------- ---------- Net Increase (Decrease) in Cash ...................................................... $ 52,159 $ 193,224 Cash at the beginning of the year .................................................... $ 462,681 $ 514,840 Cash at the end of the year .......................................................... $ 514,840 $ 708,064 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ........................................ $ 60.01 $ 29.64 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) .......................................... $ 58.43 $ 29.28 Cash Distribution to Investors for $1,000 Invested Income (1) ......................................................................... $ 19.69 $ 10.44 Capital (1) ........................................................................ $ 13.39 $ 17.30 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ..................................................... $ 65.75 N/A Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ................................... $ 64.01 N/A NOTES: (1) Based upon years average capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI VI (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1987 1988 1989(2) ------------ ------------ ------------ Gross Revenues ....................................................... $ 35,485 $ 600,194 $ 1,284,180 Less: General Partners' Mgmt Fee ..................................... 833 15,726 -0- Mortgage Servicing Fee ............................................. 2,659 46,393 90,434 Administrative Expenses ............................................ 494 19,837 53,083 Provision for Uncollected Accts .................................... -0- -0- 50,631 Amortization of Organization and Syndication Costs ................. 102 2,196 2,952 Offering Period Interest Expense to Limited Partners ............... 8,072 44,871 18,976 Interest Expense (Bank Hapoalim) ................................... -0- -0- 108,883 ----------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners .................... $ 23,325 $ 471,171 $ 959,221 ----------- ----------- ----------- Sources of Funds - Net Income ........................................ $ 23,325 $ 471,171 $ 959,221 Reduction in Assets .................................................. -0- -0- -0- Increase in Liabilities .............................................. 44,060 -0- 1,580,600 Early Withdrawal Penalties Applied to Synd. Costs .................... -0- -0- -0- Increase in Applicant's Deposit ...................................... 1,114,238 -0- -0- Increase in Partners' Capital ........................................ 1,158,336 5,811,540 2,537,274 ----------- ----------- ----------- Cash generated from Operations ....................................... $ 2,339,959 $ 6,282,711 $ 5,077,095 Use of Funds-Increase in Assets ...................................... $ 1,342,112 $ 5,836,269 $ 4,438,494 Reduction in Liabilities ............................................. -0- 37,472 -0- Decrease in Applicant's Deposit ...................................... -0- 567,520 546,718 Offering Period Interest Expense to Limited Partners ................. 1,585 16,691 9,802 Investment Income Pd to LP's ....................................... 7,864 144,038 326,195 Return of Capital to LP's .......................................... -0- -0- 8,369 ----------- ----------- ----------- Net Increase (Decrease) in Cash ...................................... $ 988,398 $ (319,279) $ (252,483) Cash at the beginning of the year .................................... -0- $ 988,398 $ 669,119 Cash at the end of the year .......................................... $ 988,398 $ 669,119 $ 416,636 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ........................ $ 24.33 $ 101.64 $ 100.56 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) .......................... $ 20.78 $ 97.18 $ 96.18 Cash Distribution to Investors for $1,000 Invested Income (1) ......................................................... $ 18.41(1) $ 29.19(1) $ 44.76(1) Capital (1) ........................................................ -0- -0- $ 1.15 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ..................................... $ 26.07 $ 109.34 $ 107.58 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ................... $ 22.50 $ 104.50 $ 102.92 NOTES: (1) Based upon years average capital balances (2) The offering terminated in September, 1989.
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI VI (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1990 1991 1992 ------------ ------------ ------------ Gross Revenues .......................................................... $ 1,527,697 $ 1,587,354 $ 1,661,779 Less: General Partners' Mgmt Fee ........................................ 3,496 14,489 15,287 Mortgage Servicing Fee ................................................ 105,405 54,390 79,326 Administrative Expenses ............................................... 113,610 76,692 93,282 Provision for Uncollected Accts ....................................... 13,687 174,290 266,786 Amortization of Organization and Syndication Costs .................... 3,167 3,167 3,166 Offering Period Interest Expense to Limited Partners .................. -0- -0- -0- Interest Expense (Bank Hapoalim) ...................................... 154,187 142,442 145,395 ----------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ....................... $ 1,134,145 $ 1,121,884 $ 1,058,537 ----------- ----------- ----------- Sources of Funds - Net Income ........................................... $ 1,134,145 $ 1,121,884 $ 1,058,537 Reduction in Assets ..................................................... -0- -0- -0- Increase in Liabilities ................................................. -0- -0- 1,401,613 Early Withdrawal Penalties Applied to Synd. Costs ....................... 3,813 1,345 5,518 Increase in Applicant's Deposit ......................................... -0- -0- -0- Increase in Partners' Capital ........................................... -0- -0- -0- ----------- ----------- ----------- Cash generated from Operations .......................................... $ 1,137,958 $ 1,123,229 $ 2,465,668 Use of Funds-Increase in Assets ......................................... $ 500,209 $ 380,888 $ 2,073,362 Reduction in Liabilities ................................................ 232,193 293,099 -0- Decrease in Applicant's Deposit ......................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners .................... -0- -0- -0- Investment Income Pd to LP's .......................................... 375,864 341,505 323,037 Return of Capital to LP's ............................................. 100,628 41,254 232,370 ----------- ----------- ----------- Net Increase (Decrease) in Cash ......................................... $ (70,936) $ 66,483 $ (163,101) Cash at the beginning of the year ....................................... $ 416,636 $ 345,700 $ 412,183 Cash at the end of the year ............................................. $ 345,700 $ 412,183 $ 249,082 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ........................... $ 100.09 $ 93.40 $ 82.87 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ............................. $ 95.75 $ 89.62 $ 79.88 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................ $ 36.01 $ 30.74 $ 27.26 Capital (1) ........................................................... $ 9.64 $ 3.71 $ 19.61 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ........................................ $ 108.29 $ 99.00 $ 91.00 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ...................... $ 103.60 $ 95.00 $ 87.71 NOTES: (1) Based upon years average capital balances (2) The offering terminated in September, 1989.
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI VI (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1993 1994 1995 ------------ ------------ ------------ Gross Revenues ............................................................. $1,713,378 $ 1,391,088 $ 1,277,782 Less: General Partners' Mgmt Fee ........................................... 15,523 8,942 -0- Mortgage Servicing Fee ................................................... 94,306 -0- 42,056 Administrative Expenses .................................................. 123,473 59,346 59,656 Provision for Uncollected Accts .......................................... 420,583 472,967 344,807 Amortization of Organization and Syndication Costs ....................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ..................... -0- -0- -0- Interest Expense (Bank Hapoalim) ......................................... 161,705 185,131 212,915 ---------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners .......................... $ 897,788 $ 664,702 $ 618,348 ----------- ----------- ----------- Sources of Funds - Net Income .............................................. $ 897,788 $ 664,702 $ 618,348 Reduction in Assets ........................................................ 676,847 18,749 749,375 Increase in Liabilities .................................................... -0- 374,511 -0- Early Withdrawal Penalties Applied to Synd. Costs .......................... 3,700 -0- -0- Increase in Applicant's Deposit ............................................ -0- -0- -0- Increase in Partners' Capital .............................................. -0- -0- -0- ----------- ----------- ----------- Cash generated from Operations ............................................. $1,578,335 $ 1,057,962 $ 1,367,723 Use of Funds-Increase in Assets ............................................ -0- -0- -0- Reduction in Liabilities ................................................... 498,663 -0- 335,500 Decrease in Applicant's Deposit ............................................ -0- -0- -0- Offering Period Interest Expense to Limited Partners ....................... -0- -0- -0- Investment Income Pd to LP's ............................................. 377,712 303,014 303,098 Return of Capital to LP's ................................................ 528,737 729,449 892,953 ---------- ----------- ----------- Net Increase (Decrease) in Cash ............................................ $ 173,223 $ 25,499 $ (163,828) Cash at the beginning of the year .......................................... $ 249,082 $ 422,305 $ 447,804 Cash at the end of the year ................................................ $ 422,305 $ 447,804 $ 283,976 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) .............................. $ 72.01 $ 54.95 $ 53.03 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ................................ $ 69.74 $ 53.62 $ 51.79 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................... $ 30.57 $ 24.53 $ 25.29 Capital (1) .............................................................. $ 42.79 $ 59.06 $ 74.51 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ........................................... $ 92.72 $ 49.87 $ 59.39 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ......................... $ 89.90 $ 48.66 $ 58.00 NOTES: (1) Based upon years average capital balances (2) The offering terminated in September, 1989.
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI VI (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
06/30/96 ------------ Gross Revenues .................................................. $ 597,065 Less: General Partners' Mgmt Fee ................................ -0- Mortgage Servicing Fee ........................................ 28,923 Administrative Expenses ....................................... 42,217 Provision for Uncollected Accts ............................... 135,588 Amortization of Organization and Syndication Costs ............ -0- Offering Period Interest Expense to Limited Partners .......... -0- Interest Expense (Bank Hapoalim) .............................. 90,206 ----------- Net Income (GAAP Basis) dist. to Limited Partners ............... $ 300,131 ----------- Sources of Funds - Net Income ................................... $ 300,131 Reduction in Assets ............................................. 645,182 Increase in Liabilities ......................................... -0- Early Withdrawal Penalties Applied to Synd. Costs ............... -0- Increase in Applicant's Deposit ................................. -0- Increase in Partners' Capital ................................... -0- ----------- Cash generated from Operations .................................. $ 945,313 Use of Funds-Increase in Assets ................................. -0- Reduction in Liabilities ........................................ 326,000 Decrease in Applicant's Deposit ................................. -0- Offering Period Interest Expense to Limited Partners ............ -0- Investment Income Pd to LP's .................................. 145,281 Return of Capital to LP's ..................................... 520,437 ----------- Net Increase (Decrease) in Cash ................................. $ (46,405) Cash at the beginning of the year ............................... $ 283,976 Cash at the end of the year ..................................... $ 237,571 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ................... $ 26.46 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ..................... $ 26.18 Cash Distribution to Investors for $1,000 Invested Income (1) .................................................... $ 12.74 Capital (1) ................................................... $ 45.63 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ................................ N/A Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions .............. N/A NOTES: (1) Based upon years average capital balances (2) The offering terminated in September, 1989.
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI V (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1986 1987 1988 ------------ ------------ ------------ (1 month only) Gross Revenues ........................................................... $ 20,794 $ 460,522 $ 627,223 Less: General Partners' Mgmt Fee ......................................... 342 7,922 5,260 Mortgage Servicing Fee ................................................. 1,052 40,010 50,274 Administrative Expenses ................................................ 753 16,702 44,802 Provision for Uncollected Accts ........................................ 1,740 -0- 22,119 Amortization of Organization and Syndication Costs ..................... 271 502 606 Offering Period Interest Expense to Limited Partners ................... 7,114 23,135 -0- Interest Expense (Bank Hapoalim) ....................................... -0- -0- -0- ---------- ---------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ........................ $ 9,522 $ 372,251 $ 504,162 ---------- ---------- ------------ Sources of Funds - Net Income ............................................ $ 9,522 $ 372,251 $ 504,162 Reduction in Assets ...................................................... -0- -0- -0- Increase in Liabilities .................................................. 7,815 -0- -0- Early Withdrawal Penalties Applied to Synd. Costs ........................ -0- -0- -0- Increase in Applicant's Deposit .......................................... 515,356 -0- -0- Increase in Partners' Capital ............................................ 1,369,469 3,540,065 -0- ----------- ---------- ----------- Cash generated from Operations ........................................... $1,902,162 $3,912,316 $ 504,162 Use of Funds-Increase in Assets .......................................... $1,743,843 $2,842,678 $ 566,387 Reduction in Liabilities ................................................. -0- 5,169 834 Decrease in Applicant's Deposit .......................................... -0- 515,356 -0- Offering Period Interest Expense to Limited Partners ..................... 1,790 9,119 -0- Investment Income Pd to LP's ........................................... 2,962 137,682 178,902 Return of Capital to LP's .............................................. -0- -0- -0- ---------- ---------- ----------- Net Increase (Decrease) in Cash .......................................... $ 153,567 $ 402,312 $ (241,961) Cash at the beginning of the year ........................................ -0- $ 153,567 $ 555,879 Cash at the end of the year .............................................. $ 153,567 $ 555,879 $ 313,918 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ............................ $ 110 $ 101 $ 95 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) .............................. $ 106 $ 96 $ 91 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................. $ 26 $ 39 $ 35 Capital (1) ............................................................ -0- -0- -0- Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ......................................... $ 114 $ 103 $ 97 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ....................... $ 109 $ 99 $ 93 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI V (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1989 1990 1991 ------------ ------------ ------------ Gross Revenues ........................................................... $ 755,856 $ 775,058 $ 745,102 Less: General Partners' Mgmt Fee ......................................... 9,395 7,323 7,487 Mortgage Servicing Fee ................................................. 47,50 57,395 29,117 Administrative Expenses ................................................ 46,12 46,319 67,569 Provision for Uncollected Accts ........................................ 63,984 51,770 61,411 Amortization of Organization and Syndication Costs ..................... 631 631 631 Offering Period Interest Expense to Limited Partners ................... -0- -0- -0- Interest Expense (Bank Hapoalim) ....................................... 61,600 67,569 24,462 ----------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ........................ $ 526,616 $ 544,051 $ 554,425 ----------- ----------- ----------- Sources of Funds - Net Income ............................................ $ 526,616 $ 544,051 $ 554,425 Reduction in Assets ...................................................... -0- 591,879 36,728 Increase in Liabilities .................................................. 808,466 -0- -0- Early Withdrawal Penalties Applied to Synd. Costs ........................ -0- 8,003 4,658 Increase in Applicant's Deposit .......................................... -0- -0- -0- Increase in Partners' Capital ............................................ -0- -0- -0- ----------- ----------- ----------- Cash generated from Operations ........................................... $ 1,335,082 $ 1,143,933 $ 595,811 Use of Funds-Increase in Assets .......................................... $ 1,272,177 -0- -0- Reduction in Liabilities ................................................. -0- 586,933 17,593 Decrease in Applicant's Deposit .......................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ..................... -0- -0- -0- Investment Income Pd to LP's ........................................... 178,180 191,970 172,259 Return of Capital to LP's .............................................. 78,120 283,253 170,711 ----------- ----------- ----------- Net Increase (Decrease) in Cash .......................................... $ (193,395) $ 81,777 $ 235,248 Cash at the beginning of the year ........................................ $ 313,918 $ 120,523 $ 202,300 Cash at the end of the year .............................................. $ 120,523 $ 202,300 $ 437,548 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ............................ $ 93 $ 94 $ 94 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) .............................. $ 89 $ 91 $ 90 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................. $ 33 $ 34 $ 30 Capital (1) ............................................................ $ 14 $ 49 $ 29 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ......................................... $ 107 $ 106 $ 99 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ....................... $ 102 $ 101 $ 95 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI V (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1992 1993 1994 ------------ ------------ ------------ Gross Revenues .......................................................... $ 840,592 $ 826,774 $ 557,036 Less: General Partners' Mgmt Fee ........................................ 14,746 12,084 2,333 Mortgage Servicing Fee ................................................ 42,526 42,609 -0- Administrative Expenses ............................................... 59,495 80,006 39,594 Provision for Uncollected Accts ....................................... 114,162 141,059 140,499 Amortization of Organization and Syndication Costs .................... 631 631 629 Offering Period Interest Expense to Limited Partners .................. -0- -0- -0- Interest Expense (Bank Hapoalim) ...................................... 68,662 79,848 79,951 ----------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ....................... $ 540,370 $ 470,537 $ 294,030 ----------- ----------- ----------- Sources of Funds - Net Income ........................................... $ 540,370 $ 470,537 $ 294,030 Reduction in Assets ..................................................... -0- 554,553 418,962 Increase in Liabilities ................................................. 945,442 -0- 9,731 Early Withdrawal Penalties Applied to Synd. Costs ....................... 1,833 1,617 634 Increase in Applicant's Deposit ......................................... -0- -0- -0- Increase in Partners' Capital ........................................... -0- -0- -0- ----------- ----------- ----------- Cash generated from Operations .......................................... $ 1,487,645 $ 1,026,707 $ 723,357 Use of Funds-Increase in Assets ......................................... $ 1,389,730 -0- -0- Reduction in Liabilities ................................................ -0- 62,234 -0- Decrease in Applicant's Deposit ......................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners .................... -0- -0- -0- Investment Income Pd to LP's .......................................... 179,048 233,928 139,550 Return of Capital to LP's ............................................. $ 280,929 $ 546,248 $ 640,685 ----------- ----------- ----------- Net Increase (Decrease) in Cash ......................................... $ (362,062) $ 184,297 $ (56,878) Cash at the beginning of the year ....................................... $ 437,548 $ 75,486 $ 259,783 Cash at the end of the year ............................................. $ 75,486 $ 259,783 $ 202,905 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ........................... $ 89 $ 77 $ 50 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ............................. $ 85 $ 75 $ 49 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................ $ 30 $ 38 $ 24 Capital (1) ........................................................... $ 47 $ 89 $ 110 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ........................................ $ 97 $ 93 $ 10 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ...................... $ 93 $ 90 $ 10 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI V (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1995 06/30/96 ------------ ------------ Gross Revenues ........................................................................ $ 567,540 $200,344 Less: General Partners' Mgmt Fee ...................................................... -0- -0- Mortgage Servicing Fee .............................................................. -0- -0- Administrative Expenses ............................................................. 30,593 23,798 Provision for Uncollected Accts ..................................................... 182,162 18,419 Amortization of Organization and Syndication Costs .................................. 627 314 Offering Period Interest Expense to Limited Partners ................................ -0- -0- Interest Expense (Bank Hapoalim) .................................................... 95,941 45,253 ----------- -------- Net Income (GAAP Basis) dist. to Limited Partners ..................................... $ 258,217 $112,560 ----------- -------- Sources of Funds - Net Income ......................................................... 258,217 112,560 Reduction in Assets ................................................................... 464,011 380,552 Increase in Liabilities ............................................................... -0- -0- Early Withdrawal Penalties Applied to Synd. Costs ..................................... -0- -0- Increase in Applicant's Deposit ....................................................... -0- -0- Increase in Partners' Capital ......................................................... -0- -0- ----------- -------- Cash generated from Operations ........................................................ $ 722,228 $493,112 Use of Funds-Increase in Assets ....................................................... -0- -0- Reduction in Liabilities .............................................................. 69,000 124,499 Decrease in Applicant's Deposit ....................................................... -0- -0- Offering Period Interest Expense to Limited Partners .................................. -0- -0- Investment Income Pd to LP's ........................................................ 124,329 51,539 Return of Capital to LP's ........................................................... 689,307 296,716 ----------- -------- Net Increase (Decrease) in Cash ....................................................... $ (160,408) $ 20,358 Cash at the beginning of the year ..................................................... $ 202,905 $ 42,497 Cash at the end of the year ........................................................... $ 42,497 $ 62,855 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ......................................... $ 50 $ 24 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ........................................... $ 49 $ 24 Cash Distribution to Investors for $1,000 Invested Income (1) .......................................................................... $ 23 $ 11 Capital (1) ......................................................................... $ 130 $ 62 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ...................................................... $ 51 N/A Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions .................................... $ 50 N/A NOTES:(1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI IV (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1985 1986 1987 ----------- ------------ ------------ Gross Revenues .......................................................... $ 236,437 $ 870,719 $ 1,104,423 Less: General Partners' Mgmt Fee ........................................ 5,253 21,185 30,732 Mortgage Servicing Fee ................................................ 11,375 44,077 93,423 Administrative Expenses ............................................... 3,384 49,905 66,321 Provision for Uncollected Accts ....................................... 7,441 22,830 (5,457) Amortization of Organization and Syndication Costs .................... 3,510 13,429 3,953 Offering Period Interest Expense to Limited Partners .................. 22,680 43,310 -0- Interest Expense (Financial Center Bank) .............................. -0- 35,242 94,461 ----------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ....................... $ 182,794 $ 640,741 $ 820,990 ----------- ----------- ----------- Sources of Funds - Net Income ........................................... $ 182,794 $ 640,741 $ 820,990 Reduction in Assets ..................................................... -0- -0- 559,202 Increase in Liabilities ................................................. 7,669 1,012,556 -0- Early Withdrawal Penalties Applied to Synd. Costs ....................... -0- -0- -0- Increase in Applicant's Deposit ......................................... 605,351 -0- -0- Increase in Partners' Capital ........................................... 3,323,145 4,238,412 -0- ----------- ----------- ----------- Cash generated from Operations .......................................... $ 4,118,959 $ 5,891,709 $ 1,380,192 Use of Funds-Increase in Assets ......................................... $ 3,327,257 $ 5,131,576 -0- Reduction in Liabilities ................................................ -0- -0- 277,205 Decrease in Applicant's Deposit ......................................... -0- 605,351 -0- Offering Period Interest Expense to Limited Partners .................... 20,118 45,713 -0- Investment Income Pd to LP's .......................................... 73,959 279,521 322,880 Return of Capital to LP's ............................................. -0- -0- -0- ----------- ----------- ----------- Net Increase (Decrease) in Cash ......................................... $ 697,625 $ (170,452) $ 780,107 Cash at the beginning of the year ....................................... -0- $ 697,625 $ 527,173 Cash at the end of the year ............................................. $ 697,625 $ 527,173 $ 1,307,280 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ........................... $ 137 $ 120 $ 101 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ............................. $ 126 $ 114 $ 97 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................ $ 28 $ 88 $ 41 Capital (1) ........................................................... -0- -0- -0- Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ........................................ $ 138 $ 122 $ 104 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ...................... $ 128 $ 116 $ 100 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI IV (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1988 1989 1990 ------------ ------------ ------------ Gross Revenues .......................................................... $ 1,129,031 $ 1,211,845 $ 1,277,106 Less: General Partners' Mgmt Fee ........................................ 29,706 34,382 23,258 Mortgage Servicing Fee ................................................ 88,759 75,527 86,746 Administrative Expenses ............................................... 63,560 60,693 73,780 Provision for Uncollected Accts ....................................... 53,594 76,840 31,384 Amortization of Organization and Syndication Costs .................... 405 1,974 1,975 Offering Period Interest Expense to Limited Partners .................. -0- -0- -0- Interest Expense (San Jose National Bank) ............................. 85,230 121,043 160,574 ----------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ....................... $ 807,777 $ 841,386 $ 899,389 ----------- ----------- ----------- Sources of Funds - Net Income ........................................... $ 807,777 $ 841,386 $ 899,389 Reduction in Assets ..................................................... -0- -0- -0- Increase in Liabilities ................................................. -0- 506,746 567,797 Early Withdrawal Penalties Applied to Synd. Costs ....................... -0- -0- -0- Increase in Applicant's Deposit ......................................... -0- -0- -0- Increase in Partners' Capital ........................................... -0- -0- -0- ----------- ----------- ----------- Cash generated from Operations .......................................... $ 807,777 $ 1,348,132 $ 1,467,186 Use of Funds-Increase in Assets ......................................... $ 1,346,774 $ 1,282,363 $ 826,609 Reduction in Liabilities ................................................ 136,669 -0- -0- Decrease in Applicant's Deposit ......................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners .................... -0- -0- -0- Investment Income Pd to LP's .......................................... 290,113 259,531 293,775 Return of Capital to LP's ............................................. -0- 353 94,721 ----------- ----------- ----------- Net Increase (Decrease) in Cash ......................................... $ (965,779) $ (194,115) $ 252,081 Cash at the beginning of the year ....................................... $ 1,307,280 $ 341,501 $ 147,386 Cash at the end of the year ............................................. $ 341,501 $ 147,386 $ 399,467 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ........................... $ 92 $ 93 $ 94 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ............................. $ 91 $ 89 $ 90 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................ $ 35 $ 29 $ 31 Capital (1) ........................................................... $ -0- $ -0- $ 10 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ........................................ $ 94 $ 101 $ 94 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ...................... $ 90 $ 97 $ 90 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI IV (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1991 1992 1993 ------------ ------------ ------------ Gross Revenues .......................................................... $ 1,261,526 $ 1,329,074 $ 1,186,369 Less: General Partners' Mgmt Fee ........................................ 12,644 6,306 12,315 Mortgage Servicing Fee ................................................ -0- 44,638 71,037 Administrative Expenses ............................................... 90,490 70,546 62,545 Provision for Uncollected Accts ....................................... 165,786 295,550 367,250 Amortization of Organization and Syndication Costs .................... 1,975 1,975 1,975 Offering Period Interest Expense to Limited Partners .................. -0- -0- -0- Interest Expense (San Jose National Bank) ............................. 118,355 122,990 -0- ----------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ....................... $ 872,276 $ 787,069 $ 671,247 ----------- ----------- ----------- Sources of Funds - Net Income ........................................... $ 872,276 $ 787,069 $ 671,247 Reduction in Assets ..................................................... -0- 1,548,510 607,766 Increase in Liabilities ................................................. 3,732 -0- -0- Early Withdrawal Penalties Applied to Synd. Costs ....................... 2,329 958 118 Increase in Applicant's Deposit ......................................... -0- -0- -0- Increase in Partners' Capital ........................................... -0- -0- -0- ----------- ----------- ----------- Cash generated from Operations .......................................... $ 878,337 $ 2,336,537 $ 1,279,131 Use of Funds-Increase in Assets ......................................... $ 103,300 -0- -0- Reduction in Liabilities ................................................ -0- 1,670,953 9,828 Decrease in Applicant's Deposit ......................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners .................... -0- -0- -0- Investment Income Pd to LP's .......................................... 327,082 331,750 292,590 Return of Capital to LP's ............................................. 454,911 613,524 742,194 ----------- ----------- ----------- Net Increase (Decrease) in Cash ......................................... $ (6,956) $ (279,690) $ 234,519 Cash at the beginning of the year ....................................... $ 399,467 $ 392,511 $ 112,822 Cash at the end of the year ............................................. $ 392,511 $ 112,821 $ 347,341 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ........................... $ 87 $ 79 $ 68 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ............................. $ 84 $ 76 $ 66 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................ $ 33 $ 33 $ 30 Capital (1) ........................................................... $ 45 $ 61 $ 75 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ........................................ $ 87 $ 90 $ 82 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ...................... $ 83 $ 87 $ 79 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI IV (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1994 1995 06/30/96 ------------ ------------ ------------ Gross Revenues ........................................................... $ 994,076 $ 1,016,152 $ 479,203 Less: General Partners' Mgmt Fee ......................................... 11,687 10,959 5,224 Mortgage Servicing Fee ................................................. 88,072 73,032 27,942 Administrative Expenses ................................................ 56,734 54,789 39,063 Provision for Uncollected Accts ........................................ 243,856 189,026 88,001 Amortization of Organization and Syndication Costs ..................... 1,975 1,241 -0- Offering Period Interest Expense to Limited Partners ................... -0- -0- -0- Interest Expense (San Jose National Bank) .............................. 9,585 139,708 68,478 ----------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ........................ $ 582,167 $ 547,397 $ 250,495 ----------- ----------- ----------- Sources of Funds - Net Income ............................................ $ 582,167 $ 547,397 250,495 Reduction in Assets ...................................................... -0- -0- 270,537 Increase in Liabilities .................................................. 1,111,875 396,156 -0- Early Withdrawal Penalties Applied to Synd. Costs ........................ 1,400 -0- -0- Increase in Applicant's Deposit .......................................... -0- -0- -0- Increase in Partners' Capital ............................................ -0- -0- -0- ----------- ----------- ----------- Cash generated from Operations ........................................... $ 1,695,442 $ 943,553 $ 521,032 Use of Funds-Increase in Assets .......................................... $ 520,319 $ 74,528 -0- Reduction in Liabilities ................................................. -0- -0- 11,875 Decrease in Applicant's Deposit .......................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ..................... -0- -0- -0- Investment Income Pd to LP's ........................................... 261,074 233,353 102,816 Return of Capital to LP's .............................................. 907,454 864,922 370,500 ----------- ----------- ----------- Net Increase (Decrease) in Cash .......................................... $ 6,595 $ (229,250) 35,841 Cash at the beginning of the year ........................................ $ 347,341 $ 353,936 124,686 Cash at the end of the year .............................................. $ 353,936 $ 124,686 160,527 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ............................ $ 62 $ 63 $ 30 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) .............................. $ 60 $ 61 $ 30 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................. $ 27 $ 26 $ 12 Capital (1) ............................................................ $ 95 $ 97 $ 44 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ......................................... $ 44 $ 67 N/A Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ....................... $ 43 $ 66 N/A NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI III (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1984 1985 1986 ------------ ------------ ------------ Gross Revenues ........................................................... $ 121,765 $ 215,150 $ 200,934 Less: General Partners' Mgmt Fee ......................................... 5,878 11,488 12,240 Mortgage Servicing Fee ................................................. 5,384 9,421 12,118 Administrative Expenses ................................................ 4,001 7,368 16,210 Provision for Uncollected Accts ........................................ 1,228 10,420 7,612 Amortization of Organization and Syndication Costs ..................... 789 1,051 1,051 Offering Period Interest Expense to Limited Partners ................... 4,501 -0- -0- ---------- ---------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ........................ $ 99,984 $ 175,402 $ 151,703 ----------- ---------- ---------- Sources of Funds - Net Income ............................................ $ 99,984 $ 175,402 $ 151,703 Decrease in Assets ....................................................... -0- -0- 73,219 Increase in Liabilities .................................................. 15,080 -0- 914 Increase in Applicant's Deposit .......................................... -0- -0- -0- Increase in Partners' Capital ............................................ 1,429,624 -0- -0- ----------- ---------- ----------- Cash generated from Operations ........................................... $1,544,688 $ 175,402 $ 225,836 Use of Funds-Increase in Assets .......................................... $1,476,990 $ 47,801 -0- Decrease in Liabilities .................................................. -0- 14,848 -0- Decrease in Applicant's Deposit .......................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ..................... -0- -0- -0- Investment Income Pd to LP's ........................................... 40,333 77,652 58,391 Return of Capital to LP's .............................................. -0- -0- -0- ---------- ---------- ----------- Net Increase (Decrease) in Cash .......................................... $ 27,365 $ 35,101 $ 167,445 Cash at the beginning of the year ........................................ -0- $ 27,365 $ 62,466 Cash at the end of the year .............................................. $ 27,365 $ 62,466 $ 229,911 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ............................ $ 123 $ 119 $ 97 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) .............................. $ 121 $ 114 $ 93 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................. $ 27 $ 52 $ 37 Capital (1) ............................................................ -0- -0- -0- Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ......................................... $ 124 $ 120 $ 96 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ....................... $ 121 $ 113 $ 92 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI III (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1987 1988 1989 ------------ ------------ ------------ Gross Revenues ............................................................. $ 165,951 $ 190,856 $ 211,062 Less: General Partners' Mgmt Fee ........................................... 1,050 -0- 3,408 Mortgage Servicing Fee ................................................... 3,989 8,678 11,179 Administrative Expenses .................................................. 14,664 16,186 16,281 Provision for Uncollected Accts .......................................... 13,886 22,486 30,612 Amortization of Organization and Syndication Costs ....................... 462 578 990 Offering Period Interest Expense to Limited Partners ..................... -0- -0- -0- --------- --------- --------- Net Income (GAAP Basis) dist. to Limited Partners .......................... $ 131,900 $ 142,928 $ 148,592 --------- --------- --------- Sources of Funds - Net Income .............................................. $ 131,900 $ 142,928 $ 148,592 Decrease in Assets ......................................................... 48,139 -0- -0- Increase in Liabilities .................................................... 2,656 1,580 -0- Increase in Applicant's Deposit ............................................ -0- -0- -0- Increase in Partners' Capital .............................................. -0- -0- -0- --------- --------- --------- Cash generated from Operations ............................................. $ 182,695 $ 144,508 $ 148,592 Use of Funds-Increase in Assets ............................................ -0- $ 290,071 $ 5,767 Decrease in Liabilities .................................................... -0- -0- 4,532 Decrease in Applicant's Deposit ............................................ -0- -0- -0- Offering Period Interest Expense to Limited Partners ....................... -0- -0- -0- Investment Income Pd to LP's ............................................. 53,836 61,267 94,559 Return of Capital to LP's ................................................ -0- -0- 116,362 --------- --------- --------- Net Increase (Decrease) in Cash ............................................ $ 128,859 $(206,830) $ (72,628) Cash at the beginning of the year .......................................... $ 229,911 $ 358,770 $ 151,940 Cash at the end of the year ................................................ $ 358,770 $ 151,940 $ 79,312 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) .............................. $ 78 $ 81 $ 83 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ................................ $ 76 $ 78 $ 80 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................... $ 32 $ 35 $ 51 Capital (1) .............................................................. $ -0- $ -0- $ 63 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ........................................... $ 79 $ 82 $ 83 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ......................... $ 76 $ 79 $ 80 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI III (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1990 1991 1992 ------------ ------------ ------------ Gross Revenues ............................................................ $ 196,540 $ 169,921 $ 177,555 Less: General Partners' Mgmt Fee .......................................... 12,833 11,454 7,915 Mortgage Servicing Fee .................................................. 9,561 8,008 9,842 Administrative Expenses ................................................. 12,596 12,399 22,371 Provision for Uncollected Accts ......................................... 5,828 4,040 9,977 Amortization of Organization and Syndication Costs ...................... -0- -0- -0- Offering Period Interest Expense to Limited Partners .................... -0- -0- $ 57 Net Income (GAAP Basis) dist. to Limited Partners ......................... $ 155,722 $ 134,020 $ 127,393 --------- ----------- ---------- Sources of Funds - Net Income ............................................. $ 155,722 $ 134,020 $ 127,393 Decrease in Assets ........................................................ 124,828 229,739 -0- Increase in Liabilities ................................................... -0- 735 764 Increase in Applicant's Deposit ........................................... -0- -0- 80,000 Increase in Partners' Capital ............................................. -0- -0- 345,151 ----------- --------- ----------- Cash generated from Operations ............................................ $ 280,550 $ 364,494 $ 553,308 Use of Funds-Increase in Assets ........................................... -0- -0- 206,184 Decrease in Liabilities ................................................... 1,279 -0- -0- Decrease in Applicant's Deposit ........................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ...................... -0- -0- -0- Investment Income Pd to LP's ............................................ 123,195 96,512 84,590 Return of Capital to LP's ............................................... 219,305 238,846 230,697 --------- --------- ----------- Net Increase (Decrease) in Cash ........................................... $ (63,229) $ 29,136 $ 31,837 Cash at the beginning of the year ......................................... $ 79,312 $ 16,083 $ 45,219 Cash at the end of the year ............................................... $16,083 $ 45,219 $ 77,056 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ............................. $ 94 $ 90 $ 88 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ............................... $ 90 $ 87 $ 85 Cash Distribution to Investors for $1,000 Invested Income (1) .............................................................. $ 69 $ 61 $ 61 Capital (1) ............................................................. $ 123 $ 150 $ 166 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner .......................................... $ 98 $ 111 $ 97 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ........................ $ 107 $ 93 $ 94 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI III (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1993 1994 1995 ------------ ------------ ------------ Gross Revenues ............................................................. $ 236,762 $ 165,126 $ 166,111 Less: General Partners' Mgmt Fee ........................................... 2,993 6,065 6,399 Mortgage Servicing Fee ................................................... 11,917 12,068 11,267 Administrative Expenses .................................................. 23,634 15,883 16,954 Provision for Uncollected Accts .......................................... 66,633 683 43 Amortization of Organization and Syndication Costs ....................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ..................... $ 242 $ 396 $ 54 --------- --------- --------- Net Income (GAAP Basis) dist. to Limited Partners .......................... $ 131,343 $ 130,031 $ 131,394 --------- --------- --------- Sources of Funds - Net Income .............................................. $ 131,343 $ 130,031 $ 131,394 Decrease in Assets ......................................................... 128,311 -0- -0- Increase in Liabilities .................................................... -0- 3,818 324 Increase in Applicant's Deposit ............................................ 10,000 -0- -0- Increase in Partners' Capital .............................................. 110,242 290,396 25,054 --------- --------- --------- Cash generated from Operations ............................................. $ 379,896 $ 424,245 $ 156,772 Use of Funds-Increase in Assets ............................................ -0- 192,646 67,506 Decrease in Liabilities .................................................... 1,099 -0- -0- Decrease in Applicant's Deposit ............................................ -0- 90,000 -0- Offering Period Interest Expense to Limited Partners ....................... 173 283 54 Investment Income Pd to LP's ............................................. 85,197 77,734 81,250 Return of Capital to LP's ................................................ 236,366 129,391 65,478 --------- --------- --------- Net Increase (Decrease) in Cash ............................................ $ 57,061 $(65,809) $ (57,516) Cash at the beginning of the year .......................................... $ 77,056 $ 134,117 $ 68,308 Cash at the end of the year ................................................ $ 134,117 $ 68,308 $ 10,792 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) .............................. $ 82 $ 80 $ 77 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ................................ $ 79 $ 77 $ 74 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................... $ 55 $ 53 $ 48 Capital (1) .............................................................. $ 153 $ 88 $ 39 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ........................................... $ 116 $ 81 $ 71 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ......................... $ 112 $ 79 $ 69 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI III (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
06/30/96 ------------ Gross Revenues ................................................ $ 82,767 Less: General Partners' Mgmt Fee .............................. 1,089 Mortgage Servicing Fee ...................................... 4,368 Administrative Expenses ..................................... 9,429 Provision for Uncollected Accts ............................. 3,275 Amortization of Organization and Syndication Costs .......... 1,658 Offering Period Interest Expense to Limited Partners ..... $ -0- -------- Net Income (GAAP Basis) dist. to Limited Partners ............. $ 62,948 -------- Sources of Funds - Net Income ................................. $ 62,948 Decrease in Assets ............................................ 60,689 Increase in Liabilities ....................................... -0- Increase in Applicant's Deposit ............................... -0- Increase in Partners' Capital ................................. 50,000 -------- Cash generated from Operations ................................ $173,637 Use of Funds-Increase in Assets ............................... -0- Decrease in Liabilities ....................................... 4,266 Decrease in Applicant's Deposit ............................... -0- Offering Period Interest Expense to Limited Partners .......... -0- Investment Income Pd to LP's ................................ 38,421 Return of Capital to LP's ................................... 13,493 -------- Net Increase (Decrease) in Cash ............................... $117,457 Cash at the beginning of the year ............................. $ 10,792 Cash at the end of the year ................................... $128,249 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ................. $ 36 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ................... $ 35 Cash Distribution to Investors for $1,000 Invested Income (1) .................................................. $ 23 Capital (1) ................................................. $ 8 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner .............................. N/A Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ............ N/A NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI II (AS OF JUNE 30,1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1984 1985 1986 ------------ ------------ ------------ Gross Revenues ............................................................ $ 207,656 $ 218,404 $ 210,308 Less: General Partners' Mgmt Fee .......................................... 13,621 14,712 15,480 Mortgage Servicing Fee .................................................. 9,591 11,334 13,950 Administrative Expenses ................................................. 6,089 7,500 13,922 Provision for Uncollected Accts ......................................... 8,282 12,056 4,132 Amortization of Organization and Syndication Costs ...................... 755 831 584 Offering Period Interest Expense to Limited Partners .................... 211 -0- -0- --------- --------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ......................... $ 169,107 $ 171,971 $ 162,240 ---------- --------- ----------- Sources of Funds - Net Income ............................................. $ 169,107 $ 171,971 $ 162,240 Decrease in Assets ........................................................ -0- -0- -0- Increase in Liabilities ................................................... -0- 217 -0- Increase in Applicant's Deposit ........................................... -0- -0- -0- Increase in Partners' Capital ............................................. 116,982 10,320 -0- ----------- --------- ----------- Cash generated from Operations ............................................ $ 286,089 $ 182,508 $ 162,240 Use of Funds-Increase in Assets ........................................... $ 221,005 $ 44,365 $ 10,802 Decrease in Liabilities ................................................... 1,277 -0- 340 Decrease in Applicant's Deposit ........................................... 113,968 -0- -0- Offering Period Interest Expense to Limited Partners ...................... -0- -0- -0- Investment Income Pd to LP's ............................................ 65,285 75,311 50,444 Return of Capital to LP's ............................................... -0- -0- 70,043 --------- --------- ----------- Net Increase (Decrease) in Cash ........................................... $(115,446) $ 62,832 $ 30,612 Cash at the beginning of the year ......................................... $ 177,223 $ 61,777 $ 124,609 Cash at the end of the year ............................................... $ 61,777 $ 124,609 $ 155,221 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ............................. $ 130 $ 122 $ 109 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ............................... $ 123 $ 116 $ 104 Cash Distribution to Investors for $1,000 Invested Income (1) .............................................................. $ 54 $ 53 $ 33 Capital (1) ............................................................. $ -0- $ -0- $ 46 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner .......................................... $ 130 $ 122 $ 109 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ........................ $ 123 $ 116 $ 104 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI II (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1987 1988 1989 ------------ ------------ ------------ Gross Revenues ..................................................................... $ 208,807 $ 232,361 $ 190,156 Less: General Partners' Mgmt Fee ................................................... 16,238 16,619 14,306 Mortgage Servicing Fee ........................................................... 16,558 17,876 10,740 Administrative Expenses .......................................................... 16,116 16,759 10,208 Provision for Uncollected Accts .................................................. -0- 19,946 4,666 Amortization of Organization and Syndication Costs ............................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ............................. -0- -0- -0- --------- --------- ----------- Net Income (GAAP Basis) dist. to Limited Partners .................................. $ 159,895 $ 161,161 $ 150,236 ----------- --------- ----------- Sources of Funds - Net Income ...................................................... $ 159,895 $ 161,161 $ 150,236 Decrease in Assets ................................................................. 55,985 -0- 258,519 Increase in Liabilities ............................................................ -0- 6,421 -0- Increase in Applicant's Deposit .................................................... -0- -0- -0- Increase in Partners' Capital ...................................................... -0- -0- -0- ----------- --------- ----------- Cash generated from Operations ..................................................... $ 215,880 $ 167,582 $ 408,755 Use of Funds-Increase in Assets .................................................... -0- $ 123,504 -0- Decrease in Liabilities ............................................................ 8,607 -0- 7,854 Decrease in Applicant's Deposit .................................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ............................... -0- -0- -0- Investment Income Pd to LP's ..................................................... 45,516 66,746 70,915 Return of Capital to LP's ........................................................ -0- 264,015 327,020 --------- --------- ----------- Net Increase (Decrease) in Cash .................................................... $ 161,757 $(286,683) $ 2,966 Cash at the beginning of the year .................................................. $ 155,221 $ 316,978 $ 30,295 Cash at the end of the year ........................................................ $ 316,978 $ 30,295 $ 33,261 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ...................................... $ 100 $ 100 $ 109 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ........................................ $ 97 $ 96 $ 104 Cash Distribution to Investors for $1,000 Invested Income (1) ....................................................................... $ 29 $ 40 $ 47 Capital (1) ...................................................................... $ -0- $ 156 $ 215 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ................................................... $ 102 $ 115 $ 109 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ................................. $ 97 $ 110 $ 106 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI II (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1990 1991 1992 ------------ ------------ ------------ Gross Revenues ............................................................. $ 131,811 $ 93,683 $ 892,67 Less: General Partners' Mgmt Fee ........................................... 11,221 -0- -0- Mortgage Servicing Fee ................................................... 5,395 -0- 2,156 Administrative Expenses .................................................. 10,146 10,950 12,948 Provision for Uncollected Accts .......................................... 5,434 57,690 16,886 Amortization of Organization and Syndication Costs ....................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ..................... -0- -0- -0- --------- --------- ---------- Net Income (GAAP Basis) dist. to Limited Partners .......................... $ 99,615 $ 25,043 $ 60,688 ---------- ---------- ---------- Sources of Funds - Net Income .............................................. $ 99,615 $ 25,043 $ 60,688 Decrease in Assets ......................................................... 58,107 69,363 -0- Increase in Liabilities .................................................... -0- 11,604 -0- Increase in Applicant's Deposit ............................................ -0- -0- -0- Increase in Partners' Capital .............................................. -0- -0- -0- ---------- --------- ---------- Cash generated from Operations ............................................. $ 157,722 $ 106,010 $ 60,688 Use of Funds-Increase in Assets ............................................ -0- -0- 11,908 Decrease in Liabilities .................................................... 845 -0- 9,935 Decrease in Applicant's Deposit ............................................ -0- -0- -0- Offering Period Interest Expense to Limited Partners ....................... -0- -0- -0- Investment Income Pd to LP's ............................................. 40,172 27,856 5,765 Return of Capital to LP's ................................................ 130,796 54,362 66,267 --------- --------- ---------- Net Increase (Decrease) in Cash ............................................ $ (14,091) $ 23,792 $ (33,187) Cash at the beginning of the year .......................................... $ 33,261 $ 19,170 $ 42,962 Cash at the end of the year ................................................ $ 19,170 $ 42,962 $ 9,775 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) .............................. $ 83 $ 20 $ 53 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ................................ $ 80 $ 20 $ 53 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................... $ 32 $ 23 $ 5 Capital (1) .............................................................. $ 103 $ 45 $ 58 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ........................................... $ 88 $ 15 $ 67 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ......................... $ 85 $ 16 $ 67 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI II (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1993 1994 1995 ------------ ------------ ------------ Gross Revenues ........................................................... $ 130,958 $ 102,122 $ 100,734 Less: General Partners' Mgmt Fee ......................................... 1,523 3,533 9,858 Mortgage Servicing Fee ................................................. 8,626 7,131 6,124 Administrative Expenses ................................................ 10,950 14,130 10,232 Provision for Uncollected Accts ........................................ 68,644 33,851 27,874 Amortization of Organization and Syndication Costs ..................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ................... -0- -0- -0- --------- --------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ........................ $ 41,215 $ 43,477 $ 46,646 ----------- --------- ----------- Sources of Funds - Net Income ............................................ $ 41,215 $ 43,477 $ 46,646 Decrease in Assets ....................................................... 213,667 -0- 121,620 Increase in Liabilities .................................................. -0- 535 4,723 Increase in Applicant's Deposit .......................................... -0- -0- -0- Increase in Partners' Capital ............................................ -0- -0- -0- ---------- --------- ----------- Cash generated from Operations ........................................... $ 254,882 $ 44,012 $ 172,989 Use of Funds-Increase in Assets .......................................... -0- $ 99,062 -0- Decrease in Liabilities .................................................. 355 -0- -0- Decrease in Applicant's Deposit .......................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ..................... -0- -0- -0- Investment Income Pd to LP's ........................................... 16,423 19,630 21,689 Return of Capital to LP's .............................................. 78,361 87,614 100,673 --------- --------- ----------- Net Increase (Decrease) in Cash ......................................... $ 159,743 $(162,294) $ 50,627 Cash at the beginning of the year ........................................ $ 9,775 $ 169,518 $ 7,224 Cash at the end of the year .............................................. $ 169,518 $ 7,224 $ 57,851 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ............................ $ 37 $ 41 $ 48 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) .............................. $ 37 $ 41 $ 47 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................. $ 15 $ 18 $ 21 Capital (1) ............................................................ $ 69 $ 81 $ 99 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ......................................... $ 100 $ (6) $ 77 Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ....................... $ 98 $ (6) $ 75 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI II (AS OF JUNE 30,1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
06/30/96 ----------- Gross Revenues ................................................... $ 46,905 Less: General Partners' Mgmt Fee ................................. 1,557 Mortgage Servicing Fee ......................................... 1,921 Administrative Expenses ........................................ 8,664 Provision for Uncollected Accts ................................ 10,888 Amortization of Organization and Syndication Costs ............. -0- Offering Period Interest Expense to Limited Partners ........... -0- -------- Net Income (GAAP Basis) dist. to Limited Partners ................ $ 23,875 -------- Sources of Funds - Net Income .................................... $ 23,875 Decrease in Assets ............................................... -0- Increase in Liabilities .......................................... -0- Increase in Applicant's Deposit .................................. -0- Increase in Partners' Capital .................................... -0- -------- Cash generated from Operations ................................... $ 23,875 Use of Funds-Increase in Assets .................................. $ 7,068 Decrease in Liabilities .......................................... 6,572 Decrease in Applicant's Deposit .................................. -0- Offering Period Interest Expense to Limited Partners ............. -0- Investment Income Pd to LP's ................................... 10,465 Return of Capital to LP's ...................................... 42,291 -------- Net Increase (Decrease) in Cash .................................. $(42,521) Cash at the beginning of the year ................................ $ 57,851 Cash at the end of the year ...................................... $ 15,330 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) .................... $ 26 Income & Distribution Data for $1,000 Invested for a Limited Partner Receiving Monthly Earning Disrtibution (GAAP Basis) ...................... $ 26 Cash Distribution to Investors for $1,000 Invested Income (1) ..................................................... $ 11 Capital (1) .................................................... $ 45 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ................................. N/A Federal Income Tax Results for $1,000 Invested for a Limited Partner Receiving Monthly Earnings Distributions ............... N/A NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1984 1985 1986 ------------ ------------ ------------ Gross Revenues ............................................................ $ 188,289 $ 205,116 $ 206,710 Less: General Partners' Mgmt Fee .......................................... 1,539 1,434 1,491 Mortgage Servicing Fee .................................................. 10,735 11,808 13,240 Administrative Expenses ................................................. 2,734 8,476 15,253 Provision for Uncollected Accts ......................................... 22,278 51,508 15,498 Amortization of Organization and Syndication Costs ...................... -0- -0- -0- Offering Period Interest Expense to Limited Partners .................... -0- -0- -0- --------- --------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ......................... $ 151,003 $ 131,890 $ 161,228 ----------- --------- ----------- Sources of Funds - Net Income ............................................. $ 151,003 $ 131,890 $ 161,228 Decrease in Assets ........................................................ -0- -0- -0- Increase in Liabilities ................................................... -0- 591 4,677 Increase in Applicant's Deposit ........................................... -0- -0- -0- Increase in Partners' Capital ............................................. -0- -0- -0- ----------- --------- ----------- Cash generated from Operations ............................................ $ 151,003 $ 132,481 $ 165,905 Use of Funds-Increase in Assets ........................................... $ 209,076 $ 8,249 $ 42,076 Decrease in Liabilities ................................................... 952 -0- -0- Decrease in Applicant's Deposit ........................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ...................... -0- -0- -0- Investment Income Pd to LP's ............................................ 2,205 15,746 14,701 Return of Capital to LP's ............................................... 53,363 100,073 76,449 --------- --------- ----------- Net Increase (Decrease) in Cash ........................................... $(114,593) $ 8,413 $ 32,679 Cash at the beginning of the year ......................................... $ 187,939 $ 73,346 $ 81,759 Cash at the end of the year ............................................... $ 73,346 $ 81,759 $ 114,438 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ............................. $ 107 $ 87 $ 105 Cash Distribution to Investors for $1,000 Invested Income (1) .............................................................. $ 2 $ 10 $ 9 Capital (1) ............................................................. $ 37 $ 65 $ 49 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner .......................................... $ 107 $ 87 $ 105 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1987 1988 1989 ------------ ------------ ------------ Gross Revenues .......................................................... $ 207,133 $ 217,668 $ 209,477 Less: General Partners' Mgmt Fee ........................................ 9,278 12,359 12,504 Mortgage Servicing Fee ................................................ 13,099 14,742 12,654 Administrative Expenses ............................................... 15,674 15,015 12,971 Provision for Uncollected Accts ....................................... 16,734 23,499 7,993 Amortization of Organization and Syndication Costs .................... -0- -0- -0- Offering Period Interest Expense to Limited Partners .................. -0- -0- -0- --------- --------- --------- Net Income (GAAP Basis) dist. to Limited Partners ....................... $ 152,348 $ 152,053 $ 163,355 --------- --------- --------- Sources of Funds - Net Income ........................................... $ 152,348 $ 152,053 $ 163,355 Decrease in Assets ...................................................... 34,814 -0- -0- Increase in Liabilities ................................................. -0- 4,608 -0- Increase in Applicant's Deposit ......................................... -0- -0- -0- Increase in Partners' Capital ........................................... -0- -0- -0- --------- --------- --------- Cash generated from Operations .......................................... $ 187,162 $ 156,661 $ 163,355 Use of Funds-Increase in Assets ......................................... -0- $ 85,795 $ 86,738 Decrease in Liabilities ................................................. 1,142 -0- 6,916 Decrease in Applicant's Deposit ......................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners .................... -0- -0- -0- Investment Income Pd to LP's .......................................... 16,331 25,710 37,745 Return of Capital to LP's ............................................. 112,317 113,029 119,469 --------- --------- --------- Net Increase (Decrease) in Cash ......................................... $ 57,372 $ (67,873) $ (87,513) Cash at the beginning of the year ....................................... $ 114,438 $ 171,810 $ 103,937 Cash at the end of the year ............................................. $ 171,810 $ 103,937 $ 16,424 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ........................... $ 96 $ 95 $ 101 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................ $ 10 $ 16 $ 23 Capital (1) ........................................................... $ 69 $ 69 $ 72 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ........................................ $ 96 $ 95 $ 101 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1990 1991 1992 ------------ ------------ ------------ Gross Revenues ............................................................ $ 187,920 $ 152,401 $ 143,619 Less: General Partners' Mgmt Fee .......................................... 12,398 11,129 -0- Mortgage Servicing Fee .................................................. 10,551 -0- 3,562 Administrative Expenses ................................................. 10,999 12,481 20,051 Provision for Uncollected Accts ......................................... 5,681 56,012 52,860 Amortization of Organization and Syndication Costs ...................... -0- -0- -0- Offering Period Interest Expense to Limited Partners .................... -0- -0- -0- --------- --------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ......................... $ 148,291 $ 72,779 $ 67,146 --------- --------- ----------- Sources of Funds - Net Income ............................................. $ 148,291 $ 72,779 $ 67,146 Decrease in Assets ........................................................ 226,219 -0- -0- Increase in Liabilities ................................................... -0- 11,215 -0- Increase in Applicant's Deposit ........................................... -0- -0- -0- Increase in Partners' Capital ............................................. -0- -0- -0- ----------- --------- ----------- Cash generated from Operations ............................................ $ 374,510 $ 83,994 $ 67,146 Use of Funds-Increase in Assets ........................................... -0- $ 67,263 $ 51,385 Decrease in Liabilities ................................................... 2,500 -0- 10,129 Decrease in Applicant's Deposit ........................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ...................... -0- -0- -0- Investment Income Pd to LP's ............................................ 51,260 25,014 7,600 Return of Capital to LP's ............................................... 149,425 93,506 66,017 --------- --------- ----------- Net Increase (Decrease) in Cash ........................................... $ 171,325 $(101,789) $ (67,985) Cash at the beginning of the year ......................................... $ 16,424 $ 187,749 $ 85,960 Cash at the end of the year ............................................... $ 187,749 $ 85,960 $ 17,975 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ............................. $ 92 $ 45 $ 43 Cash Distribution to Investors for $1,000 Invested Income (1) .............................................................. $ 31 $ 15 $ 5 Capital (1) ............................................................. $ 90 $ 58 $ 42 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner .......................................... $ 98 $ 40 $ 77 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1993 1994 1995 ------------ ------------ ------------ Gross Revenues ........................................................... $ 214,168 $ 151,237 $ 153,757 Less: General Partners' Mgmt Fee ......................................... 1,942 3,819 5,597 Mortgage Servicing Fee ................................................. 12,231 9,961 9,579 Administrative Expenses ................................................ 31,039 23,433 11,724 Provision for Uncollected Accts ........................................ 96,493 37,822 48,471 Amortization of Organization and Syndication Costs ..................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ................... -0- -0- -0- --------- --------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ........................ $ 72,463 $ 76,202 $ 78,386 ----------- --------- ----------- Sources of Funds - Net Income ............................................ $ 72,463 $ 76,202 $ 78,386 Decrease in Assets ....................................................... 207,128 -0- 41,320 Increase in Liabilities .................................................. 9,332 -0- 16 Increase in Applicant's Deposit .......................................... -0- -0- -0- Increase in Partners' Capital ............................................ -0- -0- -0- ----------- --------- ----------- Cash generated from Operations ........................................... $ 288,923 $ 76,202 $ 119,722 Use of Funds-Increase in Assets .......................................... -0- $ 75,654 -0- Decrease in Liabilities .................................................. -0- 9,152 -0- Decrease in Applicant's Deposit .......................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ..................... -0- -0- -0- Investment Income Pd to LP's ........................................... 18,867 28,658 28,580 Return of Capital to LP's .............................................. 78,090 69,512 124,513 --------- --------- ----------- Net Increase (Decrease) in Cash ......................................... $ 191,966 $(106,774) $ (33,371) Cash at the beginning of the year ........................................ $ 17,975 $ 209,941 $ 103,167 Cash at the end of the year .............................................. $ 209,941 $ 103,167 $ 69,796 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ............................ $ 47 $ 50 $ 53 Cash Distribution to Investors for $1,000 Invested Income (1) ............................................................. $ 12 $ 19 $ 19 Capital (1) ............................................................ $ 50 $ 45 $ 82 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner ......................................... $ 109 $ (18) $ 80 NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS RMI (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
06/30/96 ------------ Gross Revenues ............................................ $61,611 Less: General Partners' Mgmt Fee .......................... 1,795 Mortgage Servicing Fee .................................. 3,208 Administrative Expenses ................................. 9,526 Provision for Uncollected Accts ......................... 9,087 Amortization of Organization and Syndication Costs ...... -0- Offering Period Interest Expense to Limited Partners .... -0- ---- Net Income (GAAP Basis) dist. to Limited Partners ......... $37,995 ---- Sources of Funds - Net Income ............................. $37,995 Decrease in Assets ........................................ -0- Increase in Liabilities ................................... -0- Increase in Applicant's Deposit ........................... -0- Increase in Partners' Capital ............................. -0- ---- Cash generated from Operations ............................ $37,995 Use of Funds-Increase in Assets ........................... $31,251 Decrease in Liabilities ................................... 1,865 Decrease in Applicant's Deposit ........................... -0- Offering Period Interest Expense to Limited Partners ...... -0- Investment Income Pd to LP's ............................ 11,936 Return of Capital to LP's ............................... 46,578 ---- Net Increase (Decrease) in Cash ........................... $(53,635) Cash at the beginning of the year ......................... $69,796 Cash at the end of the year ............................... $16,161 Income & Distribution Data for $1,000 Invested for a Compounding Limited Partner (GAAP Basis) ............. $ 27 Cash Distribution to Investors for $1,000 Invested Income (1) .............................................. $ 8 Capital (1) ............................................. $ 32 Federal Income Tax Results for $1,000 Invested Capital for a Compounding Ltd. Partner .......................... N/A NOTES: (1) Based upon years initial capital balances
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS CMI (CONSOLIDATED) (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1984 1985 1986 ------------ ------------ ------------ Gross Revenues .......................................................... $ 592,783 $ 567,307 $ 515,812 Less: General Partners' Mgmt Fee ........................................ 28,027 5,366 5,336 Mortgage Servicing Fee ................................................ 28,169 33,756 42,630 Administrative Expenses ............................................... 28,900 34,833 58,759 Provision for Uncollected Accts ....................................... 77,966 155,408 171,844 Amortization of Organization and Syndication Costs .................... 2,123 1,132 1,877 Offering Period Interest Expense to Limited Partners .................. 3,529 2,997 1,849 ----------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ....................... $ 424,069 $ 333,815 $ 233,518 ----------- ----------- ----------- Sources of Funds - Net Income ........................................... $ 424,069 $ 333,815 $ 233,518 Decrease in Assets ...................................................... 274,181 873,340 919,823 Increase in Liabilities ................................................. 1,323 3,129 6,384 Increase in Applicant's Deposit ......................................... 42,433 -0- -0- Increase in Partners' Capital ........................................... 233,005 228,018 223,959 ----------- ----------- ----------- Cash generated from Operations .......................................... $ 975,011 $ 1,438,302 $ 1,383,684 Use of Funds-Increase in Assets ......................................... -0- -0- -0- Decrease in Liabilities ................................................. -0- -0- -0- Decrease in Applicant's Deposit ......................................... -0- 44,725 15,712 Offering Period Interest Expense to Limited Partners .................... -0- -0- -0- Investment Income Pd to LP's .......................................... 95,851 123,166 125,074 Return of Capital to LP's ............................................. 969,496 1,521,375 1,171,920 ----------- ----------- ----------- Net Increase (Decrease) in Cash ......................................... $ (90,336) $ (250,964) $ 70,979 Cash at the beginning of the year ....................................... $ 432,118 $ 341,782 $ 90,818 Cash at the end of the year ............................................. $ 341,782 $ 90,818 $ 161,797 Income & Distribution Data for $1,000 Invested Net Income CMI (Original Portfolio) (GAAP Basis) ................................ $ 59 $ 47 $ 32 Net Income CMI II (New Portfolio of CMI) (GAAP Basis) .................. $ 128 $ 122 $ 108 Cash Distribution to Investors for $1,000 Invested: CMI (Original Portfolio) Income (1) .......................................................... $ 13 $ 18 $ 23 Capital (1) ......................................................... $ 130 $ 224 $ 216 CMI II (New Portfolio of CMI) Income (1) .......................................................... -0- -0- -0- Capital (1) ......................................................... -0- -0- -0- Federal Income Tax Results for $1,000 Invested Capital Ordinary Income from Operations CMI (Original Portfolio) .............. $ 59 $ 47 $ 32 Ordinary Income from Operations CMI II (New Portfolio of CMI ................................................................. $ 130 $ 123 $ 110 NOTES: (1) Based upon years initial capital balances (2) CMI II (New Portfolio of CMI I) commenced operation on January 1, 1984
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS CMI (CONSOLIDATED) (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1987 1988 1989 ------------ ------------ ------------ Gross Revenues ........................................................... $ 454,722 $ 327,040 $ 355,951 Less: General Partners' Mgmt Fee ......................................... 6,884 7,631 8,223 Mortgage Servicing Fee ................................................. 26,258 25,206 9,007 Administrative Expenses ................................................ 45,785 40,102 27,002 Provision for Uncollected Accts ........................................ 140,639 75,443 170,176 Amortization of Organization and Syndication Costs ..................... 800 793 -0- Offering Period Interest Expense to Limited Partners ................... 255 -0- -0- ----------- ----------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ........................ $ 234,101 $ 177,865 $ 141,543 ----------- ----------- ----------- Sources of Funds - Net Income ............................................ $ 234,101 $ 177,865 $ 141,543 Decrease in Assets ....................................................... 977,963 963,036 423,042 Increase in Liabilities .................................................. -0- 4,680 -0- Increase in Applicant's Deposit .......................................... -0- -0- -0- Increase in Partners' Capital ............................................ 70,223 1 -0- ----------- ----------- ----------- Cash generated from Operations ........................................... $ 1,282,287 $ 1,145,582 $ 564,585 Use of Funds-Increase in Assets .......................................... -0- -0- -0- Decrease in Liabilities .................................................. 9,039 -0- 6,543 Decrease in Applicant's Deposit .......................................... 56,068 -0- -0- Offering Period Interest Expense to Limited Partners ..................... -0- -0- -0- Investment Income Pd to LP's ........................................... 50,657 59,413 33,471 Return of Capital to LP's .............................................. 1,249,210 765,486 604,010 ----------- ----------- ----------- Net Increase (Decrease) in Cash .......................................... $ (82,687) $ 320,683 $ (79,439) Cash at the beginning of the year ........................................ $ 161,797 $ 79,110 $ 399,793 Cash at the end of the year .............................................. $ 79,110 $ 399,793 $ 320,354 Income & Distribution Data for $1,000 Invested Net Income CMI (Original Portfolio) (GAAP Basis) ................................. $ 37 $ 28 $ 18 Net Income CMI II (New Portfolio of CMI) (GAAP Basis) ................... $ 100 $ 98 $ 92 Cash Distribution to Investors for $1,000 Invested: CMI (Original Portfolio) Income (1) ........................................................... $ 12 $ 17 $ 10 Capital (1) .......................................................... $ 292 $ 243 $ 243 CMI II (New Portfolio of CMI) Income (1) ........................................................... -0- $ 6 $ 9 Capital (1) .......................................................... -0- $ 6 $ 21 Federal Income Tax Results for $1,000 Invested Capital Ordinary Income from Operations CMI (Original Portfolio) ............... $ 37 $ 28 $ 19 Ordinary Income from Operations CMI II (New Portfolio of CMI .................................................................. $ 102 $ 101 $ 96 NOTES: (1) Based upon years initial capital balances (2) CMI II (New Portfolio of CMI I) commenced operation on January 1, 1984
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS CMI (CONSOLIDATED) (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1990 1991 1992 ------------ ------------ ------------ Gross Revenues ............................................................ $ 294,299 $ 310,196 $ 279,365 Less: General Partners' Mgmt Fee .......................................... 9,821 18,751 17,149 Mortgage Servicing Fee .................................................. 12,034 18,904 21,171 Administrative Expenses ................................................. 22,840 23,084 24,763 Provision for Uncollected Accts ......................................... 129,980 80,123 32,831 Amortization of Organization and Syndication Costs ...................... -0- -0- -0- Offering Period Interest Expense to Limited Partners .................... -0- -0- -0- --------- --------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ......................... $ 119,624 $ 169,334 $ 183,451 ----------- --------- ----------- Sources of Funds - Net Income ............................................. $ 119,624 $ 169,334 $ 183,451 Decrease in Assets ........................................................ 287,077 298,408 -0- Increase in Liabilities ................................................... -0- 14,202 -0- Increase in Applicant's Deposit ........................................... -0- -0- -0- Increase in Partners' Capital ............................................. -0- -0- -0- ----------- --------- ----------- Cash generated from Operations ............................................ $ 406,701 $ 481,944 $ 183,451 Use of Funds-Increase in Assets ........................................... -0- -0- 74,593 Decrease in Liabilities ................................................... 1,718 -0- 2,981 Decrease in Applicant's Deposit ........................................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ...................... -0- -0- -0- Investment Income Pd to LP's ............................................ 28,704 46,573 48,497 Return of Capital to LP's ............................................... 477,549 356,864 259,493 --------- --------- ----------- Net Increase (Decrease) in Cash ........................................... $(101,270) $ 78,507 $ (202,113) Cash at the beginning of the year ......................................... $ 320,354 $ 219,084 $ 297,591 Cash at the end of the year ............................................... $ 219,084 $ 297,591 $ 95,478 Income & Distribution Data for $1,000 Invested Net Income CMI (Original Portfolio) (GAAP Basis) .................................. $ 7 $ 58 $ 82 Net Income CMI II (New Portfolio of CMI) (GAAP Basis) .................... $ 93 $ 81 $ 82 Cash Distribution to Investors for $1,000 Invested: CMI (Original Portfolio) Income (1) ............................................................ $ 3 $ 18 $ 18 Capital (1) ........................................................... $ 249 $ 204 $ 142 CMI II (New Portfolio of CMI) Income (1) ............................................................ $ 20 $ 18 $ 22 Capital (1) ........................................................... $ 20 $ 63 $ 81 Federal Income Tax Results for $1,000 Invested Capital Ordinary Income from Operations CMI (Original Portfolio) ................ $ 7 $ 105 $ 75 Ordinary Income from Operations CMI II (New Portfolio of CMI ................................................................... $ 100 $ 101 $ 75 NOTES: (1) Based upon years initial capital balances (2) CMI II (New Portfolio of CMI I) commenced operation on January 1, 1984
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS CMI (CONSOLIDATED) (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1993 1994 1995 ------------ ------------ ------------ Gross Revenues ............................................................... $258,338 $204,608 $ 210,590 Less: General Partners' Mgmt Fee ............................................. 16,318 15,274 14,180 Mortgage Servicing Fee ..................................................... 18,665 12,451 18,193 Administrative Expenses .................................................... 17,943 16,687 14,485 Provision for Uncollected Accts ............................................ 72,551 74,215 69,692 Amortization of Organization and Syndication Costs ......................... -0- -0- -0- Offering Period Interest Expense to Limited Partners ....................... -0- -0- -0- -------- -------- ----------- Net Income (GAAP Basis) dist. to Limited Partners ............................ $132,861 $ 85,981 $ 94,040 -------- -------- ----------- Sources of Funds - Net Income ................................................ $132,861 $ 85,981 $ 94,040 Decrease in Assets ........................................................... 220,577 140,444 29,224 Increase in Liabilities ...................................................... -0- -0- -0- Increase in Applicant's Deposit .............................................. -0- -0- -0- Increase in Partners' Capital ................................................ -0- -0- -0- -------- ----------- ----------- Cash generated from Operations ............................................... $353,438 $226,425 $ 123,264 Use of Funds-Increase in Assets .............................................. -0- -0- -0- Decrease in Liabilities ...................................................... 2,954 2,600 -0- Decrease in Applicant's Deposit .............................................. -0- -0- -0- Offering Period Interest Expense to Limited Partners ......................... -0- -0- -0- Investment Income Pd to LP's ............................................... 37,370 26,841 33,554 Return of Capital to LP's .................................................. 235,477 188,064 214,560 -------- -------- ----------- Net Increase (Decrease) in Cash .............................................. $ 77,637 $ 8,920 $ (124,850) Cash at the beginning of the year ............................................ $ 95,478 $173,115 $ 182,035 Cash at the end of the year .................................................. $173,115 $182,035 $ 57,185 Income & Distribution Data for $1,000 Invested Net Income CMI (Original Portfolio) (GAAP Basis) ..................................... $ 61 $ 42 $ 50 Net Income CMI II (New Portfolio of CMI) (GAAP Basis) ....................... $ 61 $ 42 $ 50 Cash Distribution to Investors for $1,000 Invested: CMI (Original Portfolio) Income (1) ............................................................... $ 18 $ 17 $ 24 Capital (1) .............................................................. $ 138 $ 122 $ 137 CMI II (New Portfolio of CMI) Income (1) ............................................................... $ 14 $ 10 $ 12 Capital (1) .............................................................. $ 77 $ 64 $ 89 Federal Income Tax Results for $1,000 Invested Capital Ordinary Income from Operations CMI (Original Portfolio) ................... $ 23 $ 53 $ 93 Ordinary Income from Operations CMI II (New Portfolio of CMI ...................................................................... $ 23 $ 53 $ 93 NOTES: (1) Based upon years initial capital balances (2) CMI II (New Portfolio of CMI I) commenced operation on January 1, 1984
TABLE III OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS CMI (CONSOLIDATED) (AS OF JUNE 30, 1996) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
06/30/96 ------------ Gross Revenues ................................................ $ 98,061 Less: General Partners' Mgmt Fee .............................. 6,667 Mortgage Servicing Fee ...................................... 7,758 Administrative Expenses ..................................... 11,755 Provision for Uncollected Accts ............................. 23,906 Amortization of Organization and Syndication Costs .......... -0- Offering Period Interest Expense to Limited Partners ........ -0- --- Net Income (GAAP Basis) dist. to Limited Partners ............. $ 47,975 --- Sources of Funds - Net Income ................................. $ 47,975 Decrease in Assets ............................................ 176,268 Increase in Liabilities ....................................... -0- Increase in Applicant's Deposit ............................... -0- Increase in Partners' Capital ................................. -0- --- Cash generated from Operations ................................ $224,243 Use of Funds-Increase in Assets ............................... $ -0- Decrease in Liabilities ....................................... -0- Decrease in Applicant's Deposit ............................... -0- Offering Period Interest Expense to Limited Partners .......... -0- Investment Income Pd to LP's ................................ 13,642 Return of Capital to LP's ................................... 93,296 ------ Net Increase (Decrease) in Cash ............................... $117,305 Cash at the beginning of the year ............................. $ 57,185 Cash at the end of the year ................................... $174,490 Income & Distribution Data for $1,000 Invested Net Income CMI (Original Portfolio) (GAAP Basis) ...................... $ 27 Net Income CMI II (New Portfolio of CMI) (GAAP Basis) ........ $ 27 Cash Distribution to Investors for $1,000 Invested: CMI (Original Portfolio) Income (1) ................................................ $ 11 Capital (1) ............................................... $ 72 CMI II (New Portfolio of CMI) Income (1) ................................................ $ 5 Capital (1) ............................................... $ 38 Federal Income Tax Results for $1,000 Invested Capital Ordinary Income from Operations CMI (Original Portfolio) .... N/A Ordinary Income from Operations CMI II (New Portfolio of CMI ....................................................... N/A NOTES: (1) Based upon years initial capital balances (2) CMI II (New Portfolio of CMI I) commenced operation on January 1, 1984
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS VIII FOR THE THREE YEARS ENDING JUNE 30,1996
SINGLE FAMILY 1-4 UNITS (county) ================= =========== ============ ================== ============== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= =========== ============ ================== ============== San Francisco .......04/01/93 05/21/93 38500.98 672.45 39173.43 San Mateo ...........04/01/93 10/07/93 46400.00 3072.32 49472.32 San Mateo ...........06/09/93 01/21/94 65000.00 4463.41 69463.41 San Mateo .......... 10/26/93 03/21/94 40000.00 1565.51 41565.51 San Francisco ...... 05/14/93 03/22/94 65000.00 5891.09 70891.09 Sonoma ............. 05/18/93 05/17/94 65000.00 6388.70 71388.70 San Mateo .......... 02/24/94 06/01/94 225000.00 6091.16 231091.16 San Mateo ...........11/10/93 07/01/94 196800.00 12643.73 209443.73 San Mateo ...........06/28/94 09/27/94 132000.00 3719.50 135719.50 San Mateo ...........08/25/94 09/29/94 50000.00 493.15 50493.15 Contra Costa ........05/01/93 10/14/94 50000.00 8069.18 58069.18 Sonoma ..............03/15/94 11/04/94 151875.00 11638.07 163513.07 Santa Clara .........06/01/93 03/13/95 99000.00 17191.42 116191.42 San Mateo ...........07/19/94 06/20/95 40000.00 3076.20 43076.20 Santa Clara .........06/04/93 12/31/95 100000.00 26825.94 126825.94 Santa Clara .........05/31/95 02/09/96 278207.20 17412.44 295619.64 San Mateo ...........10/08/93 02/15/96 130000.00 28518.49 159428.49 Santa Clara .........12/29/94 03/13/96 250000.00 17232.38 267232.38 San Mateo ...........02/21/96 05/20/96 58500.00 1770.24 60270.20 San Mateo ...........11/15/94 05/30/96 213717.85 17458.48 231176.33 San Mateo ...........09/15/95 05/31/96 300000.00 21446.57 321446.57 Marin ...............05/05/94 06/14/96 300000.00 63479.64 363479.64 MULTIPLE 5+ UNITS (county) =============================================================================== PROPERTY ............ FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================================================================================ Alameda .............04/28/93 . 12/01/95 50000.00 9239.47 59239.47 San Francisco .......07/20/94 . 01/19/96 175000.00 12052.07 187052.07 Contra Costa ........01/06/94 . 01/19/96 1073720.93 145782.30 1219503.23 Alameda .............03/17/95 . 05/31/96 13000.00 1664.76 14664.76 COMMERICAL (county) =============================================================================== PROPERTY ............ FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE =============================================================================== Nevada ..............04/01/93 .... 12/09/93 59500.00 4963.60 64463.60 San Mateo ...........09/30/93 .... 01/01/94 400000.00 10466.61 410466.61 Merced ..............06/02/93 .... 10/31/94 45000.00 7163.32 52163.32 Alameda .............01/14/94 .... 03/17/95 300000.00 34922.50 334922.50
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS VIII FOR THE THREE YEARS ENDING JUNE 30,1996
COMMERICAL (county) CONTINUED ================================================================================ PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= =========== ============ ===================================== Alameda ............. 10/14/94 05/31/95 310000.00 20774.14 330774.14 Santa Clara ......... 01/26/96 03/21/96 1125000.00 18882.96 1143882.96 San Francisco ....... 03/19/93 06/28/96 116500.00 36540.57 153040.57 Santa Clara ......... 12/30/94 06/30/96 95000.00 14691.62 109691.62 -------- -------- ---------- -------- ----------
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS VII FOR THE THREE YEARS ENDING JUNE 30, 1996
SINGLE FAMILY 1-4 UNITS (county) ================= =========== ============ ================== ================== PROPERTY ............... FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================================================================================ San Mateo ............ 07/23/91 01/07/93 90000.00 18151.56 108151.56 San Mateo ............ 07/09/90 01/22/93 25000.00 9072.49 34072.46 San Mateo ............ 02/21/92 02/09/93 115000.00 13384.11 128384.11 Santa Clara .......... 05/17/91 02/10/93 78000.00 12285.25 90285.25 San Mateo ............ 06/19/92 02/16/93 30000.00 2561.85 32561.85 Santa Clara .......... 11/27/91 03/31/93 40000.00 9101.44 49101.44 Contra Costa ......... 07/24/91 04/01/93 70500.00 16709.15 87209.15 Contra Costa ......... 01/27/91 04/01/93 60000.00 11922.82 71922.82 Santa Cruz ........... 07/02/91 04/27/93 105000.00 26745.68 131745.68 San Francisco ........ 12/14/92 05/21/93 65000.00 2871.63 67871.63 Santa Clara .......... 04/22/91 05/24/93 150000.00 41469.24 191469.24 Santa Clara .......... 06/17/92 05/27/93 84000.00 6156.26 90156.26 San Mateo ............ 12/09/91 06/30/93 363000.00 72136.40 435136.40 Sonoma ............... 02/19/92 07/02/93 130000.00 22780.57 152780.57 San Mateo ............ 04/10/92 07/15/93 220000.00 33470.96 253470.96 San Mateo ............ 05/14/91 07/28/93 194400.00 5733.85 200133.85 San Francisco ........ 08/21/91 07/28/93 166875.00 46179.49 213054.49 Sonoma ............... 02/19/92 07/30/93 212500.00 40314.47 252814.47 Sacramento ........... 07/23/91 08/02/93 66000.00 18102.51 84102.51 San Mateo ............ 11/13/90 08/19/93 150000.00 55926.93 205926.93 Santa Clara .......... 12/26/91 08/20/93 150000.00 31008.87 181008.87 Sacramento ........... 04/13/90 08/27/93 55000.00 29505.32 84505.32 Contra Costa ......... 11/30/90 08/29/93 129000.00 45968.36 174968.36 Marin ................ 08/31/92 09/10/93 300000.00 37076.60 337076.60 Napa ................. 12/03/90 10/01/93 53500.00 22856.40 76356.40 Alameda .............. 09/01/92 10/29/93 91500.00 4006.15 95506.15 Marin ................ 03/25/91 11/10/93 202500.00 15359.92 217859.92 Monterey ............. 08/26/92 11/24/93 285000.00 45098.17 330098.17 Contra Costa ......... 08/12/92 12/10/93 80000.00 3975.47 83975.47 Monterey ............. 01/24/92 12/30/93 100000.00 19876.07 119876.07 San Mateo ............ 05/05/92 01/14/94 40000.00 8029.79 48029.79 Santa Clara .......... 08/10/90 03/16/94 75000.00 40842.82 115842.82 San Francisco ........ 05/14/93 03/22/94 15000.00 1359.48 16359.48 San Mateo ............ 05/18/92 04/01/94 32000.00 3432.74 35432.74 San Mateo ............ 06/16/92 04/15/94 60000.00 12607.41 72607.41 SanMateo ............. 03/02/93 04/19/94 100000.00 12205.41 112205.41 San Mateo ............ 06/01/90 04/22/94 91000.00 -13609.71 77390.29 Santa Clara .......... 09/01/93 04/29/94 156750.00 6524.50 163274.50 San Mateo ............ 08/07/92 05/04/94 70000.00 14318.42 84318.42 Sonoma ............... 10/02/91 05/13/94 22000.00 7643.20 29643.20 Solano ............... 03/29/90 06/28/94 44600.00 27937.99 72537.99 ---------
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS VII FOR THE THREE YEARS ENDING JUNE 30, 1996
SINGLE FAMILY 1-4 UNITS (county) (continued) - ----------------- ----------- ------------ ------------------ ----------------- Alameda .............. 09/30/91 08/05/94 68987.44 24341.28 93328.72 Sonoma ............... 12/03/90 08/16/94 57000.00 29283.93 86283.93 San Mateo ............ 12/07/92 08/24/94 250000.00 29890.13 279890.13 San Mateo ............ 04/25/90 08/25/94 33000.00 17769.20 50769.20 Alameda .............. 04/28/92 08/31/94 145000.00 3768.21 148768.21 Alameda .............. 08/31/92 09/19/94 77000.00 17401.80 94401.80 Contra Costa ......... 05/01/93 10/14/94 50000.00 8069.18 58069.18 Contra Costa ......... 09/23/92 11/30/94 50000.00 12841.91 62841.91 Mendocino ............ 08/04/92 10/19/94 100000.00 25951.11 125951.11 Solano ............... 09/21/91 02/22/95 294500.00 -19094.98 275405.02 Alameda .............. 08/07/92 03/31/95 135000.00 39743.01 174743.01 San Mateo ............ 08/12/91 03/10/95 196000.00 -17431.30 178568.70 San Mateo ............ 12/11/91 04/18/95 95000.00 -16923.29 78076.71 San Mateo ............ 07/28/93 07/14/95 60000.00 12275.08 72275.08 Alameda .............. 02/23/93 06/13/95 104000.00 27469.23 131469.23 San Mateo ............ 07/26/91 08/21/95 71000.00 25231.62 -45768.38 Monterey ............. 09/18/92 09/27/95 110000.00 -72503.76 37496.24 San Mateo ............ 11/09/93 09/29/95 153000.00 25546.76 178546.76 San Mateo ............ 12/07/93 09/29/95 25000.00 4467.56 29467.56 San Mateo ............ 03/10/95 11/29/95 200000.00 11018.65 211018.65 Santa Clara .......... 06/04/93 12/31/95 25000.00 6858.86 31858.86 Mendocino ............ 08/06/93 03/31/96 300000.00 92035.16 392035.16 San Mateo ............ 02/21/96 05/20/96 58500.00 1770.20 60270.20 San Mateo ............ 11/15/94 05/30/96 213717.85 17819.23 231537.08 Marin ................ 05/05/94 06/14/96 150000.00 32728.99 182728.99 MULTIPLE 5+ UNITS (county) ================================================================================ PROPERTY ........ FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================================================================================ San Mateo ........02/05/90 06/29/93 30000.00 10465.27 40465.27 San Francisco ....08/28/91 07/19/93 95000.00 24399.89 119399.89 Alameda ..........10/15/91 08/12/93 70000.00 17313.79 87313.79 Santa Clara .... 01/03/92 10/08/93 159375.00 35199.68 194574.68 Santa Cruz ..... 04/22/92 12/14/93 142000.00 29222.72 171222.72 San Francisco .. 05/29/90 01/11/95 75000.00 -21412.94 53587.06 San Francisco .. 12/09/91 10/31/95 25000.00 9554.33 34554.33 Alameda ........ 04/28/93 12/01/95 150000.00 28283.23 178283.23 Contra Costa ... 01/06/94 01/19/96 1226744.19 193722.14 1420466.33 Alameda ........ 03/17/95 05/31/96 28166.67 3798.22 31964.89 - -------------------------------------------------------------------------------
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS VII FOR THE THREE YEARS ENDING JUNE 30, 1996
COMMERICAL (county) ================================================================================ PROPERTY ........... FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE =============================================================================== Alameda ........... 03/06/90 03/09/93 80000.00 32361.69 112361.68 San Francisco ..... 03/10/93 05/01/93 91200.00 1150.41 92350.41 San Mateo ......... 06/13/90 09/03/93 100000.00 30969.62 130969.62 Stanislaus ........ 12/29/89 11/18/93 24999.92 16838.16 41838.08 Alameda ........... 12/29/89 11/18/93 93750.00 14626.49 108376.49 Alameda ........... 11/30/90 11/18/93 27083.33 10928.32 38011.65 San Francisco ..... 10/07/92 12/10/93 200000.00 32675.55 232675.55 San Mateo ......... 02/28/94 01/01/94 690000.00 171369.86 861369.86 San Mateo ......... 07/29/91 02/09/94 105000.00 31793.88 136793.88 Alameda ........... 05/31/93 03/29/94 200000.00 -111073.87 88926.13 Sonoma ............ 07/03/91 06/20/94 117500.00 47064.41 164564.41 Stanislaus ........ 09/10/91 12/19/94 399941.72 118615.34 518557.06 Stanislaus ........ 06/30/94 12/19/94 60000.11 3229.61 63229.72 Stanislaus ........ 09/10/91 12/19/94 399941.72 118615.34 518557.06 San Francisco ..... 07/15/93 12/31/94 10000.00 1007.71 11007.71 Alameda ........... 01/14/94 03/17/95 650000.00 87376.02 737376.02 Shasta ............ 06/06/90 05/10/95 100000.00 3005.47 103005.47 Alameda ........... 02/12/92 11/03/95 240000.00 62538.96 320296.01 Solano ............ 04/30/92 11/30/95 200000.00 37668.49 237904.59 San Francisco ..... 01/25/91 12/15/95 80000.00 50960.94 130960.94 San Mateo ......... 08/28/95 03/19/96 375000.00 48000.00 423000.00 Santa Clara ....... 01/26/96 03/21/96 1125000.00 18882.96 1143882.96 San Francisco ..... 03/19/93 06/28/96 129800.00 45175.68 174975.68 Santa Clara ....... 01/22/92 06/30/96 325000.00 116200.42 441200.42 -------- ---------- ---------- ----------
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS VI FOR THE THREE YEARS ENDING JUNE 30, 1996
SINGLE FAMILY 1-4 UNITS (county) ================= ============ ============= ================ ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============= ================ ================== San Mateo ........... 10/16/92 01/03/93 330000.00 14976.62 344976.62 Santa Clara ......... 05/17/91 02/10/93 78000.00 12285.26 90285.26 Santa Clara ......... 08/19/92 02/12/93 55750.00 3334.26 59084.26 San Francisco ....... 01/28/91 03/09/93 155000.00 22757.37 177757.37 San Mateo ........... 08/23/89 04/14/93 60000.00 32739.27 92739.27 San Mateo ........... 04/20/88 04/30/93 72000.00 49494.89 121494.89 Sonoma .............. 02/29/88 05/03/93 60000.00 41103.80 101103.80 Santa Clara ......... 04/22/91 05/24/93 150000.00 41469.24 191469.24 San Mateo ........... 09/08/89 06/07/93 120000.00 14438.23 134438.23 Contra Costa ........ 01/30/91 06/22/93 67500.00 13981.40 81481.40 San Francisco ....... 08/21/91 07/28/93 166875.00 46179.47 213054.47 Sonoma .............. 02/19/92 07/30/93 212500.00 40314.47 252814.47 Contra Costa ........ 11/13/89 08/04/93 38000.00 35070.34 73070.34 San Mateo ........... 11/13/90 08/19/93 150000.00 54354.05 204354.05 Santa Clara ......... 12/26/91 08/20/93 150000.00 31008.87 181008.87 Contra Costa ........ 08/30/90 08/24/93 150000.00 25529.86 175529.86 Alameda ............. 03/12/93 08/26/93 45000.00 2589.03 47589.03 Contra Costa ........ 06/14/88 08/29/93 22000.00 15789.89 37789.89 Marin ............... 08/31/92 09/10/93 70000.00 8651.21 78651.21 San Mateo ........... 01/06/93 10/07/93 116000.00 8378.50 124378.50 Santa Clara ......... 11/01/89 12/31/93 168000.00 -123155.57 49943.93 San Francisco ....... 01/15/93 01/28/94 45000.00 5374.32 50374.32 Santa Cruz .......... 07/31/91 03/10/94 51000.00 16959.98 67959.98 San Mateo ........... 03/02/93 04/19/94 75000.00 9154.06 84154.06 San Mateo ........... 06/01/90 04/22/94 91000.00 -13570.25 77429.75 Sonoma .............. 05/18/93 05/17/94 25000.00 2457.47 27457.47 Contra Costa ........ 07/26/90 06/06/94 95000.00 50888.89 145888.89 Marin ............... 03/11/93 08/19/94 45000.00 7614.65 52614.65 San Mateo ........... 12/07/92 08/24/94 200000.00 23912.10 223912.10 Contra Costa ........ 05/01/93 10/14/94 62500.00 10086.48 72586.48 Sonoma .............. 12/24/91 11/04/94 168750.00 56286.16 225036.16 Contra Costa ........ 12/19/90 11/10/94 22000.00 10517.42 32517.42 Stanislaus .......... 08/26/92 06/27/94 87500.00 17713.96 105213.96 Alameda ............. 11/23/88 02/10/95 50000.00 37945.22 87945.22 Solano .............. 09/21/92 02/22/95 190016.46 -13169.40 176847.06 ContraCosta ......... 10/30/92 03/02/95 89500.00 15442.55 104942.55 Contra Costa ........ 11/20/90 04/14/95 50000.00 330.88 50330.88 San Mateo ........... 12/11/91 04/18/95 95000.0 16246.05 111246.05 Contra Costa ........ 04/02/91 07/18/95 72000.00 -30261.48 41738.52 Napa ................ 12/22/88 08/31/95 200000.00 160662.42 360662.42 Monterey ............ 09/18/92 09/27/95 100000.00 -65098.70 34901.30 San Mateo ........... 10/17/88 12/08/95 91400.00 79779.21 171179.21 -------- -------- --------- ---------- ---------
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS VI FOR THE THREE YEARS ENDING JUNE 30, 1996
SINGLE FAMILY 1-4 UNITS (county)(continued) ================= ============ ============= ================ ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============= ================ ================== Santa Clara .......... 06/04/93 12/31/95 25000.00 6858.86 31858.86 San Mateo ............ 10/08/93 02/15/96 57425.00 13083.50 70508.50 San Mateo ............ 03/03/89 03/31/96 160000.00 138007.09 298007.09 Marin ................ 05/05/94 06/14/96 200000.00 43638.72 243638.72 MULTIPLE 5+ UNITS (county) ================================================================================ PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================================================================================ San Francisco ....... 06/02/89 02/25/93 75000.00 41236.25 116236.25 Marin ............... 09/17/90 06/18/93 340000.00 47489.63 387489.63 Alameda ............. 05/06/88 04/01/94 50000.00 33567.33 83567.33 Sacramento .......... 03/20/92 12/31/94 356750.00 -318741.07 38008.93 San Francisco ....... 05/29/90 01/11/95 75000.00 -21792.60 53207.40 San Francisco ....... 01/13/93 02/03/95 30000.00 7430.37 37430.37 Alameda ............. 04/28/93 12/01/95 100000.00 18853.45 118853.45 Contra Costa ........ 01/06/94 01/19/96 516279.07 89938.48 606217.55 San Mateo ........... 08/12/92 05/15/96 175000.00 42482.37 217482.37 Alameda ............. 03/17/95 05/31/96 9750.00 1279.92 11029.92 -------- --------- ---------- --------- COMMERICAL (county) ================================================================================ PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================================================================================ Alameda .............. 03/06/90 03/09/93 20000.00 8089.69 28089.69 San Francisco ........ 03/10/93 05/01/93 22800.00 287.60 23087.60 Sonoma ............... 05/09/88 05/25/93 225000.00 154627.26 379627.26 Stanislaus ........... 01/05/89 11/18/93 205000.00 133410.75 338410.75 Stanislaus ........... 12/29/89 11/18/93 75000.00 43121.09 118121.09 Alameda .............. 11/30/90 11/18/93 81249.94 32784.92 114034.86 Alameda .............. 12/29/89 11/18/93 187500.00 29253.00 216753.00 San Francisco ........ 10/07/92 12/10/93 100000.00 16337.77 116337.77 San Mateo ............ 01/17/89 12/16/93 60000.00 38626.36 9862636 San Mateo ............ 02/28/92 01/01/94 750000.00 214212.33 964212.33 Alameda .............. 05/31/91 03/29/94 150000.00 -79044.10 70955.90 Sonoma ............... 07/03/91 06/20/94 117500.00 47549.42 165049.42 Sonoma ............... 07/07/89 11/11/94 110000.00 17084.40 127084.40 -------- --------- --------- ---------
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS VI FOR THE THREE YEARS ENDING JUNE 30, 1996
COMMERICAL (county) (continued) ================= ============ ============= ================ ================= PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============= ================ ================== Stanislaus ........... 09/10/91 12/19/94 299955.53 92990.31 392945.84 Stanislaus ........... 06/30/94 12/19/94 44999.97 2422.20 47422.17 Sonoma ............... 07/06/89 12/31/94 135000.00 93057.01 228057.01 Alameda .............. 01/14/94 03/17/95 225000.00 29899.40 254899.40 Shasta ............... 06/06/90 05/10/95 100000.00 2637.03 102637.03 San Mateo ............ 01/25/91 08/03/95 162500.00 95276.39 257776.39 San Francisco ........ 01/25/91 12/15/95 100000.00 63892.44 163892.44 Alameda .............. 08/03/90 01/30/96 200000.00 141515.95 341515.95 Santa Clara .......... 02/01/96 03/21/96 392829.43 6722.72 399552.15 San Francisco ........ 03/19/93 06/28/96 110000.00 6234.61 116234.61 Santa Clara .......... 09/10/92 06/30/96 100000.00 44430.51 144430.51 Santa Clara .......... 01/22/92 06/30/96 175000.00 86246.63 261246.63 - ----------------- ------------ ------------- ---------------- -----------------
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS V FOR THE THREE YEARS ENDING JUNE 30, 1996
SINGLE FAMILY 1-4 UNITS (county) ================= ============ ============= ================ ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============= ================ ================= San Mateo ............ 10/16/92 01/08/93 90000.00 4084.52 94084.52 ContraCosta .......... 04/03/91 04/01/93 120000.00 22553.37 142553.37 Alameda .............. 04/09/92 05/21/93 81000.00 11899.69 92899.69 San Mateo ............ 11/13/90 08/19/93 75000.00 27431.21 102431.21 Monterey ............. 01/24/92 12/30/93 100000.00 19876.06 119876.06 Alameda .............. 05/29/90 02/02/94 156600.00 80234.17 236834.17 Alameda .............. 09/30/91 08/05/94 138000.00 27330.74 165330.74 San Mateo ............ 12/07/92 08/24/94 50000.00 5978.03 55978.03 Sonoma ............... 12/24/91 11/04/94 168750.00 44608.09 213358.09 San Francisco ........ 11/11/92 12/21/94 54000.00 12943.80 66943.80 Contra Costa ......... 02/14/92 04/27/95 264500.00 -44659.84 219840.16 San Mateo ............ 11/04/92 05/22/95 30000.00 9458.37 39458.37 -------- -------- --------- --------- --------- MULTIPLE 5+ UNITS (county) ================= ============ ============ ================= ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ ================= ================== Sacramento .......... 04/23/87 06/14/93 300000.00 244473.02 544473.02 Santa Clara ......... 01/03/92 10/08/93 159375.00 35199.69 194574.69 Sacramento .......... 03/20/92 12/31/94 178375.00 -159360.07 19014.93 Santa Clara ......... 09/21/88 06/19/95 100000.00 74156.73 174156.73 Alameda ............. 04/28/93 12/01/95 100000.00 19070.91 119070.91 Contra Costa ........ 01/06/94 01/19/96 187116.28 7265.70 194381.98 Alameda ............. 03/17/95 05/31/96 3250.00 438.26 3688.26 -------- -------- --------- ---------- --------- COMMERICAL (county) ================= ============ ============ ================= ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ ================= ================== Contra Costa ......... 10/09/87 04/08/93 130000.00 95053.76 225053.79 Stanislaus ........... 12/29/89 11/18/93 24999.90 14373.61 39373.51 Alameda .............. 12/29/89 11/18/93 62500.00 10779.97 73279.97 Alameda .............. 11/30/90 11/18/93 27083.33 10928.31 38011.64 Nevada ............... 11/05/92 12/09/93 119000.00 10740.82 129740.82 San Francisco ........ 10/07/92 12/10/93 70000.00 11436.44 81436.44 San Mateo ............ 02/28/92 01/01/94 500000.00 132341.61 632341.61
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS V FOR THE THREE YEARS ENDING JUNE 30, 1996
COMMERICAL (county) (continued) ================= ============ ============ ================= ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ ================= ================== San Mateo ............ 07/29/91 02/09/94 105000.00 32152.51 137152.51 Alameda .............. 05/31/91 03/29/94 100000.00 -60648.08 38351.92 Sonoma ............... 07/07/89 11/11/94 100000.00 15500.18 115500.18 Stanislaus ........... 09/10/91 12/19/94 236759.66 42103.49 278863.15 Stanislaus ........... 06/30/94 12/19/94 18749.99 1009.25 19759.24 Alameda .............. 01/14/94 03/17/95 75000.00 9966.47 84966.47 Shasta ............... 06/06/90 05/10/95 70000.00 2831.72 72831.72 San Francisco ........ 03/19/93 06/28/96 90000.00 6288.17 96288.17 Santa Clara .......... 09/10/92 06/30/96 150000.00 67251.67 217251.67 Santa Clara .......... 01/22/92 06/30/96 100000.00 42945.81 142945.81 -------- -------- --------- --------- ---------
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS IV FOR THE THREE YEARS ENDING JUNE 30, 1996
SINGLE FAMILY 1-4 UNITS (county) ================= ============ ============ ================= ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ ================= ================== Santa Clara ......... 08/09/89 03/31/93 80000.00 44091.08 124091.08 San Francisco ....... 12/31/91 09/27/93 408139.54 31892.39 440031.93 Marin ............... 03/25/91 11/10/93 202500.00 15359.93 217859.93 Alameda ............. 11/04/86 11/11/93 60000.00 42940.91 102940.91 San Francisco ....... 09/24/93 01/14/94 272093.02 5648.72 277741.74 Contra Costa ........ 05/29/91 03/09/94 80000.00 -144614.39 -64614.39 San Francisco ....... 05/14/93 03/22/94 20000.00 1812.66 21812.66 San Mateo ........... 12/02/93 06/24/94 326500.00 0.00 326500.00 Stanislaus .......... 08/26/92 06/27/94 87500.00 17713.96 105213.96 Alameda ............. 04/06/90 08/26/94 56000.00 32820.64 88820.64 San Francisco ....... 03/29/91 09/30/94 126000.00 -26456.30 99543.70 Contra Costa ........ 09/23/92 11/30/94 51500.00 13227.17 64727.17 San Mateo ........... 03/03/93 12/08/94 52500.00 9372.86 61872.86 Alameda ............. 03/01/91 12/14/94 35000.00 8275.11 43275.11 Marin ............... 04/29/88 06/02/95 67000.00 55264.42 122264.42 Alameda ............. 03/01/91 12/14/94 35000.00 8275.11 43275.11 Contra Costa ........ 02/14/92 04/27/95 259094.66 -45346.45 213748.21 San Mateo ........... 12/30/94 07/03/95 328583.63 13353.36 341936.99 -------- -------- --------- ---------- --------- MULTIPLE 5+ UNITS (county) ================= ============ ============ ================= ================= PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ ================= ================== Alameda ............ 04/01/86 06/10/94 27193.39 19547.55 46740.94 San Francisco ...... 04/05/89 09/28/94 120000.00 85295.94 205295.94 Contra Costa ....... 10/03/85 11/18/94 46281.93 25250.22 71532.15 Mendocino .......... 06/29/90 12/23/94 353097.43 119341.00 472438.43 San Francisco ...... 05/29/90 01/11/95 50000.00 -13804.88 36195.12 Santa Clara ........ 09/21/88 06/19/95 100000.00 74222.65 174222.65 Sacramento ......... 12/16/87 07/03/95 102000.00 -203272.80 -101272.80 San Francisco ...... 03/06/91 11/29/95 60000.00 39835.76 99835.76 Alameda ............ 04/28/93 12/01/95 100000.00 18472.90 118472.90 Contra Costa ....... 01/06/94 01/19/96 418604.65 69271.80 487876.45 Alameda ............ 03/17/95 05/30/96 6500.00 832.37 7332.37 -------- -------- --------- ---------- ----------
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS IV FOR THE THREE YEARS ENDING JUNE 30, 1996
COMMERICAL (county) ================= ============ ============ ================= ================= PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ ================= ================== Alameda .............. 03/06/90 03/09/93 150000.00 60680.00 210680.00 Contra Costa ......... 10/09/87 04/08/93 130000.00 95053.82 225053.82 Sonoma ............... 05/09/88 05/25/93 225000.00 154627.25 379627.25 San Mateo ............ 06/13/90 08/01/93 100000.01 30969.63 130969.64 Alameda .............. 09/10/91 09/30/93 81000.00 22903.01 103903.01 Stanislaus ........... 01/05/89 11/18/93 205000.00 133410.76 338410.76 Stanislaus ........... 12/29/89 11/18/93 75000.00 43121.09 118121.09 Alameda .............. 12/29/89 11/18/93 187500.00 32339.98 219839.98 Alameda .............. 11/30/90 11/18/93 81250.00 32784.93 114034.93 San Mateo ............ 02/28/92 01/01/94 650000.00 185650.68 835650.68 Santa Barbara ........ 05/10/94 06/30/94 150000.00 1857.19 151857.19 Stanislaus ........... 09/10/91 12/19/94 499925.87 154983.84 654909.71 Stanislaus ........... 06/30/94 12/19/94 74999.94 4037.00 79036.94 Alameda .............. 01/14/94 03/17/95 250000.00 23414.86 273414.86 Fresno ............... 05/31/85 07/11/95 160000.00 196652.27 356652.27 San Mateo ............ 01/25/91 08/03/95 162500.00 62530.67 225030.67 -------- -------- --------- --------- ---------
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS III FOR THE THREE YEARS ENDING JUNE 30, 1996
SINGLE FAMILY 1-4 UNITS (county) ================= ============ ============ ================= ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ ================= ================== San Mateo ........ 10/16/92 01/08/93 76000.00 2514.48 78541.48 Santa Clara ...... 08/19/92 02/12/93 68000.00 4066.90 72066.90 Santa Clara ...... 08/09/89 03/31/93 80000.00 35052.17 115052.17 San Mateo ........ 03/30/89 09/15/93 21000.00 13430.26 34430.26 San Mateo ........ 03/06/87 03/22/94 53000.00 36681.38 89681.38 San Mateo ........ 03/03/93 12/08/94 52500.00 9372.86 61872.86 Santa Clara ...... 03/31/93 03/13/95 110000.00 3733.39 113733.39 Napa ............. 08/31/90 08/31/95 73281.93 44487.64 117769.57 -------- -------- --------- -------- --------- MULTIPLE 5+ UNITS (county) - ----------------- ------------ ------------ ----------------- ------------------ PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE - ----------------- ------------ ------------ ----------------- ------------------ Alameda ....... 05/11/84 06/10/94 33000.00 10860.90 43860.90 -------- -------- -------- -------- -------- COMMERICAL (county) ================= ============ ============= ================ ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============= ================ ================== Alameda .......... 08/15/91 02/24/93 42500.00 6734.79 49234.79 Alameda .......... 12/20/89 10/14/93 55400.00 24598.94 79998.94 Stanislaus ....... 12/29/89 11/18/93 37500.00 21560.54 59060.54 Alameda .......... 12/29/89 11/18/93 75000.00 12833.09 87833.09 Alameda .......... 11/30/90 11/18/93 40625.00 16392.52 57017.52 Stanislaus ....... 09/10/91 12/19/94 142055.79 25262.10 167319.89 Stanislaus ....... 06/30/94 12/19/94 11249.99 605.55 11855.54 San Mateo ........ 09/30/92 08/03/95 81250.00 31562.66 112812.66 Santa Clara ...... 12/22/92 09/29/95 40000.00 13206.65 53206.65 Alameda .......... 09/30/95 01/30/96 138015.68 6304.19 144319.87 Santa Clara ...... 09/10/92 06/30/96 75000.00 33322.88 108322.88 -------- -------- --------- -------- ---------
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS II FOR THE THREE YEARS ENDING JUNE 30, 1996
SINGLE FAMILY 1-4 UNITS (county) ================= ============ ============ ================= ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ ================= ================== San Francisco ......... 12/31/91 09/27/93 470930.23 36798.91 507729.14 San Francisco ......... 09/24/93 01/14/94 313953.49 6517.76 320471.25 San Mateo ............. 02/24/94 06/01/94 100000.00 2707.18 102707.18 San Mateo ............. 11/04/94 10/24/95 119000.00 13294.21 132294.21 -------- -------- --------- -------- --------- MULTIPLE 5+ UNITS (county) ================= ============ ============ ================= ================= PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ ================= ================== Sacramento ......... 03/20/92 12/31/94 89187.50 -80131.24 9056.26 -------- -------- -------- --------- ------- COMMERICAL (county) ================= ============ ============ ================ =================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ ================ ================== Stanislaus ......... 12/29/89 11/18/93 25000.18 11909.30 36909.48 Alameda ............ 12/29/89 11/18/93 50000.00 8623.99 58623.99 Alameda ............ 11/30/90 11/18/93 27083.34 10928.31 38011.65 -------- -------- -------- -------- --------
TABLE V PAYMENT OF MORTGAGE LOANS REDWOOD MORTGAGE INVESTORS FOR THE THREE YEARS ENDING JUNE 30, 1996
SINGLE FAMILY 1-4 UNITS (county) ================= ============ ============ =============== =================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ =============== =================== Contra Costa .......... 06/14/88 08/29/93 30000.00 21531.72 51531.72 San Francisco ......... 12/31/91 09/27/93 470930.23 36798.91 507729.14 San Francisco ......... 09/24/93 01/14/94 313953.49 6517.76 320471.25 Alameda ............... 09/23/92 05/27/94 22000.00 3985.55 25985.55 San Mateo ............. 02/24/94 06/01/94 100000.00 2707.18 102707.18 Solano ................ 02/22/91 07/07/94 30800.00 14120.56 44920.56 San Mateo ............. 03/08/91 11/11/94 20000.00 -9009.44 10990.56 Napa .................. 12/22/88 08/31/95 50000.00 40203.57 90203.57 -------- -------- --------- -------- --------- MULTIPLE 5+ UNITS (county) ================= ============= ============ ================ ================= PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============= ============ ================ ================= Mendocino ......... 06/29/90 12/23/94 39233.05 13260.11 52493.16 Sacramento ........ 03/20/92 12/31/94 89187.50 -80146.80 9040.70 Alameda ........... 03/17/95 05/31/96 2166.67 277.46 2444.13 -------- -------- -------- --------- -------- COMMERICAL (county) ================= =========== ============ ================== =================- PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= =========== ============ ================== ================== Stanislaus ....... 12/29/89 11/18/93 37500.00 21560.54 59060.54 Alameda .......... 11/30/90 11/18/93 40625.09 16392.52 57017.61 Alameda .......... 05/31/91 03/29/94 50000.00 -30324.05 19675.95 Alameda .......... 01/14/94 03/17/95 50000.00 6481.93 56481.93 Fresno ........... 05/31/85 07/11/95 75000.00 92143.53 167143.53 Santa Clara ...... 12/22/92 09/29/95 30000.00 9905.00 39905.00 -------- -------- -------- --------- ---------
TABLE V PAYMENT OF MORTGAGE LOANS CORPORATE MORTGAGE INVESTORS I & II FOR THE THREE YEARS ENDING JUNE 30, 1996
SINGLE FAMILY 1-4 UNITS (county) ================= ============ ============ ================= ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ ================= ================= San Francisco ........ 06/18/92 01/22/93 55000.00 6208.83 61208.83 Alameda .............. 01/01/92 03/15/93 2834.03 303.56 3137.59 Solano ............... 01/01/92 03/31/93 27685.22 3477.50 31162.72 Contra Costa ......... 03/02/93 04/01/93 62500.00 741.40 63241.40 Alameda .............. 01/01/92 04/21/93 35125.84 6653.32 41779.16 San Mateo ............ 02/18/93 06/14/93 45500.00 1752.44 47252.44 Alameda .............. 06/13/90 03/04/94 65000.00 33159.13 98159.13 Alameda .............. 06/21/88 03/21/94 23000.00 17133.40 40133.40 San Francisco ........ 02/28/84 04/28/94 23000.00 21022.24 44022.24 San Mateo ............ 09/01/86 05/24/94 254000.00 106221.19 360221.19 Alameda .............. 10/19/92 07/20/94 25000.00 5038.21 30038.21 Contra Costa ......... 05/01/93 10/14/94 75000.00 12103.77 87103.77 San Francisco ........ 03/05/85 04/12/95 172624.22 127435.71 300059.93 San Francisco ........ 05/23/90 07/28/95 50000.00 7856.50 57856.58 San Mateo ............ 01/10/92 08/29/95 130000.00 57349.62 187349.62 Mariposa ............. 01/27/95 09/18/95 77000.00 4351.26 81351.26 Santa Clara .......... 03/31/90 12/04/95 80262.02 56152.77 136414.79 Alameda .............. 01/31/95 01/25/96 80000.00 8745.08 88745.08 San Mateo ............ 01/31/96 04/29/96 175000.00 4790.52 179790.52 -------- -------- --------- --------- --------- MULTIPLE 5+ UNITS(county) ================= ============ ============ ================= ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============ ================= ================== San Francisco ....... 05/23/90 05/15/94 140000.00 -121491.06 18508.94 Alameda ............. 12/06/84 05/20/94 106000.00 34326.10 140326.10 Contra Costa ........ 01/06/94 01/19/96 239534.88 25835.30 265370.18 Sacramento .......... 12/15/87 05/30/96 102000.00 -24018.43 77981.57 Alameda ............. 03/17/95 05/31/96 2166.67 277.46 2444.13 -------- -------- --------- ---------- ---------
TABLE V PAYMENT OF MORTGAGE LOANS CORPORATE MORTGAGE INVESTORS I & II FOR THE THREE YEARS ENDING JUNE 30, 1996
COMMERICAL (county) ================= ============ ============= ================ ================== PROPERTY FUNDED CLOSED ON LOAN AMOUNT INTEREST/ PROCEEDS LATE/MISC TO DATE ================= ============ ============= ================ ================== Unsecured ............ 01/01/92 07/08/93 29325.88 2420.93 31746.81 Sacramento ........... 07/20/90 08/26/93 125000.00 54148.23 179148.23 Alameda .............. 12/29/89 11/18/93 300000.00 144407.41 444407.41 Marin ................ 09/15/92 10/27/94 30000.00 8321.27 38321.29 San Mateo ............ 12/30/93 01/01/94 100000.00 0.00 100000.00 San Mateo ............ 04/12/90 02/20/95 100000.00 45757.46 145757.46 Alameda .............. 01/14/94 03/17/95 50000.00 6481.93 56481.93 San Francisco ........ 03/19/93 06/28/96 35000.00 9588.97 44588.97 -------- -------- --------- --------- ---------
AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF REDWOOD MORTGAGE INVESTORS VIII A California Limited Partnership THIS LIMITED PARTNERSHIP AGREEMENT was made and entered into as of the ____ day of _______________, 1996, by and among D. RUSSELL BURWELL, an individual, MICHAEL R. BURWELL, an individual, and GYMNO CORPORATION, a California corporation (collectively, the "General Partners"), and such other persons who have become Limited Partners ("Existing Limited Partners") and as may be added pursuant to the terms hereof (the "New Limited Partners") (collectively the "Limited Partners"). RECITALS A. On or about _______________, 1993, the General Partners and the Limited Partners entered into an agreement of limited partnership for the Partnership. B. In order to increase the Partnership's capital base and permit the Partnership to further diversify its portfolio, in September, 1996, the General Partners elected to offer an additional 300,000 Units. C. In connection with the additional offering of Units and in order to correct some ambiguities and supplement some provisions of the Partnership Agreement the General Partners have elected to amend and restate the agreement of limited partnership (the "Partnership Agreement"). ARTICLE 1 DEFINITIONS Unless stated otherwise, the terms set forth in this Article I shall, for all purposes of this Agreement, have the meanings as defined herein: 1.1 "Affiliate" means (a) any person directly or indirectly controlling, controlled by or under common control with another person, (b) any person owning or controlling ten percent (10%) or more of the outstanding voting securities of such other person, (c) any officer, director or partner of such person, or (d) if such other person is an officer, director or partner, any company for which such person acts in any such capacity. 1.2 "Agreement" means this Limited Partnership Agreement, as amended from time to time. 1.3 "Capital Account" means, with respect to any Partner, the Capital Account maintained for such Partner in accordance with the following provisions: (a) To each Partner's Capital Account there shall be credited, in the event such Partner utilized the services of a Participating Broker Dealer, such Partner's Capital Contribution, or if such Partner acquired his Units through an unsolicited sale, such Partner's Capital Contribution plus the amount of the sales commissions otherwise payable assuming no Continuing Servicing Fee is paid, such Partner's distributive share of Profits, and any items in the nature of income or gain (from unexpected adjustments, allocations or distributions) that are specially allocated to a Partner and the amount of any Partnership liabilities that are assumed by such Partner or that are secured by any Partnership property distributed to such Partner. (b) To each Partner's Capital Account there shall be debited the amount of cash and the Gross Asset Value of any Partnership property distributed to such Partner pursuant to any provision of this Agreement, such Partner's distributive share of Losses, and any items in the nature of expenses or losses that are specially allocated to a Partner and the amount of any liabilities of such Partner that are assumed by the Partnership or that are secured by any property contributed by such Partner to the Partnership. In the event any interest in the Partnership is transferred in accordance with Section 7.2 of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. In the event the Gross Asset Values of the Partnership assets are adjusted pursuant to Section 1.9, the Capital Accounts of all Partners shall be adjusted simultaneously to reflect the aggregate net adjustment as if the Partnership recognized gain or loss equal to the amount of such aggregate net adjustment. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulation. In the event the General Partners shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with the then existing Treasury Regulation, the General Partners may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Article IX hereof upon the dissolution of the Partnership. The General Partners shall adjust the amounts debited or credited to Capital Accounts with respect to (a) any property contributed to the Partnership or distributed to the General Partners, and (b) any liabilities that are secured by such contributed or distributed property or that are assumed by the Partnership or the General Partners, in the event the General Partners shall determine such adjustments are necessary or appropriate pursuant to Treasury Regulation Section 1.704-l(b)(2)(iv) as provided for in Section 5.4. The General Partners shall make any appropriate modification in the event unanticipated events might otherwise cause this Agreement not to comply with Treasury Regulation Section 1.704-l(b) as provided for in Sections 5.6 and 12.4(k). 1.4 "Cash Available for Distribution" means an amount of cash equal to the excess of accrued income from operations and investment of, or the sale or refinancing or other disposition of, Partnership assets during any calendar month over the accrued operating expenses of the Partnership during such month, including any adjustments for bad debt reserves or deductions as the General Partners may deem appropriate, all determined in accordance with generally accepted accounting principles; provided, that such operating expenses shall not include any general overhead expenses of the General Partners not specifically related to, billed to or reimbursable by the Partnership as specified in Sections 10.13 through 10.15. 1.5 "Code" means the Internal Revenue Code of 1986 and corresponding provisions of subsequent revenue laws. 1.6 "Continuing Servicing Fee" means an amount equal to approximately 0.25 percent of the Limited Partner's capital account which amount shall be paid to certain Participating Broker Dealers as compensation in connection with the offer and sale of units. 1.7 "Deed of Trust" means the lien or liens created on the real property or properties of the borrower securing the borrower's obligation to the Partnership to repay the Mortgage Investment. 1.8 "Earnings" means all revenues earned by the Partnership less all expenses incurred by the Partnership. 1.9 "Fiscal Year" means a year ending December 31st. 1.10 "First Formation Loan" means a loan to Redwood Mortgage, an affiliate of the General Partners, in connection with the initial offering of 150,000 Units pursuant to the Prospectus dated May 19, 1993 equal to the amount of the sales commissions (excluding any Continuing Servicing Fees) and all amounts payable in connection with any unsolicited sales. Redwood Mortgage will pay all sales commissions (excluding any Continuing Servicing Fees) and all amounts payable in connection with any unsolicited sales from the First Formation Loan. The First Formation Loan will be unsecured, and will be repaid in ten (10) equal annual installments of principal, without interest commencing on December 31 of the year in which the initial offering terminates. 1.11 "Formation Loans" means collectively the First and Second Formation Loan. 1.12 "General Partners" means D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation, or any Person substituted in place thereof pursuant to this Agreement. "General Partner" means any one of the General Partners. 1.13 "Gross Asset Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (a) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the contributed Partner and the Partnership; (b) The Gross Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the General Partners, as of the following times: (a) the acquisition of an additional interest in the Partnership (other than pursuant to Section 4.2) by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership property other than money, unless all Partners receive simultaneous distributions of undivided interests in the distributed property in proportion to their Interests in the Partnership; and (c) the termination of the Partnership for federal income tax purposes pursuant to Section 708(b)(1)(B) of the Code; and (c) If the Gross Asset Value of an asset has been determined or adjusted pursuant to clause (a) or (b) above, such Gross Asset Value shall thereafter be adjusted by the depreciation, amortization or other cost recovery deduction allowable which is taken into account with respect to such asset for purposes of computing Profits and Losses. 1.14 "Guaranteed Payment for Offering Period" means the payment guaranteed to Limited Partners by the General Partners during the Guaranteed Payment Period. The Guaranteed Payment for Offering Period calculated on a monthly basis, shall be equal to the greater of (i) the Partnership's Earnings or (ii) the interest rate established by the Monthly Weighted Average Cost of Funds for the 11th District Savings Institutions, as announced by the Federal Home Loan Bank of San Francisco during the last week of the preceding month, plus two points, up to a maximum interest rate of 12%. The Weighted Average Cost of Funds is derived from interest paid on savings accounts, Federal Home Loan Bank advances, and other borrowed money adjusted from valuation in the number of days in each month. The adjustment factors are 1.086 for February, 1.024 for 30 day months and 0.981 for 31 day months. As of the date of the Prospectus, the Monthly Weighted Average Funds for the 11th District as announced August 30, 1996 for the period ended July 30, 1996 and in effect until September 30, 1996 is 4.819%. The Guaranteed Payment Period is the period commencing on the day a Limited Partner is admitted to the Partnership and ending three months after the Offering Termination Date. To the extent the return to be paid is in excess of the Partnership's Earnings, the Guaranteed Payment for Offering Period shall be payable by the General Partners out of a Capital Contribution to the Partnership and/or fees payable to the General Partners or Redwood Mortgage which are lowered or waived. 1.15 "Limited Partners" means the Initial Limited Partner until it shall withdraw as such, and the purchasers of Units in Redwood Mortgage Investors VIII, who are admitted thereto and whose names are included on the Certificate and Agreement of Limited Partnership of Redwood Mortgage Investors VIII. Reference to a "Limited Partner" shall be to anyone of them. 1.16 "Limited Partnership Interest" means the percentage ownership interest of any Limited Partner in the Partnership determined at any time by dividing a Limited Partner's current Capital Account by the total outstanding Capital Accounts of all Limited Partners. 1.17 "Majority of the Limited Partners" means Limited Partners holding a majority of the total outstanding Limited Partnership Interests as of the first day of the current calendar month. 1.18 "Mortgage Investment(s)" means the loan(s) and/or an undivided interest in the loans the Partnership intends to extend to the general public secured by real property deeds of trust. 1.19 "Net Asset Value" means the Partnership's total assets less its total liabilities. 1.20 "Partners" means the General Partners and the Limited Partners, collectively. "Partner" means any one of the Partners. 1.21 "Partnership" means Redwood Mortgage Investors VIII, a California limited partnership, the limited partnership created pursuant to this Agreement. 1.22 "Partnership Interest" means the percentage ownership interest of each Partner in the partnership as defined in Section 5.1 below. 1.23 "Person" means any natural person, partnership, corporation, unincorporated association or other legal entity. 1.24 "Profits" and "Losses" mean, for each Fiscal Year or any other period, an amount equal to the Partnership's taxable income or loss for such Fiscal Year or other given period, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (a) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.21 shall be added to such taxable income or loss; (b) Any expenditures of the Partnership described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) of the Code expenditures pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.21, shall be subtracted from such taxable income or loss. (c) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (d) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account depreciation, amortization or other cost recovery deductions for such Fiscal Year or other period, computed such that if the Gross of an Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of a Fiscal Year or other period, depreciation, amortization or other cost recovery deductions shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deductions for such Fiscal Year or other period bears to such beginning adjusted tax basis; and (e) Notwithstanding any other provision of this Section 1.21, any items in the nature of income; or gain or expenses or losses, which are specially allocated, shall not be taken into account in computing Profits or Losses. 1.25 "Sales Commissions" means the amount of compensation, which may be paid under one of two options, to be paid to Participating Broker Dealers in connection with the sale of Units. 1.26 "Second Formation Loan" means the loan to Redwood Mortgage, an affiliate of the General Partners, in connection with the second offering of 300,000 Units pursuant to the Prospectus dated __________, 1996 equal to the amount of the sales commissions (not including any Continuing Servicing Fees) and the amounts payable in connection with unsolicited sales. Redwood Mortgage will pay all sales commissions (not including any Continuing Servicing Fees) and amounts due in connection with unsolicited sales from the Second Formation Loan. The Second Formation Loan will be unsecured, will not bear interest and will be repaid in annual installments. 1.27 "Units" mean the shares of ownership of the Partnership issued to Limited Partners upon their admission to the Partnership, pursuant to the Partnership's Prospectuses dated February 2, 1993 and ____________, 1996 and any supplements or amendments thereto (the "Prospectus"). ARTICLE 2 ORGANIZATION OF THE LIMITED PARTNERSHIP 2.1 Formation. The parties hereto hereby agree to form a limited partnership, pursuant to the provision of Chapter 3, Title 2, of the California Corporations Code, as in effect on the date hereof, commonly known as the California Revised Limited Partnership Act (the "California Act"). 2.2 Name. The name of the Partnership is REDWOOD MORTGAGE INVESTORS VIII, a California limited partnership. 2.3 Place of Business. The principal place of business of the Partnership shall be located at 650 El Camino Real, Suite G, Redwood City, California 94063, until changed by designation of the General Partners, with notice to all Limited Partners. 2.4 Purpose. The primary purpose of this Partnership is to engage in business as a mortgage lender for the primary purpose of making Mortgage Investments secured by deeds of trust (the "Mortgage Investments") on California real estate. 2.5 Substitution of Limited Partner. A Limited Partner may assign all or a portion of his Partnership Interest and substitute another person in his place as a Limited Partner only in compliance with the terms and conditions of Section 7.2 below. 2.6 Certificate of Limited Partnership. The General Partners shall duly execute and file with the Office of the Secretary of State of the State of California a Certificate of Limited Partnership pursuant to the provisions of Section 15621 of the California Corporations Code. Thereafter, the General Partners shall execute and cause to be filed Certificates of Amendment of the Certificate of Limited Partnership whenever required by the California Act or this Agreement. At the discretion of the General Partners, a certified copy of the Certificate of Limited Partnership may also be filed in the Office of the Recorder of any country in which the Partnership shall have a place of business or in which real property to which it holds title shall be situated. 2.7 Term. The Partnership shall be formed and its term shall commence as of the date on which this Limited Partnership Agreement is executed and the Certificate of Limited Partnership referred to in Section 2.6 is filed with the Office of the Secretary of State, and shall continue until December 31, 2032, unless earlier terminated pursuant to the provisions of this Agreement or by operation of law. 2.8 Power of Attorney. Each of the Limited Partners irrevocably constitutes and appoints the General Partners, and each of them, any one of them acting alone, as his true and lawful attorney-in-fact, with full power and authority for him, and in his name, place and stead, to execute, acknowledge, publish and file: (a) This Agreement, the Certificate of Limited Partnership and any amendments or conciliation thereof required under the laws of the State of California; (b) Any certificates, instruments and documents, including, without limitation, Fictitious Business Name Statements, as may be required by, or may be appropriate under, the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business; and (c) Any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Partner, or the dissolution and termination of the Partnership. Each Limited Partner hereby agrees to execute and deliver to the General Partners within five (5) days after receipt of the General Partners' written request therefore, such other and further statements of interest and holdings, designations, and further statements of interest and holdings, designations, powers of attorney and other instruments that the General Partners deem necessary to comply with any laws, rules or regulations relating to the Partnership's activities. 2.9 Nature of Power of Attorney. The foregoing grant of authority is a special power of attorney coupled with an interest, is irrevocable, and survives the death of the undersigned or the delivery of an assignment by the undersigned of a Limited Partnership Interest; provided, that where the assignee thereof has been approved by the General Partners for admission to the Partnership as a substituted Limited Partner, the Power of Attorney survives the delivery of such assignment for the sole purpose of enabling the General Partners to execute, acknowledge and file any instrument necessary to effect such substitution. ARTICLE 3 THE GENERAL PARTNERS 3.1 Authority of the General Partners. The General Partners shall have all of the rights and powers of a partner in a general partnership, except as otherwise provided herein. 3.2 General Management Authority of the General Partners. Except as expressly provided herein, the General Partners shall have sole and complete charge of the affairs of the Partnership and shall operate its business for the benefit of all Partners. Each of the General Partners, acting alone or together, shall have the authority to act on behalf of the Partnership as to any matter for which the action or consent of the General Partners is required or permitted. Without limitation upon the generality of the foregoing, the General Partners shall have the specific authority: (a) To expend Partnership funds in furtherance of the business of the Partnership and to acquire and deal with assets upon such terms as they deem advisable, from affiliates and other persons; (b) To determine the terms of the offering of Units, including the right to increase the size of the offering or offer additional securities, the amount for discounts allowable or commissions to be paid and the manner of complying with applicable law; (c) To employ, at the expense of the Partnership, such agents, employees, independent contractors, attorneys and accountants as they deem reasonable and necessary; (d) To effect necessary insurance for the proper protection of the Partnership, the General Partners or Limited Partners; (e) To pay, collect, compromise, arbitrate, or otherwise adjust any and all claims or demands against the Partnership; (f) To bind the Partnership in all transactions involving the Partnership's property or business affairs, including the execution of all loan documents and the sale of notes and to change the Partnership's investment objectives, notwithstanding any other provision of this Agreement; provided, however, the General Partners may not, without the consent of a Majority of the Limited Partners, sell or exchange all or substantially all of the Partnership's assets, as those terms are defined in Section 9.1 below; (g) To amend this Agreement with respect to the matters described in Subsections 12.4(a) through (k) below; (h) To determine the accounting method or methods to be used by the Partnership, which methods may be changed at any time by written notice to all Limited Partners; (i) To open accounts in the name of the Partnership in one or more banks, savings and loan associations or other financial institutions, and to deposit Partnership funds therein, subject to withdrawal upon the signature of the General Partners or any person authorized by him; (j) To borrow funds for the purpose of making Mortgage Investments, provided that the amount of borrowed funds does not exceed fifty percent (50%) of the Partnership's Mortgage Investment portfolio and in connection with such borrowings, to pledge or hypothecate all or a portion of the assets of the Partnership as security for such loans; and (k) To invest the reserve funds of the Partnership in cash, bank accounts, certificates of deposits, money market accounts, short-term bankers acceptances, publicly traded bond funds or any other liquid assets. 3.3 Limitations. Without a written consent of or ratification by all Limited Partners, the General Partners shall have no authority to do any act prohibited by law; or to admit a person as a Limited Partner other than in accordance with the terms of this Agreement. 3.4 No Personal Liability. The General Partners shall have no personal liability for the original invested capital or any Limited Partner or to repay the Partnership any portion or all of any negative balance in their capital accounts, except as otherwise provided in Article 4. 3.5 Compensation to General Partners. The General Partners shall be entitled to be compensated and reimbursed for expenses incurred in performing its management functions in accordance with the provisions of Article 10 thereof, and may receive compensation from parties other than the Partnership. 3.6 Fiduciary Duty. The General Partners shall have the fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership, and they shall not employ such funds or assets in any manner except for the exclusive benefit of the Partnership. 3.7 Allocation of Time to Partnership Business. The General Partner shall not be required to devote full time to the affairs of the Partnership, but shall devote whatever time, effort and skill they deem to be reasonably necessary for the conduct of the Partnership's business. The General Partners may engage in any other businesses or activities, including businesses related to or competitive with the Partnership. 3.8 Assignment by a General Partner. A General Partner's interest in income, losses and distributions of the Partnership shall be assignable at the discretion of a General Partner, which, if made, may be converted, at a General Partner's option, into a limited partnership interest to the extent of the assignment. 3.9 Partnership Interest of General Partners. The General Partners shall be allocated a total of one percent (1%) of all items of Partnership income, gains, losses, deductions and credits as described in Section 5.1 below, which shall be shared equally among them. 3.10 Removal of General Partners. A General Partner may be removed upon the following conditions: (a) By written consent of a majority of the Limited Partners. Limited Partners may exercise such right by presenting to the General Partner a notice, with their acknowledge signatures thereon, to the effect that the General Partner is removed; the notice shall set forth the grounds for removal and the date on which removal is become effective; (b) Concurrently with such notice or within thirty (30) days thereafter by notice similarly given, a majority of the Limited Partners may also designate a successor as General Partner; (c) Substitution of a new General Partner, if any, shall be effective upon written acceptance of the duties and responsibilities of a general partner by the new General Partner. Upon effective substitution of a new General Partner, this Agreement shall remain in full force and effect, except for the change in the General Partner, and business of the Partnership shall be continued by the new General Partner. The new General Partner shall thereupon execute, file and record an amendment to the Certificate of Limited Partnership in the manner required by law. (d) Failure of the Limited Partners giving notice of removal to designate a new General Partner within the time specified herein or failure of the new General Partner so designated to execute written acceptance of the duties and responsibilities of a General Partner hereunder within ten (10) days after such designation shall dissolve and terminate the Partnership, unless the business of the Partnership is continued by the remaining General Partners, if any. In the event that all of the General Partners are removed, no other General Partners are elected, the Partnership is liquidated and Redwood Mortgage is no longer receiving payments for services rendered, the debt on the Formation Loan shall be forgiven by the Partnership and Redwood Mortgage will be immediately released from any further obligation under the Formation Loan. 3.11 Commingling of Funds. The funds of the Partnership shall not be commingled with funds of any other person or entity. 3.12 Right to Rely on General Partners. Any person dealing with the Partnership may rely (without duty of further inquiry) upon a certificate signed by the General Partners as to: (a) The identity of any General Partner or Limited Partner; (b) The existence or nonexistence of any fact or facts which constitute a condition precedent to acts by a General Partner or which are in any further manner germane to the affairs of the Partnership; (c) The persons who are authorized to execute and deliver any instrument or document of the Partnership; or (d) Any act or failure to act by the Partnership or any other matter whatsoever involving the Partnership or any Partner. 3.13 Sole and Absolute Discretion. Except as otherwise provided in this Agreement, all actions which any General Partner may take and all determinations which any General Partner may take and all determinations which any General Partners may make pursuant to this Agreement may be taken and made at the sole and absolute discretion of such General Partner. 3.14 Merger or Reorganization of the General Partners. The following is not prohibited and will not cause a dissolution of the Partnership: (a) a merger or reorganization of the General Partners or the transfer of the ownership interest of the General Partners; and (b) the assumption of the rights and duties of the General Partners by the transferee of the rights and duties of the General Partners by the transferee entity so long as such transferee is an affiliate under the control of the General Partners. 3.15 Dissenting Limited Partners' Rights. If the Partnership participates in any acquisition of the Partnership by another entity, any combination of the Partnership with another entity through a merger or consolidation, or any conversion of the Partnership into another form of business entity through (such as a corporation) that requires the approval of the outstanding limited partnership interest, the result of which would cause the other entity to issue securities to the Limited Partners, then each Limited Partner who does not approve of such reorganization (the "Dissenting Limited Partner") may require the Partnership to purchase for cash, at its fair market value, the interest of the Dissenting Limited Partner in the Partnership in accordance with Section 15679.2 of the California Corporations Code. The Partnership, however, may itself convert to another form of business entity (such as a corporation, trust or association) if the conversion will not result in a significant adverse change in (i) the voting rights of the Limited Partners, (ii) the termination date of the Partnership (currently, December 31, 2032, unless terminated earlier in accordance with the Partnership Agreement), (iii) the compensation payable to the General Partners or their Affiliates, or (iv) the Partnership's investment objectives. The General Partners will make the determination as to whether or not any such conversion will result in a significant adverse change in any of the provisions listed in the preceding paragraph based on various factors relevant at the time of the proposed conversion, including an analysis of the historic and projected operations of the Partnership; the tax consequences (from the standpoint of the Limited Partners) of the conversion of the Partnership to another form of business entity and of an investment in a limited partnership as compared to an investment in the type of business entity into which the Partnership would be converted; the historic and projected operating results of the Partnership's Mortgage Investments, and the then-current value and marketability of the Partnership's Mortgage Investments. In general, the General Partners would consider any material limitation on the voting rights of the Limited Partners or any substantial increase in the compensation payable to the General Partners or their Affiliates to be a significant adverse change in the listed provisions. 3.16 Exculpation and Indemnification. The General Partners shall have no liability whatsoever to the Partnership or to any Limited Partner, so long as a General Partner determined in good faith, that the course of conduct which caused the loss or liability was in the best interests of the Partnership, and such loss or liability did not result from the gross negligence or gross misconduct of the General Partner being held harmless. The General Partners or any Partnership employee or agent shall be entitled to be indemnified by the Partnership, at the expense of the Partnership, against any loss or liability (including attorneys' fees, which shall be paid as incurred) resulting from assertion of any claim or legal proceeding relating to the activities of the Partnership, including claims, or legal proceedings brought by a third party or by Limited Partners, on their own behalf or as a Partnership derivative suit, so long as the party to be indemnified determined in good faith that the course of conduct which gave rise to such claim or proceeding was in the best interests of the Partnership and such course of conduct did not constitute gross negligence or gross misconduct; provided, however, any such indemnification shall only be recoverable out of the assets of the Partnership and not from Limited Partners. Nothing herein shall prohibit the Partnership from paying in whole or in part the premiums or other charge for any type of indemnity insurance by which the General Partners or other agents or employees of the Partnership are indemnified or insured against liability or loss arising out of their actual or asserted misfeasance or nonfeasance in the performance of their duties or out of any actual or asserted wrongful act against the Partnership including, but not limited to judgments, fines, settlements and expenses incurred in the defense of actions, proceedings and appeals therefrom. Notwithstanding the foregoing, neither the General Partners nor their affiliates shall be indemnified for any liability imposed by judgment (including costs and attorneys' fees) arising from or out of a violation of state or federal securities laws associated with the offer and sale of Units offered hereby. However, indemnification will be allowed for settlements and related expenses of lawsuits alleging securities law violations and for expenses incurred in successfully defending such lawsuits provided that (a) a court either approves indemnification of litigation costs if the General Partners are successful in defending the action; or (b) the settlement and indemnification is specifically approved by the court of law which shall have been advised as to the current position of the Securities and Exchange Commission (as to any claim involving allegations that the Securities Act of 1933 was violated) and California Commissioner of Corporations or the applicable state authority (as to any claim involving allegations that the applicable state's securities laws were violated). ARTICLE 4 CAPITAL CONTRIBUTIONS; THE LIMITED PARTNERS 4.1 Capital Contribution by General Partners. The General Partners, collectively, shall contribute to the Partnership an amount in cash equal to 1/10 of 1% of the aggregate capital contributions of the Limited Partners. 4.2 Other Contributions. (a) Capital Contribution by Initial Limited Partner. Upon the execution of this Agreement, the Initial Limited Partner made a cash capital contribution to the Partnership of $1,000. Upon the admission of additional Limited Partners to the Partnership pursuant to Section 4.2(b) of this Agreement, the Partnership promptly refunded to the Initial Limited Partner its $1,000 capital contribution and upon receipt of such sum the Initial Limited Partner was withdrawn from the Partnership as its Initial Limited Partner. (b) Capital Contributions of Existing Limited Partners. The Existing Limited Partners have contributed in the aggregate to the capital of the Partnership an amount equal to $12,350,741 as of June 30, 1996. (c) Capital Contributions of New Limited Partners. The New Limited Partners shall contribute to the capital of the Partnership an amount equal to one hundred dollars ($100) for each Unit subscribed for by each such New Limited Partners, with a minimum subscription of twenty (20) Units per Limited Partner (including subscriptions from entities of which such limited partner is the sole beneficial owner). The total additional capital contributions of the New Limited Partners will not exceed $30,000,000. (d) Escrow Account. No escrow account will be established and all proceeds from the sale of Units will be remitted directly to the Partnership. Subscription Agreements shall be accepted or rejected within 30 days of their receipt. All subscription monies deposited by persons whose subscriptions are rejected shall be returned to such subscribers forthwith after such rejection without interest. The public offering of Units shall terminate one year from the effective date of the Prospectus unless fully subscribed at an earlier date or terminated on an earlier date by the General Partners, or unless extended by the General Partners for two additional one year periods. (e) Subscription Account. Subscriptions received after the activation of the Partnership will be deposited into a subscription account at a federally insured commercial bank or other depository and invested in short-term certificates of deposit, a money market or other liquid asset account. Prospective investors whose subscriptions are accepted will be admitted into the Partnership only when their subscription funds are required by the Partnership to fund a Mortgage Investment, or the Formation Loan, to create appropriate reserves or to pay organizational expenses or other proper Partnership purposes. During the period prior to admittance of investors as Limited Partners, proceeds from the sale of Units are irrevocable, and will be held by the General Partners for the account of Limited Partners in the subscription account. Investors' funds will be transferred from the subscription account into the Partnership on a first-in, first-out basis. Upon admission to the Partnership, subscription funds will be released to the Partnership and Units will be issued at the rate of $100 per unit or fraction thereof. Interest earned on subscription funds while in the subscription account will be returned to the subscriber, or if the subscriber elects to compound earnings, the amount equal to such interest will be added to his investment in the Partnership, and the number of Units actually issued shall be increased accordingly. In the event only a portion of a subscribing Limited Partner's funds are required, then all funds invested by such subscribing Limited Partners at the same time shall be transferred. Any subscription funds remaining in the subscription account after the expiration of one (1) year from the date any such subscription funds were first received by the General Partners shall be returned to the subscriber. (f) Admission of Limited Partners. Subscribers shall be admitted as Limited Partners when their subscription funds are required by the Partnership to fund a Mortgage Investment, or the Formation Loan, to create appropriate reserves or to pay organizational expenses, as described in the Prospectus. Subscriptions shall be accepted or rejected by the General Partners on behalf of the Partnership within 30 days of their receipt. Rejected subscriptions and monies shall be returned to subscribers forthwith. The Partnership shall amend Schedule A to the Limited Partnership Agreement from time to time to effect the substitution of substituted Limited Partners in the case of assignments, where the assignee does not become a substituted Limited Partner, the Partnership shall recognize the assignment not later than the last day of the calendar month following acceptance of the assignment by the General Partners. No person shall be admitted as a Limited Partner who has not executed and filed with the Partnership the subscription form specified in the Prospectus used in connection with the public offering, together with such other documents and instruments as the General Partners may deem necessary or desirable to effect such admission, including, but not limited to, the execution, acknowledgment and delivery to the General Partners of a power of attorney in form and substance as described in Section 2.8 hereof. (g) Names, Addresses, Date of Admissions, and Contributions of Limited Partners. The names, addresses, date of admissions and Capital Contributions of the Limited Partners shall be set forth in Schedule A attached hereto, as amended from time to time, and incorporate herein by reference. 4.3 Election to Receive Monthly, Quarterly or Annual Cash Distributions. Upon subscription for Units, a subscribing Limited Partner must elect whether to receive monthly, quarterly or annual cash distributions from the Partnership or to receive additional Units in lieu of cash distributions. If the Limited Partner initially elects to receive monthly, quarterly or annual distributions, such election, once made, is irrevocable. However, a Limited Partner may change his election regarding whether he wants to receive such distributions on a monthly, quarterly or annual basis. If the Limited Partner initially elects to receive additional Units in lieu of cash distributions, he may after three (3) years, change his election and receive monthly, quarterly or annual cash distributions. Earnings allocable to Limited Partners who elect to receive additional Units will be retained by the Partnership for making further Mortgage Investments or for other proper Partnership purposes, and such amounts will be added to such Limited Partners' Capital Accounts. The Earnings from such further Mortgage Investments will be allocated among all Partners; however, Limited Partners who elect to receive additional Units will be credited with an increasingly larger proportionate share of such Earnings than Limited Partners who receive monthly, quarterly or annual distributions since, Limited Partners' Capital Accounts who elect to receive additional Units will increase over time. Annual distributions will be made after the calendar year. 4.4 Interest. No interest shall be paid on, or in respect of, any contribution to Partnership Capital by any Partner, nor shall any Partner have the right to demand or receive cash or other property in return for the Partner's Capital Contribution. 4.5 Loans. Any Partner or Affiliate of a Partner may, with the written consent of the General Partners, lend or advance money to the Partnership. If the General Partners or, with the written consent of the General Partners, any Limited Partner shall make any loans to the Partnership or advance money on its behalf, the amount of any such loan or advance shall not be treated as a contribution to the capital of the Partnership, but shall be a debt due from the Partnership. The amount of any such loan or advance by a lending Partner or an Affiliate of a Partner shall be repayable out of the Partnership's cash and shall bear interest at a rate of not in excess of the greater of (i) the prime rate established, from time to time, by any major bank selected by the General Partners for loans to the bank's most creditworthy commercial borrowers, plus 5% per annum, or (ii) the maximum rate permitted by law. None of the Partners or their Affiliates shall be obligated to make any loan or advance to the Partnership. 4.6 No Participation in Management. Except as expressly provided herein, the Limited Partners shall take no part in the conduct or control of the Partnership business and shall have no right or authority to act for or bind the Partnership; 4.7 Rights and Powers of Limited Partners. In addition to the matters described in Section 3.10 above, the Limited Partners shall have the right to vote upon and take any of the following actions upon the approval of a Majority of the Limited Partners, without the concurrence of the General Partners. (a) Dissolution and termination of the Partnership prior to the expiration of the term of the Partnership as stated in Section 2.7 above (b) Amendment of this Agreement, subject to the limitations set forth in Section 12.4; (c) Disapproval of the sale of all or substantially all the assets of the Partnership (as defined in Subsection 9.1(c) below); or (d) Removal of the General Partners and election of a successor, in the manner and subject to the conditions described in Section 3.10 above. Except as expressly set forth above or otherwise provided for in this Agreement, the Limited Partners shall have no other rights as set forth in the California Act. 4.8 Meetings. The General Partners, or Limited Partners representing ten percent (10%) of the outstanding Limited Partnership Interests, may call a meeting of the Partnership and, if desired, propose an amendment to this Agreement to be considered at such meeting. If Limited Partners representing the requisite Limited Partnership Interests present to the General Partners a statement requesting a Partnership meeting, the General Partners shall fix a date for such meeting and shall, within twenty (20) days after receipt of such statement, notify all of the Limited Partners of the date of such meeting and the purpose for which it has been called. Unless otherwise specified, all meetings of the Partnership shall be held at 2:00 P.M. at the office of the Partnership, upon not less than ten (10) and not more than sixty (60) days written notice. At any meeting of the Partnership, Limited Partners may vote in person or by proxy. A majority of the Limited Partners, present in person or by proxy, shall constitute a quorum at any Partnership meeting. Any question relating to the Partnership which may be considered and acted upon by the Limited Partners hereunder may be considered and acted upon by vote at a Partnership meeting, and any consent required to be in writing shall be deemed given by a vote by written ballot. Except as expressly provided above, additional meeting and voting procedures shall be in conformity with Section 1563 of the California Corporations Code, as amended. 4.9 Limited Liability of Limited Partners. Units are non-assessable, and no Limited Partner shall be personally liable for any of the expenses, liabilities, or obligations of the Partnership or for any of the losses thereof beyond the amount of such Limited Partners' capital contribution to the Partnership and such Limited Partners' share of any undistributed net income and gains of the Partnership, provided, that any return of capital to Limited Partners (plus interest at the legal rate on any such amount from the date of its return) will remain liable for the payment of Partnership debts existing on the date of such return of capital; and, provided further, that such Limited Partner shall be obligated upon demand by the General Partners to pay the Partnership cash equal to the amount of any deficit remaining in his Capital Account upon winding up and termination of the Partnership. 4.10 Representation of Partnership. Each of the Limited Partners hereby acknowledges and agrees that the attorneys representing the Partnership and the General Partners and their Affiliates do not represent and shall not be deemed under the applicable codes of professional responsibility to have represented or be representing any or all of the Limited Partners in any respect at any time. Each of the Limited Partners further acknowledges and agrees that such attorneys shall have no obligation to furnish the Limited Partners with any information or documents obtained, received or created in connection with the representation of the Partnership, the General Partners and/or their Affiliates. ARTICLE 5 PROFITS AND LOSSES; CASH DISTRIBUTIONS 5.1 Income and Losses. All Income and Losses of the Partnership shall be credited to and charged against the Partners in proportion to their respective "Partnership Interests", as hereafter defined. The Partnership Interest of the General Partners shall at all times be a total of one percent (1%), to be shared equally among them and the Partnership Interest of the Limited Partners collectively shall be ninety-nine percent (99%), which shall be allocated among them according to their respective Limited Partnership Interests. Income and Losses realized by the Partnership during any month shall be allocated to the Partners as of the close of business on the last day of each calendar month, in accordance with their respective Limited Partnership Interests and in proportion to the number of days during such month that they owned such Limited Partnership Interests, without regard to Income and Losses realized with respect to time periods within such month. 5.2 Cash Earnings. Earnings as of the close of business on the last day of each calendar month shall be allocated among the Partners in the same proportion as Income and Losses as described in Section 5.1 above. Earnings allocable to those Limited Partners who elect to receive cash distributions as described below shall be distributed to them in cash as soon as practicable after the end of each calendar month. The General Partners' allocable share of Earnings shall also be distributed concurrently with cash distributions to Limited Partners. Earnings allocable to those Limited Partners who elected to receive additional Units shall be retained by the Partnership and credited to their respective Capital Accounts as of the first day of the succeeding calendar month. Earnings to Limited Partners shall be distributed only to those Limited Partners who elect in writing, upon their initial subscription for the purchase of Units or after three (3) years to receive such distributions during the term of the Partnership. Each Limited Partner's decision whether to receive such distributions shall be irrevocable, except as set forth in paragraph 4.3 above. 5.3 Cash Distributions Upon Termination. Upon dissolution and termination of the Partnership, Cash Available for Distribution shall thereafter be distributed to Partners in accordance with the provisions of Section 9.3 below. 5.4 Special Allocation Rules. (a) For purposes of this Agreement, a loss or allocation (or item thereof) is attributable to non-recourse debt which is secured by Partnership property to the extent of the excess of the outstanding principal balance of such debt (excluding any portion of such principal balance which would not be treated as an amount realized under Internal Revenue Code Section 1001 and Paragraph (a) of Section 1.1001-2 if such debt were foreclosed upon over the adjusted basis of such property. This excess is herein defined as "Minimum Gain (whether taxable as capital gain or as ordinary income) as more explicitly set forth in Treasury Regulation T.704 l(b)(4)(iv)(c). Notwithstanding any other provision of Article V, the allocation of loss or deduction (or item thereof, attributable to non-recourse debt which is secured by Partnership property will be allowed only to the extent that such allocation does not cause the sum of the deficit capital account balances of the Limited Partners receiving such allocations to exceed the minimum gain determined at the end of the Partnership able year to which the allocations relate. The balance of such losses shall be allocated to the General Partners. Any Limited Partner with a deficit capital account balance resulting in whole or in part from allocations of loss or deduction (or item thereof) attributable to non-recourse debt which is secured by Partnership property shall, to the extent possible, be allocated income or gain (or item thereof) in an amount not less than the minimum gain at a time no later than the time at which the minimum gain is reduced below the sum if such deficit capital account balances. This section is intended and shall be interpreted to comply with the requirements of Treasury Regulation Section 1.704-l(b)(4)(iv)(e). (b) In the event any Limited Partner receives any adjustments, allocations or distributions, not covered by Section 75.4(a), so as to result in a deficit capital account, items of Partnership income and gain shall be specially allocated to such Limited Partners in an amount and manner sufficient to eliminate the deficit balances in their Capital Accounts created by such adjustments, allocations or distributions as quickly as possible. This Section shall operate a qualified income offset as utilized in Treasury Regulation Section 1.704-1(b)(23)(ii)(d). (c) Syndication expenses for any fiscal year or other period shall be specially allocated to the Limited Partners in proportion to their Units, provided that if additional Limited Partners are admitted to the Partnership on different dates, all Syndication Expenses shall be divided among the Persons who own Units from time to time so that, to the extent possible, the cumulative Syndication Expenses allocated with respect to each Unit at any time is the same amount. In the event the General Partners shall determine that such result is not likely to be achieved through future allocations of Syndication Expenses, the General Partners may allocate a portion of Net Income or Losses so as to achieve the same effect on the Capital Accounts of the Unit Holders, notwithstanding any other provision of this Agreement. (d) For purposes of determining the Net Income, Net Losses, or any other items allocable to any period, Net Income, Net Losses, and any such other items shall be determined on a daily, monthly, or other basis, as determined by the General Partners using any permissible method under Code Section 706 and the Treasury Regulations thereunder. (e) Notwithstanding Section 5.1 and 5.2 hereof, (i) Net Losses allocable to the period prior to the admission of any additional Limited Partners pursuant to Section 4.2(b) and (e) hereof shall be allocated 99% to the General Partners and 1% to the Initial Limited Partner and Net Income during that same period, if any, shall be allocated to the General Partners, and (ii) Profits or Losses allocable to the period commencing with the admission of any additional such Limited Partners and all subsequent periods shall be allocated pursuant to Section 5.1. (f) Except as otherwise provided in this Agreement, all items of Partnership income, gain, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Partners in the same proportions as they share Net Income or Net Losses, as the case may be, for the year. 5.5 704(c) Allocations. In accordance with Code 704(c) and the Treasury Regulations thereunder income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial fair market value. Any elections or other decisions relating to such allocations shall be made by the General Partners in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 5.5 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Person's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. 5.6 Intent of Allocations. It is the intent of the Partnership that this Agreement comply with the safe harbor test set out in Treasury Regulation Sections 1.704-1(b)(2)(ii)(D) and 1.704-l(b)(4)(iv)(D) and the requirements of those Sections, including the qualified income offset and minimum gain chargeback, which are hereby incorporated by reference. If, for whatever reasons, the Partnership is advised by counsel or its accountants that the allocation provisions of this Agreement are unlikely to be respected for federal income tax purposes, the General Partners are granted the authority to amend the allocation provisions of this Agreement, to the minimum extent deemed necessary by counsel or its accountants to effect the plan of Allocations and Distributions provided in this Agreement. The General Partners shall have the discretion to adopt and revise rules, conventions and procedures as it believes appropriate with respect to the admission of Limited Partners to reflect Partners' interests in the Partnership at the close of the years. 5.7 Guaranteed Payment for Offering Period. The Limited Partners shall receive a guaranteed payment from the Earnings of the Partnership during the Guaranteed Payment Period. The Guaranteed Payment for Offering Period, calculated on a monthly basis, shall be equal to the greater of (i) the Partnership's Earnings or (ii) the interest rate established by the Monthly Weighted Average Cost of Funds for the 11th District Savings Institutions, as announced by the Federal Home Loan Bank of San Francisco during the last week of the preceding month, plus two points, up to a maximum interest rate of 12%. The Weighted Average Cost of Funds is derived from the interest paid on savings accounts, Federal Home Loan Bank advances, and other borrowed money adjusted for valuation in the number of days in each month. The adjustment factors are 1.086 for February, 1.024 for 30 day months and 0.981 for 31 day months. As of the date of the Prospectus the Monthly Weighted Average Cost of Funds for the 11th District as announced August 30, 1996 for the period ended May 30, 1996 and in effect until September 30, 1996 is 4.819%. The Guaranteed Payment Period is the period commencing on the day a Limited Partner is admitted to the Partnership and ending three months after the Offering Termination Date. To the extent the interest rate to be paid is in excess of the Partnership's Earnings, the Guaranteed Payment for Offering Period shall be payable by the General Partners out of a Capital Contribution, to the Partnership and/or fees payable to the General Partners or Redwood Mortgage which are lowered or waived. Amounts paid pursuant to this Section 5.7 are intended to constitute guaranteed payments within the meaning of I.R.C. Code Section 707(c) and shall not be treated as distributions for purposes of computing the recipient's Capital Accounts. In the event the Partnership is unable to make any payments required to be made pursuant to this Section 5.7, the General Partners shall promptly make additional Capital Contributions sufficient to enable the Partnership to make such payments on a timely basis; provided however, that the General Partners shall not be obligated to make such Capital Contribution if such amounts would be subject to claims of creditors such that the guaranteed payments would not be available to be made to the Limited Partners. In such event, the General Partners shall pay the interest out of its fees as set forth above. ARTICLE 6 BOOKS AND RECORDS, REPORTS AND RETURNS 6.1 Books and Records. The General Partners shall cause the Partnership to keep the following: (a) Complete books and records of account in which shall be entered fully and accurately all transactions and other matters relating to the Partnership. (b) A current list setting forth the full name and last known business or residence address of each Partner which shall be listed in alphabetical order and stating his respective Capital Contribution to the Partnership and share in Profits and Losses. (c) A copy of the Certificate of Limited Partnership and all amendments thereto. (d) Copies of the Partnership's federal, state and local income tax returns and reports, if any, for the six (6) most recent years. (e) Copies of this Agreement, including all amendments thereto, and the financial statements of the Partnership for the three (3) most recent years. All such books and records shall be maintained at the Partnership's principal place of business and shall be available for inspection and copying by, and at the sole expense of, any Partner, or any Partner's duly authorized representatives, during reasonable business hours. 6.2 Annual Statements. The General Partners shall cause to be prepared at least annually, at Partnership expense, financial statements prepared in accordance with generally accepted accounting principles and accompanied by a report thereon containing an opinion of an independent certified public accounting firm. The financial statements will include a balance sheet, statements of income or loss, partners' equity, and changes in financial position. The General Partners shall have prepared at least annually, at Partnership expense: (i) a statement of Cash Flow; (ii) Partnership information necessary in the preparation of the Limited Partners' federal and state income tax returns; (iii) a report of the business of the Partnership; (iv) a statement as to the compensation received by the General Partners and their Affiliates, during the year from the Partnership which shall set forth the services rendered or to be rendered by the General Partners and their Affiliates and the amount of fees received; and (v) a report identifying distributions from (a) Earnings of that year, (b) Earnings of prior years, (c) Working Capital Reserves and other sources, and (d) a report on the costs reimbursed to the General Partners, which allocation shall be verified by independent public accountants in accordance with generally accepted auditing standards. Copies of the financial statements and reports shall be distributed to each Limited Partner within 120 days after the close of each taxable year of the Partnership; provided, however, all Partnership information necessary in the preparation of the Limited Partners' federal income tax returns shall be distributed to each Limited Partner not later than 90 days after the close of each fiscal year of the Partnership. 6.3 Semi-Annual Report. Until the Partnership is registered under Section 12(g) of the Securities Exchange Act of 1934, the General Partners shall have prepared, at Partnership expense, a semi-annual report covering the first six months of each fiscal year, commencing with the six-month period ending after the Initial Closing Date, and containing unaudited financial statements (balance sheet, statement of income or loss and statement of Cash Flow) and a statement of other pertinent information regarding the Partnership and its activities during the six-month period. Copies of this report shall be distributed to each Limited Partner within 60 days after the close of the six-month period. 6.4 Quarterly Reports. The General Partners shall cause to be prepared quarterly, at Partnership Expense: (i) a statement of the compensation received by the General Partners and Affiliates during the quarter from the Partnership, which statement shall set forth the services rendered by the General Partners and Affiliates and the amount of fees received, and (ii) other relevant information. Copies of the statements shall be distributed to each Limited Partner within 60 days after the end of each quarterly period. The information required by Form 10-Q (if required to be filed with the Securities and Exchange Commission) will be supplied to each Limited Partner within 60 days of each quarterly period. If the Partnership is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended, the General Partners shall cause to be prepared, at Partnership expense, a quarterly report for each of the first three quarters in each fiscal year containing unaudited financial statements (consisting of a balance sheet, a statement of income or loss and a statement of Cash Flow) and a statement of other pertinent information regarding the Partnership and its activities during the period covered by the report. Copies of the statements and other pertinent information shall be distributed to each Limited Partner within 60 days after the close of the quarter covered by the report of the Partnership. The quarterly financial statements shall be accompanied by the report thereon, if any, of the independent accountants engaged by the Partnership or, if there is no such report, the certificate of the General Partners that the financial statements were prepared without audit from the books and records of the Partnership. Copies of the financial statements, if any, filed with the Securities and Exchange Commission shall be distributed to each Limited Partner within 60 days after the close of the quarterly period covered by the report of the Partnership. 6.5 Filings. The General Partners, at Partnership expense, shall cause the income tax returns for the Partnership to be prepared and timely filed with the appropriate authorities. The General Partners, at Partnership expense, shall also cause to be prepared and timely filed, with appropriate federal and state regulatory and administrative bodies, all reports required to be filed with those entities under then current applicable laws, rules and regulations. The reports shall be prepared by the accounting or reporting basis required by the regulatory bodies. Any Limited Partner shall be provided with a copy of any of the reports upon request without expense to him. The General Partners, at Partnership expense, shall file, with the securities administrators for the various states in which this Partnership is registered, as required by such states, a copy of each report referred to this Article VI. 6.6 Suitability Requirements. The General Partners, at Partnership expense, shall maintain for a period of at least four years a record of the information obtained to indicate that a Limited Partner complies with the suitability standards set forth in the Prospectus. 6.7 Fiscal Matters. (a) Fiscal Year. The Partnership shall adopt a fiscal year beginning on the first day of January of each year and ending on the last day of December; provided, however, that the General Partners in their sole discretion may, subject to approval by the Internal Revenue Service and the applicable state taxing authorities at any time without the approval of the Limited Partners change the Partnership's fiscal year to a period to be determined by the General Partners. (b) Method of Accounting. The accrual method of accounting shall be used for both income tax purposes and financial reporting purposes. (c) Adjustment of Tax Basis. Upon the transfer of an interest in the Partnership, the Partnership may, at the sole discretion of the General Partners, elect pursuant to Section 754 of the Internal Revenue Code of 1986, as amended, to adjust the basis of the Partnership property as allowed by Sections 734(b) and 743(b) thereof. 6.8 Tax Matters Partner. In the event the Partnership is subject to administrative or judicial proceedings for the assessment or collection of deficiencies for federal taxes for the refund of overpayments of federal taxes arising out of a Partner's distributive share of profits, Michael R. Burwell, for so long as he is a General Partner, shall act as the Tax-Matters Partner ("TMP") and shall have all the powers and duties assigned to the TMP under Sections 6221 through 6232 of the Code and the Treasury Regulations thereunder. The Partners agree to perform all acts necessary under Section 6231 of the Code and Treasury Regulations thereunder to designate Michael R. Burwell as the TMP. ARTICLE 7 TRANSFER OF PARTNERSHIP INTERESTS 7.1 Interest of General Partners. A successor or additional General Partner may be admitted to the Partnership as follows: (a) With the consent of all General Partners and a Majority of the Limited Partners, any General Partner may at any time designate one or more Persons to be successors to such General Partner or to be additional General Partners, in each case with such participation in such General Partner's Partnership Interest as they may agree upon, provided that the Limited Partnership Interests shall not affected thereby; provided, however, that the foregoing shall be subject to the provisions of Section 9.1(d) below, which shall be controlling in any situation to which such provisions are applicable. (b) Upon any sale or transfer of a General Partner's Partnership Interest, the successor General Partner shall succeed to all the powers, rights, duties and obligations of the assigning General Partner hereunder, and the assigning General Partner shall thereupon be irrevocably released and discharged from any further liabilities or obligations of or to the Partnership or the Limited Partners accruing after the date of such transfer. The sale, assignment or transfer of all or any portion of the outstanding stock of a corporate General Partner, or of any interest therein, or an assignment of a General Partner's Partnership Interest for security purposes only, shall not be deemed to be a sale or transfer of such General Partner's Partnership interest subject to the provisions of this Section 7.1. (c) In the event that all or any one of the initial General Partners are removed by the vote of a majority of Limited Partners and a successor or additional General Partner(s) is designated pursuant to Section 3.10, prior to a Person's admission as a successor or additional General Partner pursuant to this Section 7.1, such Person shall execute a writing (i) acknowledging that Redwood Mortgage, an Affiliate of the General Partners, has been repaying the Formation Loans, which is discussed in Section 10.9, with the proceeds it receives from loan brokerage commissions on Mortgage Investments, fees received from the early withdrawal penalties and fees for other services paid by the Partnership, and (ii) agreeing that if such successor or additional General Partner(s) begins using the services of another mortgage loan broker or, loan servicing agent then Redwood Mortgage shall immediately be released from all further obligations under the Formation Loans (except for a proportionate share of the principal installment due at the end of that year, prorated according to the days elapsed). 7.2 Transfer of Limited Partnership Interest. No assignee of the whole or any portion of a Limited Partnership Interest in the Partnership shall have the right to become a substituted Limited Partner in place of his assignor, unless the following conditions are first met. (a) The assignor shall designate such intention in a written instrument of assignment, which shall be in a form and substance reasonably satisfactory to the General Partners; (b) The written consent of the General Partners to such substitution shall be obtained, which consent shall not be unreasonably withheld, but which, in any event, shall not be given if the General Partners determine that such sale or transfer may jeopardize the continued ability of the Partnership to qualify as a "partnership" for federal income tax purposes or that such sale or transfer may violate any applicable securities laws (including any investment suitability standards); (c) The assignor and assignee named therein shall execute and acknowledge such other instruments as the General Partners may deem necessary to effectuate such substitution, including, but not limited to, a power of attorney with provisions more fully described in Sections 2.8 and 2.9 above; (d) The assignee shall accept, adopt and approve in writing all of the terms and provisions of this Agreement as the same may have been amended; (e) Such assignee shall pay or, at the election of the General Partners, obligate himself to pay all reasonable expenses connected with such substitution, including but not limited to reasonable attorneys' fees associated therewith; and The Partnership has received, if required by the General Partners, a legal opinion satisfactory to the General Partners that such transfer will not violate the registration provisions of the Securities Act of 1933, as amended, which opinion shall be furnished at the Limited Partner's expense. 7.3 Further Restrictions on Transfers. Notwithstanding any provision to the contrary contained herein, the following restrictions shall also apply to any and all proposed sales, assignments and transfer of Limited Partnership Interests, and any proposed sale, assignment or transfer in violation of same to void ab initio. (a) No Limited Partner shall make any transfer or assignment of all or any part of his Limited Partnership Interest if said transfer or assignment would, when considered with all other transfers during the same applicable twelve month period, cause a termination of the Partnership for federal or California state income tax purposes. (b) Instruments evidencing a Limited Partnership Interest shall bear and be subject to legend conditions in substantially the following forms: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OR CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. (c) No Limited Partner shall make any transfer or assignment of all or any of his Limited Partnership Interest if the General Partners determine such transfer or assignment would result in the Partnership being classified as a "publicly traded partnership" with the meaning of Section 7704(b) of the Code or any regulations or rules promulgated thereunder. ARTICLE 8 WITHDRAWAL FROM PARTNERSHIP 8.1 Withdrawal by Limited Partners. No Limited Partner shall have the right to withdraw from the Partnership, receive cash distributions or otherwise obtain the return of all or any portion of his Capital Account balance for a period of one year after such Limited Partner's initial purchase of Units, except for monthly, quarterly or annual distributions of Cash Available for Distribution, if any, to which such Limited Partner may be entitled pursuant to Section 5.2 above. Withdrawal after a minimum one year holding period and before the five year holding period as set forth below shall be permitted in accordance with subsection (a) below. If a Limited Partner elects to withdraw either after the one (1) year holding period or the five (5) year withholding period, he will continue to receive distributions or have those Earnings compounded depending upon his initial election, based upon the balance of his capital account during the withdrawal period. Limited Partners may also withdraw after a five year holding period in accordance with subsection b(i) and (ii). A Limited Partner may withdraw or partially withdraw from the Partnership upon the following terms: (a) A Limited Partner who desires to withdraw from the Partnership after the expiration of the above referenced one year period shall give written notice of withdrawal ("Notice of Withdrawal") to the General Partners, which Notice of Withdrawal shall state the sum or percentage interests to be withdrawn. Subject to the provisions of subsections (e) and (f) below, such Limited Partner may liquidate part or all of his entire Capital Account in four equal quarterly installments beginning the quarter following the quarter in which the Notice of Withdrawal is given, provided that such notice was received thirty (30) days prior to the end of the quarter. An early withdrawal under this subsection (a) shall be subject to a 10% early withdrawal penalty applicable to the sum withdrawn as stated in the Notice of Withdrawal. The 10% penalty shall be subject to and payable upon the terms set forth in subsection (c) below. (b) A Limited Partner who desires to withdraw from the Partnership after the expiration of the above referenced five year period shall give written notice of withdrawal ("Notice of Withdrawal") to the General Partners, and subject to the provisions of subsections (e) and (f) below such Limited Partner's Capital Account shall be liquidated as follows: (i) Except as provided in subsection (b)(ii) below, the Limited Partner's Capital Account shall be liquidated in twenty (20) equal quarterly installments each equal to 5% of the total Capital Account beginning the calendar quarter following the quarter in which the Notice of Withdrawal is given, provided that such notice is received thirty (30) days prior to the end of the preceding quarter. Upon approval by the General Partners, the Limited Partner's Capital Account may be liquidated upon similar terms over a period longer than twenty (20) equal quarterly installments. (ii) Notwithstanding subsection (b)(i) above, any Limited Partner may liquidate part or all of his entire outstanding Capital Account in four equal quarterly installments beginning of the calendar quarter following the preceding quarter in which Notice of Withdrawal is given, provided that such notice was received thirty (30) days prior to the end of the preceding quarter. An early withdrawal under this subsection 8.1(b)(ii) shall be subject to a 10% early withdrawal penalty applicable to any sums prior to the time when such sums could have been withdrawn pursuant to the withdrawal provisions set forth in subsection (a)(i) above. (c) The 10% early withdrawal penalty will be deducted pro rata from the Limited Partner's Capital Account. The 10% early withdrawal penalty will be received by the Partnership, and a portion of the sums collected as such early withdrawal penalty shall be applied by the Partnership toward the next installment(s) of principal under the Formation Loan owed to the Partnership by Redwood Mortgage, an Affiliate of the General Partners and any successor firm, as described in Section 10.9 below. This portion shall be determined by the ratio between the initial amount of the Formation Loan and the total amount of the organizational and syndication costs incurred by the Partnership in this offering of Units. The balance of such early withdrawal penalties shall be retained by the Partnership for its own account. After the Formation Loan has been paid, the 10% early withdrawal penalty will be used to pay the Continuing Servicing Fee, as set forth in Section 10.13 below. The balance of such early withdrawal penalties shall be returned by the Partnership for its own account. (d) Commencing with the end of the calendar month in which such Notice of Withdrawal is given, and continuing on or before the twentieth day after the end of each month thereafter, any Cash Available for Distribution allocable to the Capital Account (or portion thereof) with respect to which Notice of Withdrawal has been given shall also be distributed in cash to the withdrawing Limited Partner in the manner provided in Section 5.2 above. (e) During the liquidation period described in subsections 8.1(a) and (b), the Capital Account of a withdrawing Limited Partner shall remain subject to adjustment as described in Section 1.3 above. Any reduction in said Capital Account by reason of an allocation of Losses, if any, or otherwise shall reduce all subsequent liquidation payments proportionately. In no event shall any Limited Partner receive cash distributions upon withdrawal from the Partnership if the effect of such distribution would be to create a deficit in such Limited Partner's Capital Account. (f) Payments to withdrawing Limited Partners shall at all times be subject to the availability of sufficient cash flow generated in the ordinary course of the Partnership's business, and the Partnership shall not be required to liquidate outstanding Mortgage Investments prior to their maturity dates for the purposes of meeting the withdrawal requests of Limited Partners. For this purpose, cash flow is considered to be available only after all current Partnership expenses have been paid (including compensation to the General Partners and Affiliates) and adequate provision has been made for the payment of all monthly or annual cash distributions on a pro rata basis which must be paid to Limited Partners who elected to receive such distributions upon subscription for Units pursuant to Section 4.3 or who changed their initial election to compound Earnings as set forth in Section 4.3. Furthermore, no more than 20% of the total Limited Partners' Capital Accounts outstanding for the beginning of any calendar year shall be liquidated during any calendar year. Notwithstanding the 20% limitation, the General Partners shall have the discretion to further limit the percentage of the total Limited Partners' Capital Accounts that may be withdrawn in order to comply with any Regulations to be enacted pursuant to Section 7704 of the Code and the safe harbor provisions set forth in Notice 88-75 to avoid the Partnership being taxed as a corporation. If Notices of Withdrawal in excess of these limitations are received by the General Partners, the priority of distributions among Limited Partners shall be determined as follows: first, to those Limited Partners withdrawing Capital Accounts according to the 20 quarter or longer installment liquidation period described under subsection (b)(i) above, then to ERISA plan Limited Partners withdrawing Capital Accounts under subsection (b)(ii) above, then to all other Limited Partners withdrawing Capital Accounts under subsection (b)(ii) above, and finally to all other Limited Partners withdrawing Capital Accounts under subsection (a) above. 8.2 Retirement by General Partners. Any one or all of the General Partners may withdraw ("retire") from the Partnership upon not less than six (6) months written notice of the same to all Limited Partners. Any retiring General Partner shall not be liable for any debts, obligations or other responsibilities of the Partnership or this Agreement arising after the effective date of such retirement. 8.3 Payment to Terminated General Partner. If the business of the Partnership is continued as provided in Section 9.1(d) or 9.1(e) below upon the removal, retirement, death, insanity, dissolution, or bankruptcy of a General Partner, then the Partnership shall pay to such General Partner, or his/its estate, a sum equal to such General Partner's outstanding Capital Account as of the date of such removal, retirement, death, insanity, dissolution or bankruptcy, payable in cash within thirty (30) days after such date. If the business of the Partnership is not so continued, then such General Partner shall receive from the Partnership such sums as he may be entitled to receive in the course of terminating the Partnership and winding up its affairs, as provided in Section 9.3 below. ARTICLE 9 DISSOLUTION OF THIS PARTNERSHIP; MERGER OF THE PARTNERSHIP 9.1 Events Causing Dissolution. The Partnership shall dissolve upon occurrence of the earlier of the following events: (a) Expiration of the term of the Partnership as stated in Section 2.7 above. (b) The affirmative vote of a majority of the Limited Partners. (c) The sale of all or substantially all of the Partnership's assets; provided, for purposes of this Agreement the term "substantially all of the Partnership's assets" shall mean assets comprising not less than seventy percent (70%) of the aggregate fair market value of the Partnership's total assets as of the time of sale. (d) The retirement, death, insanity, dissolution or bankruptcy of a General Partner unless, within ninety (90) days after any such event (i) the remaining General Partners, if any, elect to continue the business of the Partnership, or (ii) if there are no remaining General Partners, all of the Limited Partners agree to continue the business of the Partnership and to the appointment of a successor General Partner who executes a written acceptance of the duties and responsibilities of a General Partner hereunder. (e) The removal of a General Partner, unless within ninety (90) days after the effective date of such removal (i) the remaining General Partners, if any, elect to continue the business of the Partnership, or (ii) if there are no remaining General Partners, a successor General Partner is approved by a majority of the Limited Partners as provided in Section 3.7 above, which successor executes a written acceptance as provided therein and elects to continue the business of the Partnership. (f) Any other event causing the dissolution of the Partnership under the laws of the State of California. 9.2 Winding Up and Termination. Upon the occurrence of an event of dissolution, the Partnership shall immediately be terminated, but shall continue until its affairs have been wound up. Upon dissolution of the Partnership, unless the business of the Partnership is continued as provided above, the General Partners will wind up the Partnership's affairs as follows: (a) No new loans shall be made or purchased; (b) Except as may be agreed upon by a majority of the Limited Partners in connection with a merger or consolidation described in Sections 9.5, 9.6 or 9.7, the General Partners shall liquidate the assets of the Partnership as promptly as is consistent with recovering the fair market value thereof, either by sale to third parties or by servicing the Partnership's outstanding Mortgage Investments in accordance with their terms; provided, however, the General Partners shall liquidate all Partnership assets for the best price reasonably obtainable in order to completely wind up the Partnership's affairs within five (5) years after the date of dissolution; (c) Except as may be agreed upon by a majority of the Limited Partners in connection with a merger or consolidation described in Sections 9.5, 9.6 or 9.7, all sums of cash held by the Partnership as of the date of dissolution, together with all sums of cash received by the Partnership during the winding up process from any source whatsoever, shall be distributed in accordance with Section 9.3 below. 9.3 Order of Distribution of Assets. In the event of dissolution as provided in Section 9.1 above, the cash of the Partnership shall be distributed as follows: (a) All of the Partnership's debts and liabilities to persons other than Partners shall be paid and discharged; (b) All of the Partnership's debts and liabilities to Partners shall be paid and discharged; (c) The balance of the cash of the Partnership shall be distributed to the Partners in proportion to their respective outstanding Capital Accounts. Upon dissolution, each Limited Partner shall look solely to the assets of the Partnership for the return of his Capital Contribution, and if the Partnership assets remaining after the payment or discharge of the debts and liabilities of the Partnership is insufficient to return the Capital Contribution of each Limited Partner, such Limited Partner shall have no recourse against the General Partners or any other Limited Partner. The winding-up of the affairs of the Partnership and the distribution of its assets shall be conducted exclusively by the General Partners. It is hereby authorized to do any and all acts and things authorized by law for these purposes. In the event of insolvency, dissolution, bankruptcy or resignation of all of the General Partners or removal of the General Partners by the Limited Partners, the winding up of the affairs of the Partnership and the distribution of its assets shall be conducted by such person or entity as may be selected by a vote of a majority of the outstanding Units, which person or entity is hereby authorized to do any and all acts and things authorized by law for such purposes. 9.4 Compliance With Timing Requirements of Regulations. In the event the Partnership is "liquidated" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g), (a) distributions shall be made pursuant to this Article 9 (if such liquidation constitutes a dissolution of the Partnership) or Article 5 hereof (if it does not) to the General Partners and Limited Partners who have positive Capital Accounts in compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2) and (b) if the General Partners' Capital Accounts have a deficit balance (after giving effect to all contributions, distributions, and allocations for all taxable years, including the year during which such liquidation occurs), such General Partners shall contribute to the capital of the Partnership the amount necessary to restore such deficit balance to zero in compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(3); 9.5 Merger or Consolidation of the Partnership. The Partnership's business may be merged or consolidated with one or more limited partnerships that are Affiliates of the Partnership, provided the approval of the required percentage in interest of Partners is obtained pursuant to Section 9.6. Any such merger or consolidation may be effected by way of a sale of the assets of, or units in, the Partnership or purchase of the assets of, or units in, another limited partnership(s), or by any other method approved pursuant to Section 9.6. In any such merger or consolidation, the Partnership may be either a disappearing or surviving entity. 9.6 Vote Required. The principal terms of any merger or consolidation described in Section 9.5 must be approved by the General Partners and by the affirmative vote of a Majority of the Limited Partners. 9.7 Sections Not Exclusive. Sections 9.5 and 9.6 shall not be interpreted as setting forth the exclusive means of merging or consolidating the Partnership in the event that the California Revised Limited Partnership Act, or any successor statute, is amended to provide a statutory method by which the Partnership may be merged or consolidated. ARTICLE 10 TRANSACTIONS BETWEEN THE PARTNERSHIP, THE GENERAL PARTNERS AND AFFILIATES 10.1 Loan Brokerage Commissions. The Partnership will enter into Mortgage Investment transactions where the borrower has employed and agreed to compensate the General Partners or an Affiliate of the General Partners to act as a broker in arranging the loan. The exact amount of the Loan Brokerage Commissions are negotiated with prospective borrowers on a case by case basis. It is estimated that such commissions will be approximately three percent (3%) to six percent (6%) of the principal amount of each Mortgage Investment made during that year. The Loan Brokerage Commissions shall be capped at 4% of the Partnership's total assets per year. 10.2 Loan Servicing Fees. A General Partner or an Affiliate of a General Partner may act as servicing agent with respect to all Mortgage Investments, and in consideration for such collection efforts he/it shall be entitled to receive a monthly servicing fee up to one-eighth of one percent (.125%) of the total unpaid principal balance of each Mortgage Investment serviced, or such higher amount as shall be customary and reasonable between unrelated Persons in the geographical area where the property securing the Mortgage Investment is located. The General Partners or an Affiliate may lower such fee for any period of time and thereafter raise it up to the limit set forth above. 10.3 Escrow and Other Loan Processing Fees. The General Partners or an Affiliate of a General Partner may act as escrow agent for Mortgage Investments made by the Partnership, and may also provide certain document preparation, notarial and credit investigation services, for which services the General Partners shall be entitled to receive such fees as are permitted by law and as are generally prevailing in the geographical area where the property securing the Mortgage Investment is located. 10.4 Asset Management Fee. The General Partners shall receive a monthly fee for managing the Partnership's Mortgage Investment portfolio and general business operations in an amount up to 1/32 of one percent (.03125%) of the total "net asset value" of all Partnership assets (as hereafter defined), payable on the first day of each calendar month until the Partnership is finally wound up and terminated. "Net asset value" shall mean total Partner's capital, determined in accordance with generally accepted accounting principles as of the last day of the preceding calendar month. The General Partners, in their discretion, may lower such fee for any period of time and thereafter raise it up to the limit set forth above. 10.5 Reconveyance Fees. The General Partners may receive a fee from a borrower for reconveyance of a property upon full payment of a loan in an amount as is generally prevailing in the geographical area where the property is located. 10.6 Assumption Fees. An Affiliate of the General Partners may receive a fee payable by a borrower for assuming a loan in an amount equal to a percentage of the loan or a set fee. 10.7 Extension Fee. An Affiliate of the General Partners may receive a fee payable by a borrower for extending the loan period in an amount equal to a percentage of the loan. 10.8 Prepayment and Late Fees. Any prepayment and late fees collected by an Affiliate of the General Partners in connection with Mortgage Investments shall be paid by the Affiliate to the Partnership. 10.9 Formation Loans to Affiliate of General Partners. The Partnership may lend to Redwood Mortgage, an Affiliate of the General Partners, a sum not to exceed 10% of the total amount of Capital Contributions to the Partnership by the Limited Partners, the proceeds of which shall be used solely for the purpose of paying selling commissions (not including the Continuing Servicing Fee) and all amounts payable in connection with unsolicited orders received by the General Partners. The Formation Loans shall be unsecured and shall be evidenced by a non-interest bearing promissory note executed by Redwood Mortgage in favor of the Partnership. The First Formation Loan will be repaid in ten (10) equal annual installments of principal without interest, commencing on December 31 of the year in which the offering terminates. The Second Formation Loan will be repaid as follows: Upon the commencement of this offering, Redwood Mortgage shall make annual installments of one-tenth of the principal balance of the Formation loan as of December 31 of each year. Such payment shall be due and payable by December 31 of the following year with the first payment due by December 31, 1997 assuming this offering commences in 1996. The principal balance of the Second Formation Loan will increase as additional sales of Units are made each year. The amount of the annual installment payment to be made by Redwood Mortgage during the offering stage, will be determined by the principal balance of the Second Formation Loan on December 31 of each year. Upon the completion of this offering the balance of the Second Formation Loan will be repaid in ten (10) equal annual installments of principal, without interest, commencing on December 31 of the year following the year the offering terminates. Redwood Mortgage at its option may prepay all or any part of the Formation Loans. Redwood Mortgage will repay the Formation Loans principally from loan brokerage commissions earned on Mortgage Investments, early withdrawal penalties and other fees paid by the Partnership. Since Redwood Mortgage will use the proceeds from loan brokerage commissions on Mortgage Investments to repay the Formation Loans, if all or any one of the initial General Partners is removed as a General Partner by the vote thereafter designated, and if such successor or additional General Partner(s) begins using any other loan brokerage firm for the placement of Mortgage Investments, Redwood Mortgage will be immediately released from any further obligation under the Formation Loans (except for a proportionate share of the principal installment due at the end of that year, pro rated according to the days elapsed.) In addition, if all of the General Partners are removed, no successor General Partners are elected, the Partnership is liquidated and Redwood Mortgage is no longer receiving any payments for services rendered, the debt on the Formation Loans shall be forgiven and Redwood Mortgage will be immediately released from any further obligations under the Formation Loans. 10.10 Sale of Mortgage Investments and Loans Made to General Partners or Affiliates. The Partnership may sell existing Mortgage Investments to the General Partners or their Affiliates, but only so long as the Partnership receives net sales proceeds from such sales in an amount equal to the total unpaid balance of principal, accrued interest and other charges owing under such Mortgage Investment, or the fair market value of such Mortgage Investment, whichever is greater. Notwithstanding the foregoing, the General Partners shall be under no obligation to purchase any Mortgage Investment from the Partnership or to guarantee any payments under any Mortgage Investment. Generally, Mortgage Investments will not be made to the General Partners or their Affiliates. However, the Partnership may make the Formation Loans to Redwood Mortgage and may in certain limited circumstances, loan funds to Affiliates to purchase real estate owned by the Partnership as a result of foreclosure. 10.11 Purchase of Mortgage Investments from General Partners or Affiliates. The Partnership may purchase existing Mortgage Investments from the General Partners or Affiliates, provided that the following conditions are met: (a) At the time of purchase the borrower shall not be in default under the Mortgage Investment; (b) No brokerage commissions or other compensation by way of premiums or discounts shall be paid to the General Partners or their Affiliates by reason of such purchase; and (c) If such Mortgage Investment was held by the seller for more than 180 days, the seller shall retain a ten percent (10%) interest in such Mortgage Investment. 10.12 Interest. Redwood Mortgage shall be entitled to keep interest if any, earned on the Mortgage Investments between the date of deposit of borrower's funds into Redwood Mortgage's trust account and date of payment of such funds by Redwood Mortgage. 10.13 Sales Commissions; Continuing Servicing Fee. The Units are being offered to the public on a best efforts basis through the Participating Broker-Dealers. The Participating Broker-Dealers may receive commissions under one of the two following options: (i) at the rate of either 5% or 9% (depending upon the investor's election to receive cash distributions or to compound earnings in the Partnership) of the Gross Proceeds on all of their sales; or (ii) at the rate of 4% or 7% (depending upon the investor's election to receive cash distributions or to compound earnings in the Partnership) of the Gross Proceeds on all of their sales together with the Continuing Servicing Fee. The Continuing Servicing Fee is equal to one quarter of one percent (0.25% payable annually in quarterly installments) of a Partner's Capital Account. In the event the Partnership receives any unsolicited orders directly from an investor who did not utilize the services of a Participating Broker Dealer, Redwood Mortgage through the Formation Loans will pay to the Partnership an amount equal to the amount of the sales commissions otherwise attributable to a sale of a Unit through a Participating Broker Dealer assuming no Continuing Servicing Fee is paid. The Partnership will in turn credit such amounts received from Redwood Mortgage to the account of the Investor who placed the unsolicited order. Sales commissions will not be paid by the Partnership out of the offering proceeds. All sales commissions will be paid by Redwood Mortgage, an affiliate of the General Partners, which will also act as the mortgage loan broker for all Mortgage Investments as set forth in Section 10.7 above. The Continuing Servicing Fee will be paid by Redwood Mortgage, but will not be included in the Formation Loans. The Partnership will loan to Redwood Mortgage funds in an amount equal to the sales commissions (not including any Continuing Servicing Fees) and all amounts payable in connection with unsolicited sales by the General Partners, as a Formation Loan. Units may also be offered or sold directly by the General Partners for which they will receive no sales commissions. The Partnership shall reimburse Participating Broker-Dealers for bona fide due diligence expenses in an amount up to .5% of the Gross Proceeds. 10.14 Reimbursement. The Partnership shall reimburse the General Partners or their Affiliates for the actual cost to the General Partners or their Affiliates (or pay directly the cost) of goods and materials used for or by the Partnership and obtained from entities unaffiliated with the General Partners or their Affiliates. The Partnership shall also pay or reimburse the General Partners or their Affiliates for the cost of administrative services necessary to the prudent operation of the Partnership, provided that such reimbursement will be at the lower of (A) the actual cost to the General Partners or their Affiliates of providing such services, or (B) 90% of the amount the Partnership would be required to pay to non affiliated persons rendering similar services in the same or comparable geographical location. The cost of administrative services as used in this subsection shall mean the pro rata cost of personnel, including an allocation of overhead directly attributable to such personnel, based on the amount of time such personnel spent on such services, or other method of allocation acceptable to the program's independent certified public accountant. 10.15 Non-reimbursable Expenses. The General Partners will pay and will not be reimbursed by the Partnership for any general or administrative overhead incurred by the General Partners in connection with the administration of the Partnership which is not directly attributable to services authorized by Sections 10.15 or 10.17. 10.16 Operating Expenses. Subject to Sections 10.15 and 10.16 all expenses of the Partnership shall be billed directly to and paid by the Partnership which may include, but are not limited to: (i) all salaries, compensation, travel expenses and fringe benefits of personnel employed by the Partnership and involved in the business of the Partnership. including persons who may also be employees of the General Partners or Affiliates of the General Partners, but excluding control persons of either the General Partners or Affiliates of the General Partners, (ii) all costs of borrowed money, taxes and assessments on Partnership properties foreclosed upon and other taxes applicable to the Partnership, (iii) legal, audit, accounting, and brokerage fees, (iv) printing, engraving and other expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and recording of documents evidencing ownership of an interest in the Partnership or in connection with the business of the Partnership, (v) fees and expenses paid to leasing agents, consultants, real estate brokers, insurance brokers, and other agents, (vi) costs and expenses of foreclosures, insurance premiums, real estate brokerage and leasing commissions and of maintenance of such property, (vii) the cost of insurance as required in connection with the business of the Partnership, (viii) expenses of organizing, revising, amending, modifying or terminating the Partnership, (ix) expenses in connection with Distributions made by the Partnership, and communications, bookkeeping and clerical work necessary in maintaining relations with the Limited Partners and outside parties, including the cost of printing and mailing to such persons certificates for Units and reports of meetings of the Partnership, and of preparation of proxy statements and solicitations of proxies in connection therewith, (x) expenses in connection with preparing and mailing reports required to be furnished to the Limited Partners for investor, tax reporting or other purposes, or other reports to the Limited Partners which the General Partners deem to be in the best interests of the Partnership, (xi) costs of any accounting, statistical or bookkeeping equipment and services necessary for the maintenance of the books and records of the Partnership including, but not limited to, computer services and time, (xii) the cost of preparation and dissemination of the information relating to potential sale, refinancing or other disposition of Partnership property,xiii) costs incurred in connection with any litigation in which the Partnership is involved, as well as in the examination, investigation or other proceedings conducted by any regulatory agency with jurisdiction over the Partnership including legal and accounting fees incurred in connection therewith. (xiv) costs of any computer services used for or by the Partnership, (xv) expenses of professionals employed by the Partnership in connection with any of the foregoing, including attorneys, accountants and appraisers. For the purposes of Sections 10.17(i), a control person is someone holding a 5% or greater equity interest in the General Partners or affiliate or a person having the power to direct or cause the direction of the General Partners or Affiliate, whether.through the ownership of voting securities, by contract or otherwise. 10.17 Deferral of Fees and Expense Reimbursement. The General Partners may defer payment of any fee or expense reimbursement provided for herein. The amount so deferred shall be treated as a non-interest bearing debt of the Partnership and shall be paid from any source of funds available to the Partnership, including cash available for Distribution prior to the distributions to Limited Partners provided for in Article 5. 10.18 Payment upon Termination. Upon the occurrence of a terminating event specified in Article 9 of the termination of an affiliate's agreement, any portion of any reimbursement or interest in the Partnership payable according to the provisions of this Agreement if accrued, but not yet paid, shall be paid by the Partnership to the General Partners or Affiliates in cash, within thirty (30) days of the terminating event or termination date set forth in the written notice of termination. ARTICLE 11 ARBITRATION 11.1 Arbitration. As between the parties hereto, all questions as to rights and obligations arising under the terms of this Agreement are subJect to arbitration, including any question concerning any right or duty under the Securities Act of 1933, the Securities Exchange Act of 1934 and the securities laws of any state in which Units are offered, and such arbitration shall be governed by the rules of the American Arbitration Association. 11.2 Demand for Arbitration. If a dispute should arise under this Agreement, any Partner may within 60 days make a demand for arbitration by filing a demand in writing for the other. 11.3 Appointment of Arbitrators. The parties may agree upon one arbitrator, but in the event that they cannot agree) there shall be three, one named in writing by each of the parties within five (5) days after demand for arbitration is given and a third chosen by the two appointed. Should either party refuse or neglect to join in the appointment of the arbitrator(s) or to furnish the arbitrator(s) with any papers or information demanded, the arbitrator(s) are empowered by both parties to proceed ex parte. 11.4 Hearing. Arbitration shall take place in San Mateo, California, and the hearing before the arbitrator(s) of the matter to be arbitrated shall be at the time and place within said city as is selected by the arbitrator(s). The arbitrator(s) shall select such time and place promptly after his (or their) appointment and shall give written notice thereof to each party at least sixty (60) days prior to the date so fixed. At the hearing any relevant evidence may be presented by either party, and the formal rules of evidence applicable to judicial proceedings shall not govern. Evidence may be admitted or excluded in the sole discretion of the arbitrator(s). Said arbitrator(s) shall hear and determine the matter and shall execute and acknowledge their award in writing and cause a copy thereof to be delivered to each of the parties. 11.5 Arbitration Award. If there is only one arbitrator, his decision shall be binding and conclusive on the parties, and if there are three arbitrators the decision of any two shall be binding and conclusive. The submission of a dispute to the arbitrator(s) and the rendering of his (or their) decision shall be a condition precedent to any right of legal action on the dispute. A judgment confirming the award of the arbitrator(s) may be rendered by any Court having Jurisdiction; or such Court may vacate, modify, or correct the award in accordance with the prevailing sections of California State Law. 11.6 New Arbitrators. If three arbitrators are selected under the foregoing procedure but two of the three fail to reach an Agreement in the determination of the matter in question, the matter shall be decided by three new arbitrators who shall be appointed and shall proceed in the same manner, and the process shall be repeated until a decision is finally reached by two of the three arbitrators selected. 11.7 Costs of Arbitration. The costs of such arbitration shall be borne by the losing party or in such proportions as the arbitrators shall determine. ARTICLE 12 MISCELLANEOUS 12.1 Covenant to Sign Documents. Without limiting the power granted by Sections 2.8 and 2.9, each Partner covenants, for himself and his successors and assigns, to execute, with acknowledgment or verification, if required, any and all certificates, documents and other writings which may be necessary or expedient to form the Partnership and to achieve its purposes, including, without limitation, the Certificate of Limited Partnership and all amendments thereto, and all such filings, records or publications necessary or appropriate laws of any jurisdiction in which the Partnership shall conduct its business. 12.2 Notices. Except as otherwise expressly provided for in this Agreement, all notices which any Partner may desire or may be required to give any other Partners shall be in writing and shall be deemed duly given when delivered personally or when deposited in the United States mail, first-class postage pre-paid. Notices to Limited Partners shall be addressed to the Limited Partners at the last address shown on the Partnership records. Notices to the General Partners or to the Partnership shall be delivered to the Partnership's principal place of business, as set forth in Section 2.3 above or as hereafter charged as provided herein. Notice to any General Partner shall constitute notice to all General Partners. 12.3 Right to Engage in Competing Business. Nothing contained herein shall preclude any Partner from purchasing or lending money upon the security of any other property or rights therein, or in any manner investing in, participating in, developing or managing any other venture of any kind, without notice to the other Partners, without participation by the other Partners, and without liability to them or any of them. Each Limited Partner waives any right he may have against the General Partners for capitalizing on information received as a consequence of the General Partners management of the affairs of this Partnership. 12.4 Amendment. This Agreement is subject to amendment by the affirmative vote of a Majority of the Limited Partners in accordance with Section 4.5; provided, however, that no such amendment shall be permitted if the effect of such amendment would be to increase the duties or liabilities of any Partner or materially change any Partner's interest in Profits, Losses, Partnership assets, distributions, management rights or voting rights, except as agreed by that Partner. In addition, and notwithstanding anything to the contrary contained in this Agreement the General Partners shall have the right to amend this Agreement, without the vote or consent of any of the Limited Partnership, when: (a) There is a change in the name of the Partnership or the amount of the contribution of any Limited Partner; (b) A Person is substituted as a Limited Partner; (c) An Additional Limited Partner is admitted; (d) A Person is admitted as a successor or additional General Partner in accordance with the terms of this Agreement; (e) A General Partner retires, dies, files a petition in bankruptcy, becomes insane or is removed, and the Partnership business is continued by a remaining or replacement General Partner; (f) There is a change in the character of the business of the Partnership; (g) There is a change in the time as stated in the Agreement for the dissolution of the Partnership, or the return of a Partnership contribution; (h) To cure any ambiguity, to correct or supplement any provision which may be inconsistent with any other provision, or to make any other provisions with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement; (i) To delete or add any provision of this Agreement required to be so deleted or added by the Staff of the Securities and Exchange Commission or by a State "Blue Sky" Administrator or similar official, which addition or deletion is deemed by the Administrator or official to be for the benefit or protection of the Limited Partners; (j) To elect for the Partnership to be governed by any successor California statute governing limited partnerships; and (k) To modify provisions of this Agreement as noted in Sections 1.3 and 5.6 to cause this Agreement to comply with Treasury Regulation Section 1.704-1(b). The General Partners shall notify the Limited Partners within a reasonable time of the adoption of any such amendment. 12.5 Entire Agreement. This Agreement constitutes the entire Agreement between the parties and supersedes any and all prior agreements and representations, either oral or in writing, between the parties hereto with respect to the subject matter contained herein. 12.6 Waiver. No waiver by any party hereto of any breach of, or default under, this Agreement by any other party shall be construed or deemed a waiver of any other breach of or default under this Agreement, and shall not preclude any party from exercising or asserting any rights under this Agreement with respect to any other. 12.7 Severability. If any term, provision, covenant or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 12.8 Application of California law; Venue.This Agreement and the application or interpretation thereof shall be governed, construed, and enforced exclusively by its terms and by the law of the State of California and the appropriate Courts in the County of San Mateo, State of California shall be the appropriate forum for any litigation arising hereunder. 12.9 Captions. Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement. 12.10 Number and Gender. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders. 12.11 Counterparts. This Agreement may be executed in counterparts, any or all of which may be signed by a General Partner on behalf of the Limited Partners as their attorney-in-fact. 12.13 Waiver of Action for Partition. Each of the parties hereto irrevocably waives during the term of the Partnership any right that it may have to maintain any action for partition with respect to any property of the Partnership. 12.14 Defined Terms. All terms used in this Agreement which are defined in the Prospectus of Redwood Mortgage Investors VIII, dated _______________, 1996 shall have the meanings assigned to them in said Prospectus, unless this Agreement shall provide for a specific definition in Article 2. 12.15 Assignability. Each and all of the covenants, terms, provisions and arguments herein contained shall be binding upon and inure to the benefit of the successors and assigns of the respective parties hereto, subject to the requirements of Article 7. IN WITNESS WHEREOF, the parties hereto have hereunto set their hand the day and year first above written. GENERAL PARTNERS: --------------------------- D. Russell Burwell ----------------------------- Michael R. Burwell GYMNO CORPORATION A California Corporation By: ----------------------------- D. Russell Burwell, President LIMITED PARTNERS: By: Gymno Corporation, (General Partner and Attorney-in-Fact) By: ----------------------------- D. Russell Burwell, President SCHEDULE A LIMITED PARTNERS OF REDWOOD MORTGAGE INVESTORS VIII, A California Limited Partnership Name and Address Date of Admission Capital Contribution SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY REDWOOD MORTGAGE INVESTORS VIII, A California Limited Partnership The undersigned hereby applies to become a Limited Partner in REDWOOD MORTGAGE INVESTORS VIII, a California limited partnership (the "Partnership"), and subscribes to purchase the number of Units specified herein in accordance with the terms and conditions of the Limited Partnership Agreement attached as Exhibit A to the Prospectus dated ______________, 1996. 1. Representations and Warranties. The undersigned represents and warrants to the Partnership and its General Partners as follows: (a) I have received, read and understand the Prospectus dated ____________, 1996, and in making this investment I am relying only on the information provided therein. I have not relied on any statements or representations inconsistent with those contained in the Prospectus. (b) I, or the fiduciary account for which I am purchasing, meet the applicable suitability standards and financial requirements set forth in the Prospectus under "INVESTOR SUITABILITY STANDARDS" as they pertain to the state of my primary residence and domicile. (c) I am aware that this Subscription may be rejected in whole or in part by the General Partners in their sole and absolute discretion; that my investment, if accepted, is subject to certain risks described in part in "RISKS AND OTHER FACTORS" set forth in the Prospectus; and that there will be no public market for Units, and accordingly, it may not be possible for me to readily liquidate my investment in the Partnership. (d) I have been informed by the Participating Broker-Dealer firm specified herein, if any, of all pertinent facts relating to the lack of liquidity or marketability of this investment. I understand that Units may not be sold or otherwise disposed of without the prior written consent of the General Partners, which consent may be granted or withheld in their sole discretion, that any transfer is subject to numerous other restrictions described in the Prospectus and in the Limited Partnership Agreement, and that if I am a resident of California or if the transfer occurs in California, any such transfer is also subject to the prior written consent of the California Commissioner of Corporations. I have liquid assets sufficient to assure myself that such purchase will cause me no undue financial difficulties and that I can provide for my current needs and possible personal contingencies, or if I am the trustee of a retirement trust, that the limited liquidity of the Units will not cause difficulty in meeting the trust s obligations to make distributions to plan participants in a timely manner. (e) I am of the age of majority (as established in the state in which I am domiciled) if I am an individual, and in any event, I have full power, capacity, and authority to enter into a contractual relationship with the Partnership. If acting in a representative or fiduciary capacity for a corporation, partnership or trust, or as a custodian, or agent for any person or entity. I have full power or authority to enter into this Subscription Agreement in such capacity and on behalf of such corporation, partnership, trust, person or entity; (f) By virtue of my own investment acumen and experience or financial advice from my independent advisors (other than a person receiving commissions by reason of my purchase of Units), I am capable of evaluating the risks and merits of an investment in the Partnership. (g) I am buying the Units solely for my own account, or for the account of a member or members of my immediate family or in a fiduciary capacity for the account of another person or entity and not as an agent for another. (h) I acknowledge and agree that counsel representing the Partnership, the General Partners and their Affiliates does not represent me and shall not be deemed under the applicable codes of professional responsibility to have represented or to be representing me or any of the Limited Partners in any respect. (i) If I am buying the Units in a fiduciary capacity or as a custodian for the account of another person or entity, I have been directed by that person or entity to purchase the Unit(s), and such person or entity is aware of my purchase of Units on their behalf, and consents thereto and is aware of the merits and risks involved in the investment in the Partnership. By making these representations, the subscriber has not waived any right of action available under applicable federal or state securities laws. 2. Power of Attorney. The undersigned hereby irrevocably constitutes and appoints the General Partners, and each of them, either one acting alone, as his true and lawful attorney-in-fact, with full power and authority for him, and in his name, place and stead, to execute, acknowledge, publish and file: (a) The Limited Partnership Agreement, the Certificate of Limited Partnership and any amendments thereto or cancellations thereof required under the laws of the State of California; (b) Any other certificates, instruments, and documents as may be required by, or may be appropriate under, the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business; and (c) Any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Limited Partner, or the dissolution and termination of the Partnership. The power of attorney granted above is a special power of attorney coupled with an interest, is irrevocable, and shall survive the death or incapacity of the undersigned or, if the undersigned is a corporation, partnership, trust or association, the dissolution or termination thereof. The power of attorney shall also survive the delivery of an assignment of Units by a Limited Partner; provided, that where the assignee thereof has been approved by the General Partners for admission to the Partnership as a substituted Limited Partner, such power of attorney shall survive the delivery of such assignment for the sole purpose of enabling the General Partners to execute, acknowledge, file and record any instrument necessary to effect such substitution. 3. Acceptance. This Subscription Agreement will be accepted or rejected by a General Partner within thirty (30) days of its receipt by the Partnership. Upon acceptance, this subscription will become irrevocable, and will obligate the undersigned to purchase the number of Units specified herein, for the purchase price of $100 per Unit. The General Partners will return a countersigned copy of this Subscription Agreement to accepted subscribers, which copy (together with my canceled check) will be evidence of my purchase of Units. 4. Payment of Subscription Price. The full purchase price for Units is $100 per Unit, payable in cash concurrently with delivery of this Subscription Agreement. I understand that my subscription funds will be held by the General Partners, until my funds are needed by the Partnership to fund a mortgage loan or for other proper Partnership purposes, and only then will I actually be admitted to the Partnership. In the interim, my subscription funds will earn interest at passbook savings accounts rates. If I elect to receive monthly, quarterly or annual cash distributions, then such interest will be returned to me when I am admitted to the Partnership. If I elect to allow my share of Partnership income in the form of additional Units that will be reinvested by the Partnership, then such interest will be invested in the Partnership in which case I understand that the number of Units I initially subscribed for will be increased accordingly. If I initially elect to receive additional Units and reinvest my share of Partnership income, I may after three (3) years change my election and receive monthly, quarterly or annual cash distributions. I understand that if I initially elect to receive monthly, quarterly or annual cash distributions, my election to receive cash distributions is irrevocable. However, I understand that I may change whether I receive such distributions on a monthly, quarterly or annual basis. 5. THE UNDERSIGNED AGREES TO INDEMNIFY AND HOLD REDWOOD MORTGAGE INVESTORS VIII, A CALIFORNIA LIMITED PARTNERSHIP, AND ITS GENERAL PARTNERS AND OTHER AGENTS AND EMPLOYEES HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, LIABILITIES, AND DAMAGES, INCLUDING, WITHOUT LIMITATION, ALL ATTORNEYS' FEES WHICH SHALL BE PAID AS INCURRED) WHICH ANY OF THEM MAY INCUR, IN ANY MANNER OR TO ANY PERSON, BY REASON OF THE FALSITY, INCOMPLETENESS OR MISREPRESENTATION OF ANY INFORMATION FURNISHED BY THE UNDERSIGNED HEREIN OR IN ANY DOCUMENT SUBMITTED HEREWITH. 6. Signature. The undersigned represents that: (a) I have read the foregoing and that all the information provided by me is accurate and complete; and (b) I will notify the General Partners immediately of any material adverse change in any of the information set forth herein which occurs prior to the acceptance of my subscription. REDWOOD MORTGAGE INVESTORS VIII SUBSCRIPTION AGREEMENT PLEASE READ BOTH SIDES OF THIS AGREEMENT BEFORE SIGNING Type Of Ownership: (check one) 1.[ ] SINGLE PERSON (I) 10. [ ]INDIVIDUAL RETIREMENT ACCOUNT (IRA) (Beneficiary & Plan Administrator must sign) 2.[ ]MARRIED PERSON-SEPARATE PROPERTY (I-2) 11.[ ]IRA/SEP (SEP) (Beneficiary & Plan Administrator must sign) *3.[ ]COMMUNITY PROPERTY (COM) 12.[ ]ROLLOVER IRA (ROI) (Beneficiary & Plan Administrator must sign) *4.[ ]TENANTS IN COMMON (T) All parties must sign) 13. [ ]KEOGH (H.R.10) (K) (Custodian signature required) *5.[ ] JOINT TENANTS WITH RIGHTS OF SURVIVORSHIP (J) (All parties must sign) 14.[ ]PARTNERSHIP (P) 6. [ ]CORPORATION: Authorized Party must sign on behalf of the corporation. (C) 15.[ ]NON-PROFIT ORGANIZATION (NP) 7.[ ]TRUST (TR) 16.[ ]CUSTODIAN (CU) (Trustee signature required) Custodian signature required) (Print trustee name(s) here; sign in signaturesection) 17.[ ]CUSTODIAN/UGMA (UGM) [ ] Taxable (TRT)_________________ (Custodian signature required) [ ] Tax Exempt (TRE)_____________ 8.[ ]PENSION PLAN (PP) 18.[ ]OTHER (Explain) Trustee signature required) ---------------------------------- ---------------------------------- 9. [ ] PROFIT SHARING PLAN (PSP) ---------------------------------- (Trustee signature required) *Two or more signatures required. If using Ownership Boxes 7 through 18, Complete Sections 1 through 7. - ------------------------------- ------------------------------------------------ 1.INVESTOR OR BENEFICIARY Type or print your name(s) exactly as they should REGISTRATION AND REPORT appear in the account records of the Partnership. INFORMATION Include the name and addresses of the trustee, custodian and administrator when applicable. A social security number is required for each individual investor or beneficiary. For IRAs, Keoghs, and other trusts, a taxpayer identification number is also required. All checks and correspondence will go to this address unless another address is listed in Sections 5 or 6 below. ---------------------------------------------------- Individual Name ----------------------------------------------------- (Additional Name(s) if held in joint tenancy, community property, tenants-in-common) ----------------------------------------------------- Street Address ------------------- ------------- ------------------- City State Zip Code -------------------------- -------------------------- Daytime Phone Number Home Phone Number --------------------- ------------------------ Taxpayer ID# Social Security # (For IRAs, Keoghs (HR10) and Qualified Plans, the taxpayer identification number is your plan or account tax or employer identification number. For most individual taypayers, it is your social security number. NOTE: If the Units are to be held in more than one name, the number should be that of the first person listed. For IRAs and Keoghs enter both the social security number and the taxpayer identification number.) --------------------------------------------------- State of Residence (IRA and KEOGH accounts: state of residence of plan beneficiary; all others, state of residence of investor) 2. TRUST REGISTRATION Name of Trust: -------------------------------------------------- Please print here the exact name of Trust and Trustee, Custodian or Administrator -------------------------------------------------- Address ----------------- ------------- ------------------- City State Zip Code ------------------------- ---------------------- Taxpayer ID# Tax Year End # 3. INVESTMENT Number of Units to be purchased ----------------- Minimum Subscription is 20 Units at $100 per Unit ($2,000), with additional Amount of payment enclosed ---------------------- investments of any amount. (Make check payable to "Redwood Mortgage Investors VIII") If the investor has elected to compound his share of monthly, quarterly or annual income (see 4 below), then the interest earned on subscription funds until admission to the Partnership will be invested in additional Units on behalf of the investor; therefore, the actual number of Units to be issued to the investor upon admission to the Partnership will be increased. Check one:[ ]Initial Investment [ ] Additional Investment 4. DISTRIBUTIONS Does the investor wish to receive additional Units that will be reinvested in lieu Of cash distributions? [ ] YES [ ] NO If "NO", income shall be distributed: [ ] Monthly [ ] Quarterly [ ] Annually. The election to compound income may only be changed after three (3) years. 5. SPECIAL ADDRESS FOR Name ADDITIONAL CORRESPONDENCE ------------------------------------------ (If the Same as in 2, Please Disregard) ---------------------------------------- ------------- ------------------ ------------ City State Zip Code If the registration is for an IRA, KEOGH or Trust Account, all correspondence will go to the address of the custodian. If additional correspondence on this account is requested to be sent to the investor's home address please indicate: _____________________________ 6. SPECIAL ADDRESS FOR CASH DISTRIBUTIONS -------------------------------------------- (If the Same as in 2, Please Disregard) Name -------------------------------------------- Address ------------- ------------- --------------- City State Zip Code If cash distributions are to be sent to a money market or other account at an address other than that listed, please enter that account number and address here.All other communications will be mailed to the investor's registered address of record under Sections 2 or 3, or to the alternate address listed in Section 6 above. In no event will the Partnership or its Affiliates be responsible for any adverse consequences of direct deposits. 7. SIGNATURES IN WITNESS WHEREOF, the undersigned has executed below this __________ day of _______ at ___________________________________. Investor's primary residence is in _________ _____________________________________________ --------------------------------------------- (Investor Signature and Title) --------------------------------------------- (Investor Signature and Title) --------------------------------------------- (Investor Signature and Title) ---------------------------------------------- (Investor Signature and Title) 8. BROKER-DEALER DATA The undersigned Broker-Dealer hereby (To Be Completed By Selling certifies that (i) a copy of the Broker-Dealer) Prospectus, as amended and/or supplemented to date, has been delivered to the above investor; and (ii) that the appropriate suitability determination under NASD Conduct Rules has been made and that the appropriate records are being maintained by the Broker-Dealer. --------------------------------------------- Broker-Dealer Authorized Signature (Required On All Orders) Registered Representative Last Name First: ____________________________ Registered Representative No.: ______________ Registered Representative Phone No.: ________ Broker-Dealer Name: _________________________ Street Address (Branch Office): _____________________________________________ City, State, Zip Code:_______________________ The registered representative, by signing below, certifies that he has reasonable grounds to believe, on the basis of information obtained from the investor concerning his investment objectives, other investments, financial situation and needs and any other information known by the selling Broker-Dealer, that investment in the Units is suitable for the investor and that suitability records are being maintained; and (2) that he has informed the investor of all pertinent facts relating to the liquidity and marketability of the Units. Registered Representative's Signature _________________________________________ Print or Type Name: _______________________ Check box if you wish to receive Trails [ ] 9. ACCEPTANCE This subscription accepted This Subscription will not be an REDWOOD MORTGAGE INVESTORS VIII, effective Agreement until it is A California Limited Partnership signedby a General Partner of P.O. Box 5096 Redwood Mortgage Investors VIII, a Redwood City, California 94063 California limited partnership (415) 365-5341 By:_____________________________________ (Office Use Only) Account #:______________________________ Investor Check Date:____________________ Check Amount:___________________________ Check #:________________________________ Entered By: _______ Checked By: ______ Date Entered:___________________________ UNSOLICITED FUNDS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY REDWOOD MORTGAGE INVESTORS VIII, A California Limited Partnership The undersigned hereby applies to become a Limited Partner in REDWOOD MORTGAGE INVESTORS VIII, a California limited partnership (the "Partnership"), and subscribes to purchase the number of Units specified herein in accordance with the terms and conditions of the Limited Partnership Agreement attached as Exhibit A to the Prospectus dated ______________, 1996. 1. Representations and Warranties. The undersigned represents and warrants to the Partnership and its General Partners as follows: (a) I have received, read and understand the Prospectus dated ____________, 1996, and in making this investment I am relying only on the information provided therein. I have not relied on any statements or representations inconsistent with those contained in the Prospectus. (b) I, or the fiduciary account for which I am purchasing, meet the applicable suitability standards and financial requirements set forth in the Prospectus under "INVESTOR SUITABILITY STANDARDS" as they pertain to the state of my primary residence and domicile. (c) I am aware that this Subscription may be rejected in whole or in part by the General Partners in their sole and absolute discretion; that my investment, if accepted, is subject to certain risks described in part in "RISKS AND OTHER FACTORS" set forth in the Prospectus; and that there will be no public market for Units, and accordingly, it may not be possible for me to readily liquidate my investment in the Partnership. (d) I have been informed by the Participating Broker-Dealer firm specified herein, if any, of all pertinent facts relating to the lack of liquidity or marketability of this investment. I understand that Units may not be sold or otherwise disposed of without the prior written consent of the General Partners, which consent may be granted or withheld in their sole discretion, that any transfer is subject to numerous other restrictions described in the Prospectus and in the Limited Partnership Agreement, and that if I am a resident of California or if the transfer occurs in California, any such transfer is also subject to the prior written consent of the California Commissioner of Corporations. I have liquid assets sufficient to assure myself that such purchase will cause me no undue financial difficulties and that I can provide for my current needs and possible personal contingencies, or if I am the trustee of a retirement trust, that the limited liquidity of the Units will not cause difficulty in meeting the trust s obligations to make distributions to plan participants in a timely manner. (e) I am of the age of majority (as established in the state in which I am domiciled) if I am an individual, and in any event, I have full power, capacity, and authority to enter into a contractual relationship with the Partnership. If acting in a representative or fiduciary capacity for a corporation, partnership or trust, or as a custodian, or agent for any person or entity. I have full power or authority to enter into this Subscription Agreement in such capacity and on behalf of such corporation, partnership, trust, person or entity; (f) By virtue of my own investment acumen and experience or financial advice from my independent advisors (other than a person receiving commissions by reason of my purchase of Units), I am capable of evaluating the risks and merits of an investment in the Partnership. (g) I am buying the Units solely for my own account, or for the account of a member or members of my immediate family or in a fiduciary capacity for the account of another person or entity and not as an agent for another. (h) I acknowledge and agree that counsel representing the Partnership, the General Partners and their Affiliates does not represent me and shall not be deemed under the applicable codes of professional responsibility to have represented or to be representing me or any of the Limited Partners in any respect. (i) If I am buying the Units in a fiduciary capacity or as a custodian for the account of another person or entity, I have been directed by that person or entity to purchase the Unit(s), and such person or entity is aware of my purchase of Units on their behalf, and consents thereto and is aware of the merits and risks involved in the investment in the Partnership. By making these representations, the subscriber has not waived any right of action available under applicable federal or state securities laws. 2. Power of Attorney. The undersigned hereby irrevocably constitutes and appoints the General Partners, and each of them, either one acting alone, as his true and lawful attorney-in-fact, with full power and authority for him, and in his name, place and stead, to execute, acknowledge, publish and file: (a) The Limited Partnership Agreement, the Certificate of Limited Partnership and any amendments thereto or cancellations thereof required under the laws of the State of California; (b) Any other certificates, instruments, and documents as may be required by, or may be appropriate under, the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business; and (c) Any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Limited Partner, or the dissolution and termination of the Partnership. The power of attorney granted above is a special power of attorney coupled with an interest, is irrevocable, and shall survive the death or incapacity of the undersigned or, if the undersigned is a corporation, partnership, trust or association, the dissolution or termination thereof. The power of attorney shall also survive the delivery of an assignment of Units by a Limited Partner; provided, that where the assignee thereof has been approved by the General Partners for admission to the Partnership as a substituted Limited Partner, such power of attorney shall survive the delivery of such assignment for the sole purpose of enabling the General Partners to execute, acknowledge, file and record any instrument necessary to effect such substitution. 3. Acceptance. This Subscription Agreement will be accepted or rejected by a General Partner within thirty (30) days of its receipt by the Partnership. Upon acceptance, this subscription will become irrevocable, and will obligate the undersigned to purchase the number of Units specified herein, for the purchase price of $100 per Unit. The General Partners will return a countersigned copy of this Subscription Agreement to accepted subscribers, which copy (together with my canceled check) will be evidence of my purchase of Units. 4. Payment of Subscription Price. The full purchase price for Units is $100 per Unit, payable in cash concurrently with delivery of this Subscription Agreement. I understand that my subscription funds will be held by the General Partners, until my funds are needed by the Partnership to fund a mortgage loan or for other proper Partnership purposes, and only then will I actually be admitted to the Partnership. In the interim, my subscription funds will earn interest at passbook savings accounts rates. If I elect to receive monthly, quarterly or annual cash distributions, then such interest will be returned to me when I am admitted to the Partnership. If I elect to allow my share of Partnership income in the form of additional Units that will be reinvested by the Partnership, then such interest will be invested in the Partnership in which case I understand that the number of Units I initially subscribed for will be increased accordingly. If I initially elect to receive additional Units and reinvest my share of Partnership income, I may after three (3) years change my election and receive monthly, quarterly or annual cash distributions. I understand that if I initially elect to receive monthly, quarterly or annual cash distributions, my election to receive cash distributions is irrevocable. However, I understand that I may change whether I receive such distributions on a monthly, quarterly or annual basis. 5. THE UNDERSIGNED AGREES TO INDEMNIFY AND HOLD REDWOOD MORTGAGE INVESTORS VIII, A CALIFORNIA LIMITED PARTNERSHIP, AND ITS GENERAL PARTNERS AND OTHER AGENTS AND EMPLOYEES HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, LIABILITIES, AND DAMAGES, INCLUDING, WITHOUT LIMITATION, ALL ATTORNEYS' FEES WHICH SHALL BE PAID AS INCURRED) WHICH ANY OF THEM MAY INCUR, IN ANY MANNER OR TO ANY PERSON, BY REASON OF THE FALSITY, INCOMPLETENESS OR MISREPRESENTATION OF ANY INFORMATION FURNISHED BY THE UNDERSIGNED HEREIN OR IN ANY DOCUMENT SUBMITTED HEREWITH. 6. Signature. The undersigned represents that: (a) I have read the foregoing and that all the information provided by me is accurate and complete; and (b) I will notify the General Partners immediately of any material adverse change in any of the information set forth herein which occurs prior to the acceptance of my subscription. REDWOOD MORTGAGE INVESTORS VIII SUBSCRIPTION AGREEMENT PLEASE READ BOTH SIDES OF THIS AGREEMENT BEFORE SIGNING Type Of Ownership: (check one) 1.[ ] SINGLE PERSON (I) 10. [ ]INDIVIDUAL RETIREMENT ACCOUNT (IRA) (Beneficiary & Plan Administrator must sign) 2.[ ]MARRIED PERSON-SEPARATE PROPERTY (I-2) 11.[ ]IRA/SEP (SEP) (Beneficiary & Plan Administrator must sign) *3.[ ]COMMUNITY PROPERTY (COM) 12.[ ]ROLLOVER IRA (ROI) (Beneficiary & Plan Administrator must sign) *4.[ ]TENANTS IN COMMON (T) All parties must sign) 13. [ ]KEOGH (H.R.10) (K) (Custodian signature required) *5.[ ] JOINT TENANTS WITH RIGHTS OF SURVIVORSHIP (J) (All parties must sign) 14.[ ]PARTNERSHIP (P) 6. [ ]CORPORATION: Authorized Party must sign on behalf of the corporation. (C) 15.[ ]NON-PROFIT ORGANIZATION (NP) 7.[ ]TRUST (TR) 16.[ ]CUSTODIAN (CU) (Trustee signature required) Custodian signature required) (Print trustee name(s) here; sign in signaturesection) 17.[ ]CUSTODIAN/UGMA (UGM) [ ] Taxable (TRT)_________________ (Custodian signature required) [ ] Tax Exempt (TRE)_____________ 8.[ ]PENSION PLAN (PP) 18.[ ]OTHER (Explain) Trustee signature required) ----------------------------------- ------------------------------------- 9. [ ] PROFIT SHARING PLAN (PSP) ------------------------------------- (Trustee signature required) *Two or more signatures required. If using Ownership Boxes 7 through 18, Complete Sections 1 through 7. - ------------------------------- ------------------------------------------------ 1.INVESTOR OR BENEFICIARY Type or print your name(s) exactly as they should REGISTRATION AND REPORT appear in the account records of the Partnership. INFORMATION Include the name and addresses of the trustee, custodian and administrator when applicable. A social security number is required for each individual investor or beneficiary. For IRAs, Keoghs, and other trusts, a taxpayer identification number is also required. All checks and correspondence will go to this address unless another address is listed in Sections 5 or 6 below. ---------------------------------------------------- Individual Name ----------------------------------------------------- (Additional Name(s) if held in joint tenancy, community property, tenants-in-common) ----------------------------------------------------- Street Address ------------------- ------------- ------------------- City State Zip Code -------------------------- -------------------------- Daytime Phone Number Home Phone Number --------------------- ------------------------ Taxpayer ID# Social Security # (For IRAs, Keoghs (HR10) and Qualified Plans, the taxpayer identification number is your plan or account tax or employer identification number. For most individual taypayers, it is your social security number. NOTE: If the Units are to be held in more than one name, the number should be that of the first person listed. For IRAs and Keoghs enter both the social security number and the taxpayer identification number.) --------------------------------------------------- State of Residence (IRA and KEOGH accounts: state of residence of plan beneficiary; all others, state of residence of investor) 2. TRUST REGISTRATION Name of Trust: -------------------------------------------------- Please print here the exact name of Trust and Trustee, Custodian or Administrator -------------------------------------------------- Address ----------------- ------------- ------------------- City State Zip Code ------------------------- ---------------------- Taxpayer ID# Tax Year End # 3. INVESTMENT Number of Units to be purchased ----------------- Minimum Subscription is 20 Units at $100 per Unit ($2,000), with additional Amount of payment enclosed ---------------------- investments of any amount. (Make check payable to "Redwood Mortgage Investors VIII") If the investor has elected to compound his share of monthly, quarterly or annual income (see 4 below), then the interest earned on subscription funds until admission to the Partnership will be invested in additional Units on behalf of the investor; therefore,the actual number of Units to be issued to the investor upon admission to the Partnership will be increased. Check one:[ ]Initial Investment [ ] Additional Investment 4. DISTRIBUTIONS Does the investor wish to receive additional Units that will be reinvested in lieu Of cash distributions? [ ] YES [ ] NO If "NO", income shall be distributed: [ ] Monthly [ ] Quarterly [ ] Annually. The election to compound income may only be changed after three (3) years. 5. SPECIAL ADDRESS FOR Name ADDITIONAL CORRESPONDENCE ----------------------------------------- (If the Same as in 2, Please Disregard) ---------------------------------------- ------------- ------------------ ----------- City State Zip Code If the registration is for an IRA, KEOGH or Trust Account, all correspondence will go to the address of the custodian. If additional correspondence on this account is requested to be sent to the investor's home address please indicate: _____________________________ 6. SPECIAL ADDRESS FOR CASH DISTRIBUTIONS -------------------------------------------- (If the Same as in 2, Please Disregard) Name -------------------------------------------- Address ------------- ------------- ---------------- City State Zip Code If cash distributions are to be sent to a money market or other account at an address other than that listed, please enter that account number and address here.All other communications will be mailed to the investor's registered address of record under Sections 2 or 3, or to the alternate address listed in Section 6 above. In no event will the Partnership or its Affiliates be responsible for any adverse consequences of direct deposits. 7. SIGNATURES IN WITNESS WHEREOF, the undersigned has executed below this __________ day of _______ at ___________________________________. Investor's primary residence is in _________ _____________________________________________ --------------------------------------------- (Investor Signature and Title) --------------------------------------------- (Investor Signature and Title) --------------------------------------------- (Investor Signature and Title) ---------------------------------------------- (Investor Signature and Title) 8. ACCEPTANCE This subscription accepted This Subscription will not be an REDWOOD MORTGAGE INVESTORS VIII, effective Agreement until it is A California Limited Partnership signedby a General Partner of P.O. Box 5096 Redwood Mortgage Investors VIII, a Redwood City, California 94063 California limited partnership (415) 365-5341 By:_____________________________________ (Office Use Only) Account #:______________________________ Investor Check Date:____________________ Check Amount:___________________________ Check #:________________________________ Entered By: _______ Checked By: ______ Date Entered:___________________________ SPECIAL NOTICE FOR CALIFORNIA RESIDENTS ONLY COMMISSIONERS RULE 260.141.11 260.141.11 Restriction on Transfer (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferors ancestors, descendants or spouse or anycustodian or trustee for the account of the transferor or the transferors ancestors, descendants or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferees ancestors, descendants or spouse; (5) to the holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioners written consent is obtained or under this rule is not required; (10) by way of a sale qualified under Sections 25111, 25112, or 25113, or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112, or 25113 of the Code, provided that no order under Section 25140 or Subdivision (a) of Section 25148 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or (15) by the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state, if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities, provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer,whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR,WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONERS RULES. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 30. Other Expenses of Issuance and Distribution. The expenses payable in connection with the issuance and distribution of the securities being registered are estimated on the maximum offering amount of $30,000,000 to be as follows: Maximum of $ 30,000,000 ----------------- SEC Registration Fee $10,341.81 NASD Registration Fee 3,500.00 California Registration Fee 2,500.00 Printing and Engraving Expenses 80,000.00 Accounting Fees and Expenses 100,000.00 Legal Fees and Expenses 175,000.00 Other Blue Sky Filing Fees and Expenses 10,000.00 Postage 40,000.00 Miscellaneous Expenses 375,000.00 ----------------- Total $796,341.81 ================= ITEM 31 Sales to Special Parties. Inapplicable ITEM 32. Recent Sales of Unregistered Securities. None ITEM 33 Indemnification of Directors and Officers Section 3.16 of the Limited Partnership Agreement provides that the General Partners and their Affiliates shall be indemnified by the Partnership for liability and related expenses (including attorneys fees) incurred in dealing with third parties, excluding matters arising under the Securities Act of 1933, as amended, provided the General Partners or their Affiliates acted in good faith, and provided that the conduct did not constitute gross negligence or gross misconduct. ITEM 34. Treatment of Proceeds from Stock Being Registered Inapplicable. ITEM 35. Financial Statements and Exhibits. (a) Financial Statements Included in the Prospectus: 1. Redwood Mortgage Investors VIII: Report of Independent Public Accountant Balance Sheet at June 30, 1995 and June 30, 1996 (audited) 2. Gymno Corporation: Report of Independent Public Accountant Balance Sheet at June 30, 1995, June 30, 1992 and June 30, 1996 (audited) (b) Exhibits: Exhibit Number 1.1 Form of Participating Dealer Agreement with Supplemental Participating Broker Dealer) Agreement 1.2 Form of Advisory Agreement 3.1 Limited Partnership Agreement 3.2 Form of Certificate of Limited Partnership Interest *3.3 Certificate of Limited Partnership 5.1 Opinion of Counsel as to the Legality of the Securities Being Registered 5.2 Opinion of Counsel as to ERISA Matters 8.1 Opinion of Counsel on Certain Tax Matters 10.2 Loan Servicing Agreement 10.3 (a) Form of Note secured by Deed of Trust for Construction Loans which provides for principal and interest payments (b) Form of Note secured by Deed of Trust for Commercial Loans which provides for interest only payments. (c) Form of Note secured by Deed of Trust for Commercial Loans which provides for principal and interest only payments (d) Form of Note secured by Deed of Trust for Residential Loans which provides for interest only payments (e) Form of Note secured by Deed of Trust for Residential Loans which provides for interest and principal prepayments. 10.4 (a) Construction Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing to accompany Exhibit 10.3(a). (b) Deed of Trust, Assignment of Leases and Rents, and Security Agreement and Fixture Filing to accompany Exhibits 10.3(b) and 10.3(c) (c) Deed of Trust, Assignment of Leases and Rents, and Security Agreement and Fixture Filing to accompany Exhibit 10.3(d) 10.6 Agreement to Seek a Lender 24.1 Consent of Parodi & Cropper 24.2 Consent of Wilson, Ryan & Campilongo 27.1 Financial Data Schedule - Gymno * Financial Data Schedule filed under Form SE ITEM 36. Undertaking. THE UNDERSIGNED REGISTRANT HEREBY UNDERTAKES: 30. To file during any period in which offers or sales are being made, a post-effective amendment to this registration statement: i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. 31. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 32. That each such post-effective amendment will comply with the applicable forms, rules and regulations of the Commission in effect at the time such post-effective amendment is filed. 33. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the terminating of the offering. 34. To provide the Underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. 35. To send to each limited partner at least on an annual basis a detailed statement of any transactions with the general partners or its affiliates, and of fees, commissions, compensation and other benefits paid, or accrued to the general partners or its affiliates for the fiscal year completed, showing the amount paid or accrued to each recipient and the services performed. 36. To provide to the limited partners the financial statements required by Form 10-K for the first full fiscal year of operations of the partnership. 37. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expense incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication for such issue. 38. The General Partners undertake to file a sticker supplement pursuant to Rule 424(c) under the Act during this distribution period describing each Partnership Loan not identified in the Prospectus at such time as there arises a reasonable probability that such Partnership Loan will be acquired and to consolidate all such stickers into a post-effective amendment filed at least once every three (3) months, with the information contained in such amendment provided simultaneously to the existing Limited Partners. The General Partners also undertake to file, after the end of the distribution period, a current report on Form 8-K containing the financial statements and any additional information required by Rule 3-14 of Regulation S-X, to reflect each commitment (i.e., the signing of a binding purchase agreement) made after the end of the distribution period involving the use of ten percent (10%) or more (cumulative basis) of the net proceeds of the offering and to provide the information contained in such report to the Limited Partners at least once each quarter after the distribution period of the offering has ended. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this post-effective amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Redwood City, State of California, on September , 1996. REDWOOD MORTGAGE INVESTORS VIII By: ------------------------------------ D. Russell Burwell, General Partner By: ------------------------------------ Michael R. Burwell, General Partner By: GYMNO CORPORATION General Partner By: ------------------------------------ D. Russell Burwell, General Partner By: ---------------------------------- Michael R. Burwell Secretary/Treasurer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date President of Gymno Corporation (Principal ________________________ Executive Officer); _______________________ D. Russell Burwell Director of Gymno September ,1996 Corporation Secretary/Treasurer of Gymno Corporation (Principal Financial and Accounting Officer); ________________________ Director of Gymno _________________________ September , 1996 Michael R. Burwell Corporation ________________________ __________________ General Partner September , 1996 D. Russell Burwell ________________________ General Partner __________________________ Michael R. Burwell September , 1996 Exhibit Number 1.1 Form of Participating Dealer Agreement with Supplemental Participating Broker Dealer) Agreement 1.2 Form of Advisory Agreement 3.1 Limited Partnership Agreement 3.2 Form of Certificate of Limited Partnership Interest *3.3 Certificate of Limited Partnership 5.1 Opinion of Counsel as to the Legality of the Securities Being Registered 5.2 Opinion of Counsel as to ERISA Matters 8.1 Opinion of Counsel on Certain Tax Matters 10.2 Loan Servicing Agreement 10.3 (a) Form of Note secured by Deed of Trust for Construction Loans which provides for principal and interest payments (b) Form of Note secured by Deed of Trust for Commercial Loans which provides for interest only payments. (c) Form of Note secured by Deed of Trust for Commercial Loans which provides for principal and interest only payments (d) Form of Note secured by Deed of Trust for Residential Loans which provides for interest only payments (e) Form of Note secured by Deed of Trust for Residential Loans which provides for interest and principal prepayments. 10.4 (a) Construction Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing to accompany Exhibit 10.3(a). (b) Deed of Trust, Assignment of Leases and Rents, and Security Agreement and Fixture Filing to accompany Exhibits 10.3(b) and 10.3(c) (c) Deed of Trust, Assignment of Leases and Rents, and Security Agreement and Fixture Filing to accompany Exhibit 10.3(d) 10.6 Agreement to Seek a Lender 24.1 Consent of Parodi & Cropper 24.2 Consent of Wilson, Ryan & Campilongo 27.1 Financial Data Schedule - Gymno * Financial Data Schedule filed under Form SE Exhibit 1-1 300,000 Limited Partnership Units ($100 per Unit) REDWOOD MORTGAGE INVESTORS VIII PARTICIPATING BROKER DEALER AGREEMENT - ------------------------------------------------------------------- - ------------------------------------------------------------------- - ------------------------------------------------------------------- - ------------------------------------------------------------------- Gentlemen: D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation are the General Partners of Redwood Mortgage Investors VIII, a California Limited partnership (the "Partnership") engaged in business as a mortgage lender. The Partnership will loan Redwood Home Loan Company, a California corporation doing business as Redwood Mortgage ("Redwood Mortgage") an affiliate of the General Partners, funds (the "Formation Loan") out of which Redwood Mortgage will pay sales commissions under this Agreement. The General Partners, on behalf of the Partnership, propose to offer and sell to qualified investors, upon the terms and subject to the conditions set forth in the Prospectus dated __________, 1996 (the "Prospectus"), limited partnership interests ("Units") of the Partnership at an offering price of $100 per Unit, with a minimum investment of twenty (20) Units per purchaser. The offering is for a maximum of 300,000 Units ($30,000,000). 1. Sale of Units. The General Partners hereby appoint you to effect sales of Units, on a best efforts basis, for the account of the Partnership. This appointment shall commence on the date hereof. Subject to the terms and conditions of this Agreement and upon the basis of the representations and warranties herein set forth, you accept such appointment and agree to use your best efforts to find purchasers of Units. Offers and sales of Units may only be made in accordance with the terms of the offering thereof as set forth in the Prospectus. 2. Eligible Purchasers of Units. You agree not to offer or sell Units to any person who does not meet the suitability standards set forth in the Prospectus. Each prospective purchaser must complete and execute a Subscription Agreement, and return it to the undersigned together with such other documents, instruments or information as the General Partners may request together with a check in the full amount of the purchase price for the number of Units subscribed for. As this is not the first offering of Units in the Partnership, no escrow will be established and all funds shall be immediately available to the Partnership. A purchaser's check shall be made payable to "Redwood Mortgage Investors VIII" and remitted directly to Redwood Mortgage Investors VIII, 650 El Camino Real, Suite G, Redwood City, California 94063, Attention: D. Russell Burwell, together with the above referenced documents by noon of the next business day after your receipt. You shall ascertain that each Subscription Agreement sent in by a prospective purchaser of Units has been fully completed and properly executed by such prospective purchaser. The General Partners, no later than thirty (30) days after such receipt of such Subscription Agreement, shall determine whether they wish to accept the proposed purchaser as a limited partner in the Partnership. It is understood that the General Partners reserve the right to reject the tender of any Subscription Agreement or any reason whatsoever. Should the General Partners determine to accept the tender of a Subscription Agreement the General Partners will promptly advise you of such action. Should the General Partners determine to reject such tender, they will notify you of such determination within this thirty (30) day period and will return to you the tendered Subscription Agreement. If the funds are being held by the Partnership, the General Partners will return to you a check made payable to the proposed purchaser in the same amount as the proposed purchaser's initial check. You agree to return this Subscription Agreement and check to the prospective purchaser by noon of the next business day. You shall not be entitled to any commissions with respect to subscription offers which are rejected. 3. Compensation. In consideration of your services in soliciting and obtaining purchasers of Units, Redwood Mortgage agrees to pay out of the Formation Loan to you a sales commission in accordance with the following number of Units sold: (a) You shall be paid a sales commission of either (i) five percent (5%) of the gross proceeds from the sale of Units, if the investor elects to receive monthly, quarterly or annual cash distributions of his allocable share of Partnership income or (ii) nine percent (9%) of the gross proceeds from the sale of such Units, if the investor elects to allow his allocable share of cash distributions to be received in the form of additional Units. Except as otherwise set forth in this Agreement or any supplements thereto, in no event shall you be entitled to receive any commission with respect an investor's election to receive additional Units in lieu of Periodic Cash Distributions. Furthermore, you may, at our discretion, and provided that you meet certain selling requirements receive additional sales commissions as set forth in the Supplemental Participating Broker Dealer Agreement. In addition, you may be paid, in the discretion of the General Partners, up to one-half of one percent (.5%) of the gross proceeds of the Offering for bona fide accountable expenses as set forth in NASD Notice to Members 82-51 incurred by you, in connection with the performance of your due diligence services under this Agreement, including by way of illustration (i) the cost of independent auditors, accountants and legal counsel; and (ii) the costs to supervise, review and exercise due diligence activities with respect to the Partnership, including, without limitation, telephone calls and travel. An investor's written election to receive monthly, quarterly or annual cash distributions as indicated on his Subscription Agreement shall be final and binding on all parties. However, such investor may change his initial decision regarding whether he wants the cash distributions paid to him on a monthly, quarterly or annual basis. After three (3) years an investor who initially elected to receive additional Units in lieu of Periodic Cash Distributions may elect to receive monthly, quarterly or annual cash distributions. The decision of an investor to receive cash distributions after three (3) years will not effect the payment of sales commissions. You may also be paid, in the discretion of the General Partners, for certain expense reimbursements and sales seminar expenses. Commissions, expense reimbursements and sales seminar expenses (and due diligence expenses if specified above) shall be paid within 30 days after the Partnership's acceptance of a prospective investor's proper tender of a completed Subscription Agreement. Total compensation, including commissions, expense reimbursements and sales seminars expenses, to be paid by Redwood Mortgage and the Partnership for the sale of Units shall not exceed a maximum of ten percent (10%) of the gross proceeds of the offering received plus a maximum of one-half of one percent (.5%) of gross proceeds of the offering received for bona fide due diligence expense reimbursements on an accountable basis as set forth in NASD Notice to Members 82-51 or that amount allowable under NASD Notice to Members 89-16. 4. Further Agreements of Broker-Dealer. (a) You represent that you are a corporation duly organized, validly existing and in good standing under the laws of the Jurisdiction in which you are incorporated, with all requisite power and authority to enter into this Agreement and to carry out your obligations hereunder. (b) You represent that you are a member in good standing of the National Association of Securities Dealers, Inc., and shall maintain such registration and qualification throughout the term of this Agreement. (c) You covenant and agree to comply with any applicable requirements of the Securities Exchange Act of 1934, the Securities Act of 1933, the California Corporations Code, the laws of the state in which you are registered and sell Units, the published rules and regulations of the Securities and Exchange Commission, the By-Laws and the Conduct Rules of the National Association of Securities Dealers, Inc. ("NASD"). Furthermore, you specifically covenant and agree not to deliver the Partnership's sales literature, if any, to any person unless such sales literature is accompanied or preceded by a copy of the Prospectus. (d) You will not give any information or make any representations or warranties in connection with the offering of Units other than, or inconsistent with, those contained in the Prospectus and any sales material approved in writing by the General Partners of the Partnership. You will deliver a copy of the Prospectus to each investor to whom an offer is made prior to or simultaneously with the first solicitation of any offer to sell the Units to an investor. You agree to deliver or send any supplements and any amended Prospectus to any investor you have previously sent to or given a Prospectus prior to or simultaneously with the first solicitation of an offer to sell the Units to an investor. You will not deliver the approved sales material to any person unless such sales material is accompanied or preceded by the Prospectus. You expressly agree not to prepare or use any sales literature, advertisements or other materials in connection with the offering or sale of the Units without our prior written consent. You agree that to the extent information is provided to you marked "For Broker-Dealer Use Only", you will not provide such information to prospective investors. (e) You will solicit only eligible purchasers of Units as described in the Prospectus under "INVESTOR SUITABILITY STANDARDS - Minimum Unit Purchase." (f) You agree to make diligent inquiries and maintain a record thereof for a period of at least six years of all prospective purchasers of the Units, in order to ascertain whether the purchase of Units represents a suitable investment for such purchaser, and whether the purchaser is otherwise eligible to purchase Units in accordance with the terms of the offering. Such inquiry shall also be made with respect to any resales or transfers of Units. Accordingly, you shall satisfy the following requirements: (i) In recommending to a prospective investor the purchase of Units, you shall have reasonable grounds to believe, on the basis of information obtained from the investor concerning his investment objectives, other investments, financial situation and needs, and any other information known by you or your representatives, that the investor (or, if the investor is acting as trustee or custodian of a trust or other entity, that such other trust or entity) is or will be in a financial position to realize to a significant extent the benefits described in the Prospectus, that such investor has a fair market net worth sufficient to sustain the risks inherent in the purchase of Units, including loss of investment and lack of liquidity, and that Units are otherwise suitable as an investment. (ii) You shall also maintain in your files documents disclosing the basis upon which your determination of suitability was reached as to each investor. (iii) Notwithstanding the foregoing, you shall not execute any transaction for the purchase or sale of Units in a discretionary account, without prior written approval of the transaction by your customer. (iv) Prior to executing any transaction for the purchase or sale of Units, and any resale or transfer of Units as permitted, you (or one of your associated persons) shall fully inform the prospective investor of all pertinent facts relating to the liquidity and marketability of Units during the term of the Partnership. (g) In connection with offering and selling Units, you agree to comply with all of the applicable requirements under the Securities Act of 1933, as amended (hereinafter referred to as the "Act"), the Securities Exchange Act of 1934, as amended, the "Securities Exchange Act"), including without limitation, the provisions of Rule 10b-6, Rule 10b-9, Rule 15c2-4 and Rule 15c2-8 under the Securities Exchange Act, the Conduct Rules of the NASD, and state blue sky or securities laws. You agree that you will not rely exclusively on us to satisfy your duty of due diligence and, in particular, you agree to obtain from us and from other sources such information as you deem necessary to comply with Rule 2810 of NASD Conduct Rules. You further agree to supply the Partnership with such written reports of your activities relating to the offer and sale of Units as the Partnership may request from time to time. (h) You agree to diligently make inquiries as required by law of all prospective purchasers of Units in order to ascertain whether a purchase of Units is suitable for each such purchaser, and not rely solely on information supplied by each purchaser. You also agree to promptly transmit to the Partnership all fully completed and duly executed Subscription Agreements. You shall retain all records relating to investor suitability as to each purchaser for a period of six years from the date of sale of the Units to each purchaser. Upon reasonable notice to you, the General Partners, or their designated agents, shall have the right to inspect such records. (i) By executing this Agreement, you represent and warrant that you have reasonable grounds to believe (based on information made available to you by the General Partners of the Partnership through the Prospectus and other materials, or otherwise obtained as a result of inquiries conducted by you or other NASD member firms) that all material facts concerning the Partnership are adequately and accurately disclosed and provide a basis for evaluating the Partnership, including facts relating to items of compensation, physical properties, tax aspects, financial stability and experience of the sponsor, conflicts of interest and risk factors, and appraisals or other reports. (j) For purposes of 4(i) above, you may rely upon the results of an inquiry conducted by another member broker dealer, provided that: (i) You have reasonable grounds to believe that such inquiry was conducted with due care; (ii) The results of the inquiry were provided to you with the consent of the member broker dealer conducting or directing the inquiry; (iii) No broker dealer that participated in the inquiry is the Sponsor or affiliate of the Sponsor. 5. Termination. Either party may terminate this Agreement at any time, effective immediately, by giving written notice to other party. In the event of termination, you shall not be entitled to any commissions or any restitution for the value of your services rendered prior to or subsequent to the effective date of such termination, excepting only such commissions as may have been earned with respect to Units already sold by you and accepted by the Partnership prior to the termination date. 6. Expenses. You shall bear all your own expenses incurred in connection with the offer and sale of Units, and you shall not be entitled to any reimbursement for such expenses by the Partnership except to the extent that any due diligence expenses are specified in Section 3 of this Agreement. 7. Indemnification. (a) The Partnership and the General Partners agree to indemnify you and your officers, directors, representatives and controlling persons against losses, claims, damages or liabilities (including reasonable attorneys' fees) to which you or such other persons may become subject, under federal or state securities laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement of a material fact contained in the Prospectus or the omission to state therein, material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading. The foregoing indemnity shall include reimbursement of any legal or other expenses reasonably incurred in connection with investigation or defending any such loss, claim, damage, liability or action, and shall be paid by you as such expenses are incurred. (b) You agree to indemnify and hold harmless the Partnership, its General Partners, their affiliated mortgage company (Redwood Mortgage), all other dealers participating in the offering of Units, and each officer, director and controlling person of such persons, against any losses, claims, damages or liabilities (including reasonable attorneys' fees) to which any of such persons may become subject, under federal or state securities laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any statements, actions or omissions by you or any person controlled by you or acting on your behalf, which statement, action or omission is untrue or is inconsistent with or in violation of any provision of federal or state securities laws, the rules and regulations of the Securities and Exchange Commission, or the NASD Conduct Rules. The foregoing indemnity shall include reimbursement of any legal or other expenses reasonably incurred in connection with investigation or defending any such loss, claim, damage, liability or action, and shall be paid by you as such expenses are incurred. (c) In order to provide for just and equitable contribution in any case in which (i) a claim is made for indemnification pursuant to this Section 7 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that express provisions of this Section 7 provide for indemnification in such case or (ii) contribution may be required on the part of a party thereto, then the General Partners, the Partnership, and Participating Dealers shall contribute to the aggregate losses, claims, damages, or liabilities to which they may be subject (which shall, for all purposes of this Agreement include, without limitation, all costs of defense and investigation and ail attorneys fees) in either such case (after contribution from others) in such proportions that the Participating Dealers are responsible in the aggregate for that portion of such losses, claims, damages or liabilities represented by the percentage that the aggregate amounts received by the Participating Dealers pursuant to Section 3 of this agreement bear to the aggregate of the offering price of the Units, and the General Partners and the Partnership shall be responsible for the balance; provided, however, that the contribution of each such Participating Dealer shall not be in excess of their proportionate share (based upon the ratio of the aggregate purchase price of the Units sold by such Participating Dealer to the aggregate purchase price of the Units sold) of the portion of such losses, claims, damages or liabilities for which the Participating Dealer is responsible. No person guilty of a fraudulent misrepresentation shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. If the full amount of the contribution specified in this subsection (c) of Section 7 is not permitted by law, then each Participating Dealer and each person who controls each Participating Dealer shall be entitled to contribution from the General Partners and the Partnership and controlling persons to the full extent permitted by law. 8. Arbitration. (a) As between the parties hereto, all questions as to rights and obligations arising under the terms of this Agreement are subject to arbitration, including any question concerning any right or duty under the Securities Act of 1933, the Securities Exchange Act of 1934, and the securities laws of any state in which Units are offered, and the Conduct Rules of the NASD and such arbitration shall be governed by the rules of the American Arbitration Association. (b) If a dispute should arise under this Agreement, any Party may within 60 days make a demand for arbitration by filing a demand in writing for the other. (c) The parties may agree upon one arbitrator, but in the event that they cannot agree, there shall be three, one named in writing by each of the parties within five (5) days after demand for arbitration is given and a third chosen by the two appointed. Should either party refuse or neglect to join in the appointment of the arbitrator(s) or to furnish the arbitrator(s) with any papers or information demanded, the arbitrator(s) are empowered by both parties to proceed ex parte. (d) Arbitration shall take place in San Mateo, California, and the hearing before the arbitrator(s) of the matter to be arbitrated shall be at the time and place within said city as is selected by the arbitrator(s). The arbitrator(s) shall select such time and place promptly after his (or their) appointment and shall give written notice thereof to each party at least sixty (60) days prior to the date so fixed. At the hearing any relevant evidence may be presented by either party, and the formal rules of evidence applicable to judicial proceedings shall not govern. Evidence may be admitted or excluded in the sole discretion of the arbitrator(s). Said arbitrator(s) shall hear and determine the matter and shall execute and acknowledge their award in writing and cause a copy thereof to be delivered to each of the parties. (e) If there is only one arbitrator, his decision shall be binding and conclusive on the parties, and if there are three arbitrators the decision of any two shall be binding and conclusive. The submission of a dispute to the arbitrator(s) and the rendering of his (or their) decision shall be a condition precedent to any right of legal action on the dispute. A judgment confirming the award of the arbitrator(s) may be rendered by any Court having jurisdiction; or such Court may vacate, modify, or correct the award in accordance with the prevailing sections of California State Law. (f) If three arbitrators are selected under the foregoing procedure but two of the three fail to reach an Agreement in the determination of the matter in question, the matter shall be decided by three new arbitrators who shall be appointed and shall proceed in the same manner, and the process shall be repeated until a decision is finally reached by two of the three arbitrators selected. (g) The costs of such arbitration shall be borne by the losing party or in such proportions as the arbitrator(s) shall determine. 9. Authority. It is understood that your relationship with the Partnership is as an independent contractor and that nothing herein shall be construed and creating a relationship of partnership, joint venturers, employer and employee or any other agency relationship between you and the Partnership. 10. Survival of Indemnities, Warranties and Representations. The indemnity agreements and the representations and warranties of the parties as set forth herein shall remain operative and in full force and effect, regardless of any termination or cancellation of this Agreement, and shall survive the delivery of any payment for Units. 11. Notices. All communications hereunder shall be in writing and shall be mailed, hand delivered or telegraphed, all charges prepaid, to the respective parties at the addresses set forth herein. The address of the Partnership and its General Partners is 650 El Camino Real, Suite G, Redwood City, California 94063 (telephone: (415) 365-5341), until changed by written notice. 12. Successors and Assigns. This Agreement and the terms and provisions hereof shall inure to the benefit of and shall be binding upon the successors and assigns of the parties hereto; provided, however, that in no in event shall the term "successors and assigns" as used herein include any purchaser, as such, of any Units. In addition, and without limiting the generality of the foregoing, the indemnity agreements contained herein shall inure to the benefit of the successors and assigns of the parties hereto, and shall be valid irrespective of any investigation made or not made by or on behalf of any party hereto. 13. Applicable Law. This Agreement shall be governed and construed in accordance with the laws of the State of California and the appropriate courts in the County of San Mateo, California should be the forum for any litigation arising hereunder. Please confirm your Agreement with the General Partners and Redwood Mortgage to the terms contained herein and your acceptance of this appointment by dating and signing below and return a fully executed copy of this Participating Dealer Agreement to us. ------------------------------------------ D. Russell Burwell, General Partner REDWOOD HOME LOAN COMPANY doing business as REDWOOD MORTGAGE By: ------------------------------------------- Its: ------------------------------------------- BROKER-DEALER ACCEPTANCE ACCEPTED this day of ------------------ 199 - -------------------- ------- By: ------------------------------------------------------------ (Print Name) ------------------------------------------------------------ (Signature) ------------------------------------------------------------ Title ------------------------------------------------------------ Taxpayer I.D. No. ------------------------------------------------------------ (Telephone Number) ------------------------------------------------------------ Type of Entity: (corporation, partnership or proprietorship) EX-1.1 2 FORM OF PARTICIPATING DEALER AGREEMENT Exhibit 1.1 REDWOOD MORTGAGE INVESTORS VIII SUPPLEMENTAL PARTICIPATING BROKER DEALER AGREEMENT This Supplemental Participating Dealer Agreement is entered into on this ___ day of ________________, 199__, by and between D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation, the general partners of Redwood Mortgage Investors VIII, a California limited partnership (the "Partnership") and Redwood Home Loan Company doing business as Redwood Mortgage ("Redwood Mortgage") and _________________________, (the "Participating Broker Dealer"). RECITALS A. The General Partners and the Participating Broker Dealer entered into a Participating Broker Dealer Agreement whereby the Participating Broker Dealer agreed to effect sales of Units in the Partnership, on a best efforts basis, for the account of the Partnership. B. The General Partners and Redwood Mortgage have agreed to amend the terms of compensation payable to the Participating Broker Dealers set forth in Section 3 of the Participating Dealer Agreement as set forth herein. NOW THEREFORE, the parties agree as follows: The Participating Broker Dealer may elect on a transaction by transaction basis, as so indicated by its registered representatives, as to which terms or compensation payable, e.g. Section 3 or this Supplemental Participating Broker Dealer Agreement, shall apply to each specific transaction. 1. Alternative Sales Compensation (Including the Continuing Servicing Fee). (a) Commissions. The parties hereby agree that Redwood Mortgage shall pay to the Participating Broker Dealer in consideration for its services in soliciting and obtaining purchasers of Units, sales commission of either (i) four percent (4%) of the gross proceeds from the sale of such Units, if the investors elect to receive monthly, quarterly or annual cash distributions of his allocable share of Partnership income or (ii) seven percent (7%) of the gross proceeds from the sale of such Units, if the investor elects to receive his allocable share of cash distributions in additional Units pursuant to the Partnership's Dividend Reinvestment Plan. (b) Continuing Servicing Fee. In addition to the foregoing commissions, the General Partners and Redwood Mortgage will pay to you a continuing servicing fee (0.25% payable annually in quarterly installments) (the "Continuing Servicing Fee") for each Limited Partner who has subscribed through you. The Continuing Servicing Fee shall be equal to one-quarter (1/4) of one percent (1%) of that Partner's capital account, which shall include any increases in the capital account due to the investor's reinvestment of his allocable share of Partnership distributions. However, in no event shall the Continuing Servicing Fee be payable if such amount will cause the total compensation paid to exceed that amount allowed to be paid under NASD Notice to Members 89-16, 82-51 and Rule 2810 of the NASD Conduct Rules. The Participating Broker Dealer may elect on a transaction by transaction basis, as so indicated by its registered representatives, as to which terms or compensation payable, e.g. Section 3 or this Supplemental Participating Broker Dealer Agreement, shall apply to each specific transaction. 2. Payment of the Continuing Servicing Fee. The Continuing Servicing Fee shall be payable thirty days after the end of the calendar quarter for which the Continuing Servicing Fee is being paid (the "Payment Date") provided that the Investor has been a Limited Partner for the full calendar quarter for which the Continuing Servicing Fee is being paid. Subject to Paragraph 3 below, in order to receive a payment in any quarter, the aggregate amount of the Continuing Servicing Fee payable must be at least $25. 3. Aggregate Sales Requirements. Redwood Mortgage shall have no obligation to pay the Continuing Servicing Fee until such time as (i) the registered representative has aggregate sales of 400 Units ($40,000) and (ii) the Participating Broker Dealer has aggregate sales of 2,000 Units ($200,000). However, in no event shall the Partnership pay the Continuing Servicing Fee for any quarter, in which the aggregate amount of the Continuing Servicing Fee payable to a registered representative is less than twenty-five dollars ($25). In the event that a registered representative during the term of this Agreement transfers his or her license to another Participating Broker Dealer, who has not met the aggregate sales requirement of (ii) above, such registered representative will continue to be entitled to receive the Continuing Servicing Fee provided he or she has met the requirements of (i) above prior to the transfer. 4. Term. The payment of Commissions and the Continuing Servicing Fee as set forth herein is subject to the terms, conditions and obligations set forth in the Participating Broker Dealer Agreement and the Prospectus and incorporated herein by reference. Except as set forth in this Agreement, the terms, conditions and obligations of the Participating Broker Dealer Agreement shall be binding upon the parties. Please confirm your Agreement with the General Partners and Redwood Mortgage to the terms contained herein and your acceptance of this appointment by dating and signing below and return a fully executed copy of this Participating Broker Dealer Agreement to us. -------------------------------------------- D. Russell Burwell, General Partner REDWOOD HOME LOAN COMPANY doing business as REDWOOD MORTGAGE By: ------------------------------------------- Its: ------------------------------------------- BROKER-DEALER ACCEPTANCE: ACCEPTED this day of --------------------------- 199 - ---------------------------- ----- By: ------------------------------------------------------------ (Print Name) - ---------------------------------------------------------------------- (Signature) - ---------------------------------------------------------------------- Title - ---------------------------------------------------------------------- Taxpayer I.D. No. - ---------------------------------------------------------------------- (Telephone Number) Type of Entity: ------------------------------------------------- (corporation, partnership or proprietorship) EX-1.2 3 ADVISORY AGREEMENT Exhibit 1.2 300,000 Limited Partnership Units ($100 per Unit) REDWOOD MORTGAGE INVESTORS VIII ADVISORY AGREEMENT - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- Gentlemen: D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation are the General Partners of Redwood Mortgage Investors VIII, a California Limited partnership (the "Partnership") engaged in business as a mortgage lender. The General Partners, on behalf of the Partnership, propose to offer and sell to qualified investors, upon the terms and subject to the conditions set forth in the Prospectus dated __________, 1996 (the "Prospectus"), limited partnership interests ("Units") of the Partnership at an offering price of $100 per Unit, with a minimum investment of twenty (20) Units per purchaser. The offering is for a maximum of 300,000 Units ($30,000,000). 1. Advisory Relationship. You are in the business of advising clients with respect to certain investments including investments in the Partnership (the "Advisor"). As an Advisor you do not receive any sales commissions or other compensation from the Partnership, but instead receive your fees directly from your client. You do not act as a broker dealer and investments in the Partnership are made directly by the Investor. 2. Eligible Purchasers of Units. You agree not to advise to any client to invest in Units who does not meet the suitability standards set forth in the Prospectus. You agree that you will deliver and cause each prospective purchaser to complete and execute a Subscription Agreement, and return it to the undersigned together with such other documents, instruments or information as the General Partners may request together with a check in the full amount of the purchase price for the number of Units subscribed for. You agree to inform purchasers that a purchaser's check shall be made payable to "Redwood Mortgage Investors VIII" and remitted directly to Redwood Mortgage Investors VIII, 650 El Camino Real, Suite G, Redwood City, California 94063, Attention: D. Russell Burwell. You shall ascertain that each Subscription Agreement sent in by a prospective purchaser of Units has been fully completed and properly executed by such prospective purchaser. 3. No Compensation. As an Advisor to the Investor you will receive no compensation from the Partnership in connection with any Units purchased by a client who you have advised to invest in the Partnership. 4. Further Agreements of Advisor. (a) You covenant and agree to comply with any applicable requirements of the Securities Exchange Act of 1934, the Securities Act of 1933, the California Corporations Code, the laws of the state in which you are advising clients, the published rules and regulations of the Securities and Exchange Commission, and any other applicable agency. Furthermore, you specifically covenant and agree not to deliver the Partnership's sales literature, if any, to any person unless such sales literature is accompanied or preceded by a copy of the Prospectus. 5. Further Agreements of Advisor. (a) You covenant and agree to comply with any applicable requirements of the Securities Exchange Act of 1934, the Securities Act of 1933, the California Corporations Code, the laws of the state in which you are advising clients, the published rules and regulations of the Securities and Exchange Commission, and any other applicable agency. Furthermore, you specifically covenant and agree not to deliver the Partnership's sales literature, if any, to any person unless such sales literature is accompanied or preceded by a copy of the Prospectus. (b) You will not give any information or make any representations or warranties in connection with the offering of Units other than, or inconsistent with, those contained in the Prospectus and any sales material approved in writing by the General Partners of the Partnership. You will deliver a copy of the Prospectus to each investor to whom you are advising. You will not deliver the approved sales material to any person unless such sales material is accompanied or preceded by the Prospectus. You expressly agree not to prepare or use any sales literature, advertisements or other materials in connection with your advisory services. You agree that to the extent information is provided to you marked "For Broker-Dealer and/or Advisor Use Only", you will not provide such information to prospective investors. (c) You will only advise eligible purchasers of Units to invest in the Partnership as described in the Prospectus under "INVESTOR SUITABILITY STANDARDS - - Minimum Unit Purchase." (d) You agree to make diligent inquiries and maintain a record thereof for a period of at least six years of all clients who you advise to purchase Units in, in order to ascertain whether the purchase of Units represents a suitable investment for such purchaser, and whether the purchaser is otherwise eligible to purchase Units in accordance with the terms of the offering. Accordingly, you shall satisfy the following requirements: (i) In recommending to a prospective investor the purchase of Units, you shall have reasonable grounds to believe, on the basis of information obtained from the investor concerning his investment objectives, other investments, financial situation and needs, and any other information known by you or your representatives, that the investor (or, if the investor is acting as trustee or custodian of a trust or other entity, that such other trust or entity) is or will be in a financial position to realize to a significant extent the benefits described in the Prospectus, that such investor has a fair market net worth sufficient to sustain the risks inherent in the purchase of Units, including loss of investment and lack of liquidity, and that Units are otherwise suitable as an investment. (ii) You shall also maintain in your files documents disclosing the basis upon which your determination of suitability was reached as to each investor. (e) In connection with your advisory activity, you agree to comply with all of the applicable requirements under the Securities Act of 1933, as amended (hereinafter referred to as the "Act"), the Securities Exchange Act of 1934, as amended, the "Securities Exchange Act"). We have no due diligence obligation to you. (f) You agree to diligently make inquiries as required by law of all clients who you recommend to purchase Units in order to ascertain whether an investment in Units is suitable for each such purchaser, and not rely solely on information supplied by each purchaser. You shall retain all records relating to investor suitability as to each purchaser for a period of six years. Upon reasonable notice to you, the General Partners, or their designated agents, shall have the right to inspect such records. (g) By executing this Agreement, you represent and warrant that you have reasonable grounds to believe (based on information made available to you by the General Partners of the Partnership through the Prospectus and other materials, or otherwise obtained as a result of inquiries conducted by you) that all material facts concerning the Partnership are adequately and accurately disclosed and provide a basis for evaluating the Partnership, including facts relating to items of compensation, physical properties, tax aspects, financial stability and experience of the sponsor, conflicts of interest and risk factors, and appraisals or other reports. 5. Termination. Either party may terminate this Agreement at any time, effective immediately, by giving written notice to other party. 6. Expenses. You shall bear all your own expenses incurred in connection with your advisory activities and shall not be entitled to any reimbursement. 7. Indemnification. (a) The Partnership and the General Partners agree to indemnify against losses, claims, damages or liabilities (including reasonable attorneys' fees) to which you or such other persons may become subject, under federal or state securities laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement of a material fact contained in the Prospectus or the omission to state therein, material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading. The foregoing indemnity shall include reimbursement of any legal or other expenses reasonably incurred in connection with investigation or defending any such loss, claim, damage, liability or action, and shall be paid by you as such expenses are incurred. (b) You agree to indemnify and hold harmless the Partnership, its General Partners, their affiliated mortgage company (Redwood Mortgage), against any losses, claims, damages or liabilities (including reasonable attorneys' fees) to which any of such persons may become subject, under federal or state securities laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any statements, actions or omissions by you or any person controlled by you or acting on your behalf, which statement, action or omission is untrue or is inconsistent with or in violation of any provision of federal or state securities laws, the rules and regulations of the Securities and Exchange Commission, or other applicable agency. The foregoing indemnity shall include reimbursement of any legal or other expenses reasonably incurred in connection with investigation or defending any such loss, claim, damage, liability or action, and shall be paid by you as such expenses are incurred. 8. Arbitration. (a) As between the parties hereto, all questions as to rights and obligations arising under the terms of this Agreement are subject to arbitration, including any question concerning any right or duty under the Securities Act of 1933, the Securities Exchange Act of 1934, and the securities laws of any state in which Units are offered, and such arbitration shall be governed by the rules of the American Arbitration Association. (b) If a dispute should arise under this Agreement, any Party may within 60 days make a demand for arbitration by filing a demand in writing for the other. (c) The parties may agree upon one arbitrator, but in the event that they cannot agree, there shall be three, one named in writing by each of the parties within five (5) days after demand for arbitration is given and a third chosen by the two appointed. Should either party refuse or neglect to join in the appointment of the arbitrator(s) or to furnish the arbitrator(s) with any papers or information demanded, the arbitrator(s) are empowered by both parties to proceed ex parte. (d) Arbitration shall take place in San Mateo, California, and the hearing before the arbitrator(s) of the matter to be arbitrated shall be at the time and place within said city as is selected by the arbitrator(s). The arbitrator(s) shall select such time and place promptly after his (or their) appointment and shall give written notice thereof to each party at least sixty (60) days prior to the date so fixed. At the hearing any relevant evidence may be presented by either party, and the formal rules of evidence applicable to judicial proceedings shall not govern. Evidence may be admitted or excluded in the sole discretion of the arbitrator(s). Said arbitrator(s) shall hear and determine the matter and shall execute and acknowledge their award in writing and cause a copy thereof to be delivered to each of the parties. (e) If there is only one arbitrator, his decision shall be binding and conclusive on the parties, and if there are three arbitrators the decision of any two shall be binding and conclusive. The submission of a dispute to the arbitrator(s) and the rendering of his (or their) decision shall be a condition precedent to any right of legal action on the dispute. A judgment confirming the award of the arbitrator(s) may be rendered by any Court having jurisdiction; or such Court may vacate, modify, or correct the award in accordance with the prevailing sections of California State Law. (f) If three arbitrators are selected under the foregoing procedure but two of the three fail to reach an Agreement in the determination of the matter in question, the matter shall be decided by three new arbitrators who shall be appointed and shall proceed in the same manner, and the process shall be repeated until a decision is finally reached by two of the three arbitrators selected. (g) The costs of such arbitration shall be borne by the losing party or in such proportions as the arbitrator(s) shall determine. 9. Authority. It is understood that your relationship with the Partnership is as an independent contractor and that nothing herein shall be construed and creating a relationship of partnership, joint venturers, employer and employee or any other agency relationship between you and the Partnership. 10. Survival of Indemnities, Warranties and Representations. The indemnity agreements and the representations and warranties of the parties as set forth herein shall remain operative and in full force and effect, regardless of any termination or cancellation of this Agreement, and shall survive the delivery of any payment for Units. 11. Notices. All communications hereunder shall be in writing and shall be mailed, hand delivered or telegraphed, all charges prepaid, to the respective parties at the addresses set forth herein. The address of the Partnership and its General Partners is 650 El Camino Real, Suite G, Redwood City, California 94063 (telephone: (415) 365-5341), until changed by written notice. 12. Successors and Assigns. This Agreement and the terms and provisions hereof shall inure to the benefit of and shall be binding upon the successors and assigns of the parties hereto; provided, however, that in no in event shall the term "successors and assigns" as used herein include any purchaser, as such, of any Units. In addition, and without limiting the generality of the foregoing, the indemnity agreements contained herein shall inure to the benefit of the successors and assigns of the parties hereto, and shall be valid irrespective of any investigation made or not made by or on behalf of any party hereto. 13. Applicable Law. This Agreement shall be governed and construed in accordance with the laws of the State of California and the appropriate courts in the County of San Mateo, California should be the forum for any litigation arising hereunder. Please confirm your Agreement with the General Partners to the terms contained herein and return a fully executed copy of this Advisory Agreement to us. ----------------------------------------- D. Russell Burwell, General Partner ADVISOR ACCEPTANCE: ACCEPTED this day of ------------------ 199 - -------------------- ------- By: ------------------------------------------------------------ (Print Name) ------------------------------------------------------------ (Signature) ------------------------------------------------------------ Title ------------------------------------------------------------ Taxpayer I.D. No. ------------------------------------------------------------ (Telephone Number) ------------------------------------------------------------ Type of Entity: (corporation, partnership or proprietorship) EX-3.1 4 LIMITED PARTNERSHIP AGREEMENT Exhibit 3.1 AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF REDWOOD MORTGAGE INVESTORS VIII A California Limited Partnership THIS LIMITED PARTNERSHIP AGREEMENT was made and entered into as of the ____ day of _______________, 1996, by and among D. RUSSELL BURWELL, an individual, MICHAEL R. BURWELL, an individual, and GYMNO CORPORATION, a California corporation (collectively, the "General Partners"), and such other persons who have become Limited Partners ("Existing Limited Partners") and as may be added pursuant to the terms hereof (the "New Limited Partners") (collectively the "Limited Partners"). RECITALS A. On or about _______________, 1993, the General Partners and the Limited Partners entered into an agreement of limited partnership for the Partnership. B. In order to increase the Partnership's capital base and permit the Partnership to further diversify its portfolio, in September, 1996, the General Partners elected to offer an additional 300,000 Units. C. In connection with the additional offering of Units and in order to correct some ambiguities and supplement some provisions of the Partnership Agreement the General Partners have elected to amend and restate the agreement of limited partnership (the "Partnership Agreement"). ARTICLE 1 DEFINITIONS Unless stated otherwise, the terms set forth in this Article I shall, for all purposes of this Agreement, have the meanings as defined herein: 1.1 "Affiliate" means (a) any person directly or indirectly controlling, controlled by or under common control with another person, (b) any person owning or controlling ten percent (10%) or more of the outstanding voting securities of such other person, (c) any officer, director or partner of such person, or (d) if such other person is an officer, director or partner, any company for which such person acts in any such capacity. 1.2 "Agreement" means this Limited Partnership Agreement, as amended from time to time. 1.3 "Capital Account" means, with respect to any Partner, the Capital Account maintained for such Partner in accordance with the following provisions: (a) To each Partner's Capital Account there shall be credited, in the event such Partner utilized the services of a Participating Broker Dealer, such Partner's Capital Contribution, or if such Partner acquired his Units through an unsolicited sale, such Partner's Capital Contribution plus the amount of the sales commissions otherwise payable assuming no Continuing Servicing Fee is paid, such Partner's distributive share of Profits, and any items in the nature of income or gain (from unexpected adjustments, allocations or distributions) that are specially allocated to a Partner and the amount of any Partnership liabilities that are assumed by such Partner or that are secured by any Partnership property distributed to such Partner. (b) To each Partner's Capital Account there shall be debited the amount of cash and the Gross Asset Value of any Partnership property distributed to such Partner pursuant to any provision of this Agreement, such Partner's distributive share of Losses, and any items in the nature of expenses or losses that are specially allocated to a Partner and the amount of any liabilities of such Partner that are assumed by the Partnership or that are secured by any property contributed by such Partner to the Partnership. In the event any interest in the Partnership is transferred in accordance with Section 7.2 of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. In the event the Gross Asset Values of the Partnership assets are adjusted pursuant to Section 1.9, the Capital Accounts of all Partners shall be adjusted simultaneously to reflect the aggregate net adjustment as if the Partnership recognized gain or loss equal to the amount of such aggregate net adjustment. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulation. In the event the General Partners shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with the then existing Treasury Regulation, the General Partners may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Article IX hereof upon the dissolution of the Partnership. The General Partners shall adjust the amounts debited or credited to Capital Accounts with respect to (a) any property contributed to the Partnership or distributed to the General Partners, and (b) any liabilities that are secured by such contributed or distributed property or that are assumed by the Partnership or the General Partners, in the event the General Partners shall determine such adjustments are necessary or appropriate pursuant to Treasury Regulation Section 1.704-l(b)(2)(iv) as provided for in Section 5.4. The General Partners shall make any appropriate modification in the event unanticipated events might otherwise cause this Agreement not to comply with Treasury Regulation Section 1.704-l(b) as provided for in Sections 5.6 and 12.4(k). 1.4 "Cash Available for Distribution" means an amount of cash equal to the excess of accrued income from operations and investment of, or the sale or refinancing or other disposition of, Partnership assets during any calendar month over the accrued operating expenses of the Partnership during such month, including any adjustments for bad debt reserves or deductions as the General Partners may deem appropriate, all determined in accordance with generally accepted accounting principles; provided, that such operating expenses shall not include any general overhead expenses of the General Partners not specifically related to, billed to or reimbursable by the Partnership as specified in Sections 10.13 through 10.15. 1.5 "Code" means the Internal Revenue Code of 1986 and corresponding provisions of subsequent revenue laws. 1.6 "Continuing Servicing Fee" means an amount equal to approximately 0.25 percent of the Limited Partner's capital account which amount shall be paid to certain Participating Broker Dealers as compensation in connection with the offer and sale of units. 1.7 "Deed of Trust" means the lien or liens created on the real property or properties of the borrower securing the borrower's obligation to the Partnership to repay the Mortgage Investment. 1.8 "Earnings" means all revenues earned by the Partnership less all expenses incurred by the Partnership. 1.9 "Fiscal Year" means a year ending December 31st. 1.10 "First Formation Loan" means a loan to Redwood Mortgage, an affiliate of the General Partners, in connection with the initial offering of 150,000 Units pursuant to the Prospectus dated May 19, 1993 equal to the amount of the sales commissions (excluding any Continuing Servicing Fees) and all amounts payable in connection with any unsolicited sales. Redwood Mortgage will pay all sales commissions (excluding any Continuing Servicing Fees) and all amounts payable in connection with any unsolicited sales from the First Formation Loan. The First Formation Loan will be unsecured, and will be repaid in ten (10) equal annual installments of principal, without interest commencing on December 31 of the year in which the initial offering terminates. 1.11 "Formation Loans" means collectively the First and Second Formation Loan. 1.12 "General Partners" means D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation, or any Person substituted in place thereof pursuant to this Agreement. "General Partner" means any one of the General Partners. 1.13 "Gross Asset Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (a) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the contributed Partner and the Partnership; (b) The Gross Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the General Partners, as of the following times: (a) the acquisition of an additional interest in the Partnership (other than pursuant to Section 4.2) by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership property other than money, unless all Partners receive simultaneous distributions of undivided interests in the distributed property in proportion to their Interests in the Partnership; and (c) the termination of the Partnership for federal income tax purposes pursuant to Section 708(b)(1)(B) of the Code; and (c) If the Gross Asset Value of an asset has been determined or adjusted pursuant to clause (a) or (b) above, such Gross Asset Value shall thereafter be adjusted by the depreciation, amortization or other cost recovery deduction allowable which is taken into account with respect to such asset for purposes of computing Profits and Losses. 1.14 "Guaranteed Payment for Offering Period" means the payment guaranteed to Limited Partners by the General Partners during the Guaranteed Payment Period. The Guaranteed Payment for Offering Period calculated on a monthly basis, shall be equal to the greater of (i) the Partnership's Earnings or (ii) the interest rate established by the Monthly Weighted Average Cost of Funds for the 11th District Savings Institutions, as announced by the Federal Home Loan Bank of San Francisco during the last week of the preceding month, plus two points, up to a maximum interest rate of 12%. The Weighted Average Cost of Funds is derived from interest paid on savings accounts, Federal Home Loan Bank advances, and other borrowed money adjusted from valuation in the number of days in each month. The adjustment factors are 1.086 for February, 1.024 for 30 day months and 0.981 for 31 day months. As of the date of the Prospectus, the Monthly Weighted Average Funds for the 11th District as announced August 30, 1996 for the period ended July 30, 1996 and in effect until September 30, 1996 is 4.819%. The Guaranteed Payment Period is the period commencing on the day a Limited Partner is admitted to the Partnership and ending three months after the Offering Termination Date. To the extent the return to be paid is in excess of the Partnership's Earnings, the Guaranteed Payment for Offering Period shall be payable by the General Partners out of a Capital Contribution to the Partnership and/or fees payable to the General Partners or Redwood Mortgage which are lowered or waived. 1.15 "Limited Partners" means the Initial Limited Partner until it shall withdraw as such, and the purchasers of Units in Redwood Mortgage Investors VIII, who are admitted thereto and whose names are included on the Certificate and Agreement of Limited Partnership of Redwood Mortgage Investors VIII. Reference to a "Limited Partner" shall be to anyone of them. 1.16 "Limited Partnership Interest" means the percentage ownership interest of any Limited Partner in the Partnership determined at any time by dividing a Limited Partner's current Capital Account by the total outstanding Capital Accounts of all Limited Partners. 1.17 "Majority of the Limited Partners" means Limited Partners holding a majority of the total outstanding Limited Partnership Interests as of the first day of the current calendar month. 1.18 "Mortgage Investment(s)" means the loan(s) and/or an undivided interest in the loans the Partnership intends to extend to the general public secured by real property deeds of trust. 1.19 "Net Asset Value" means the Partnership's total assets less its total liabilities. 1.20 "Partners" means the General Partners and the Limited Partners, collectively. "Partner" means any one of the Partners. 1.21 "Partnership" means Redwood Mortgage Investors VIII, a California limited partnership, the limited partnership created pursuant to this Agreement. 1.22 "Partnership Interest" means the percentage ownership interest of each Partner in the partnership as defined in Section 5.1 below. 1.23 "Person" means any natural person, partnership, corporation, unincorporated association or other legal entity. 1.24 "Profits" and "Losses" mean, for each Fiscal Year or any other period, an amount equal to the Partnership's taxable income or loss for such Fiscal Year or other given period, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (a) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.21 shall be added to such taxable income or loss; (b) Any expenditures of the Partnership described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) of the Code expenditures pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.21, shall be subtracted from such taxable income or loss. (c) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (d) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account depreciation, amortization or other cost recovery deductions for such Fiscal Year or other period, computed such that if the Gross of an Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of a Fiscal Year or other period, depreciation, amortization or other cost recovery deductions shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deductions for such Fiscal Year or other period bears to such beginning adjusted tax basis; and (e) Notwithstanding any other provision of this Section 1.21, any items in the nature of income; or gain or expenses or losses, which are specially allocated, shall not be taken into account in computing Profits or Losses. 1.25 "Sales Commissions" means the amount of compensation, which may be paid under one of two options, to be paid to Participating Broker Dealers in connection with the sale of Units. 1.26 "Second Formation Loan" means the loan to Redwood Mortgage, an affiliate of the General Partners, in connection with the second offering of 300,000 Units pursuant to the Prospectus dated __________, 1996 equal to the amount of the sales commissions (not including any Continuing Servicing Fees) and the amounts payable in connection with unsolicited sales. Redwood Mortgage will pay all sales commissions (not including any Continuing Servicing Fees) and amounts due in connection with unsolicited sales from the Second Formation Loan. The Second Formation Loan will be unsecured, will not bear interest and will be repaid in annual installments. 1.27 "Units" mean the shares of ownership of the Partnership issued to Limited Partners upon their admission to the Partnership, pursuant to the Partnership's Prospectuses dated February 2, 1993 and ____________, 1996 and any supplements or amendments thereto (the "Prospectus"). ARTICLE 2 ORGANIZATION OF THE LIMITED PARTNERSHIP 2.1 Formation. The parties hereto hereby agree to form a limited partnership, pursuant to the provision of Chapter 3, Title 2, of the California Corporations Code, as in effect on the date hereof, commonly known as the California Revised Limited Partnership Act (the "California Act"). 2.2 Name. The name of the Partnership is REDWOOD MORTGAGE INVESTORS VIII, a California limited partnership. 2.3 Place of Business. The principal place of business of the Partnership shall be located at 650 El Camino Real, Suite G, Redwood City, California 94063, until changed by designation of the General Partners, with notice to all Limited Partners. 2.4 Purpose. The primary purpose of this Partnership is to engage in business as a mortgage lender for the primary purpose of making Mortgage Investments secured by deeds of trust (the "Mortgage Investments") on California real estate. 2.5 Substitution of Limited Partner. A Limited Partner may assign all or a portion of his Partnership Interest and substitute another person in his place as a Limited Partner only in compliance with the terms and conditions of Section 7.2 below. 2.6 Certificate of Limited Partnership. The General Partners shall duly execute and file with the Office of the Secretary of State of the State of California a Certificate of Limited Partnership pursuant to the provisions of Section 15621 of the California Corporations Code. Thereafter, the General Partners shall execute and cause to be filed Certificates of Amendment of the Certificate of Limited Partnership whenever required by the California Act or this Agreement. At the discretion of the General Partners, a certified copy of the Certificate of Limited Partnership may also be filed in the Office of the Recorder of any country in which the Partnership shall have a place of business or in which real property to which it holds title shall be situated. 2.7 Term. The Partnership shall be formed and its term shall commence as of the date on which this Limited Partnership Agreement is executed and the Certificate of Limited Partnership referred to in Section 2.6 is filed with the Office of the Secretary of State, and shall continue until December 31, 2032, unless earlier terminated pursuant to the provisions of this Agreement or by operation of law. 2.8 Power of Attorney. Each of the Limited Partners irrevocably constitutes and appoints the General Partners, and each of them, any one of them acting alone, as his true and lawful attorney-in-fact, with full power and authority for him, and in his name, place and stead, to execute, acknowledge, publish and file: (a) This Agreement, the Certificate of Limited Partnership and any amendments or conciliation thereof required under the laws of the State of California; (b) Any certificates, instruments and documents, including, without limitation, Fictitious Business Name Statements, as may be required by, or may be appropriate under, the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business; and (c) Any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Partner, or the dissolution and termination of the Partnership. Each Limited Partner hereby agrees to execute and deliver to the General Partners within five (5) days after receipt of the General Partners' written request therefore, such other and further statements of interest and holdings, designations, and further statements of interest and holdings, designations, powers of attorney and other instruments that the General Partners deem necessary to comply with any laws, rules or regulations relating to the Partnership's activities. 2.9 Nature of Power of Attorney. The foregoing grant of authority is a special power of attorney coupled with an interest, is irrevocable, and survives the death of the undersigned or the delivery of an assignment by the undersigned of a Limited Partnership Interest; provided, that where the assignee thereof has been approved by the General Partners for admission to the Partnership as a substituted Limited Partner, the Power of Attorney survives the delivery of such assignment for the sole purpose of enabling the General Partners to execute, acknowledge and file any instrument necessary to effect such substitution. ARTICLE 3 THE GENERAL PARTNERS 3.1 Authority of the General Partners. The General Partners shall have all of the rights and powers of a partner in a general partnership, except as otherwise provided herein. 3.2 General Management Authority of the General Partners. Except as expressly provided herein, the General Partners shall have sole and complete charge of the affairs of the Partnership and shall operate its business for the benefit of all Partners. Each of the General Partners, acting alone or together, shall have the authority to act on behalf of the Partnership as to any matter for which the action or consent of the General Partners is required or permitted. Without limitation upon the generality of the foregoing, the General Partners shall have the specific authority: (a) To expend Partnership funds in furtherance of the business of the Partnership and to acquire and deal with assets upon such terms as they deem advisable, from affiliates and other persons; (b) To determine the terms of the offering of Units, including the right to increase the size of the offering or offer additional securities, the amount for discounts allowable or commissions to be paid and the manner of complying with applicable law; (c) To employ, at the expense of the Partnership, such agents, employees, independent contractors, attorneys and accountants as they deem reasonable and necessary; (d) To effect necessary insurance for the proper protection of the Partnership, the General Partners or Limited Partners; (e) To pay, collect, compromise, arbitrate, or otherwise adjust any and all claims or demands against the Partnership; (f) To bind the Partnership in all transactions involving the Partnership's property or business affairs, including the execution of all loan documents and the sale of notes and to change the Partnership's investment objectives, notwithstanding any other provision of this Agreement; provided, however, the General Partners may not, without the consent of a Majority of the Limited Partners, sell or exchange all or substantially all of the Partnership's assets, as those terms are defined in Section 9.1 below; (g) To amend this Agreement with respect to the matters described in Subsections 12.4(a) through (k) below; (h) To determine the accounting method or methods to be used by the Partnership, which methods may be changed at any time by written notice to all Limited Partners; (i) To open accounts in the name of the Partnership in one or more banks, savings and loan associations or other financial institutions, and to deposit Partnership funds therein, subject to withdrawal upon the signature of the General Partners or any person authorized by him; (j) To borrow funds for the purpose of making Mortgage Investments, provided that the amount of borrowed funds does not exceed fifty percent (50%) of the Partnership's Mortgage Investment portfolio and in connection with such borrowings, to pledge or hypothecate all or a portion of the assets of the Partnership as security for such loans; and (k) To invest the reserve funds of the Partnership in cash, bank accounts, certificates of deposits, money market accounts, short-term bankers acceptances, publicly traded bond funds or any other liquid assets. 3.3 Limitations. Without a written consent of or ratification by all Limited Partners, the General Partners shall have no authority to do any act prohibited by law; or to admit a person as a Limited Partner other than in accordance with the terms of this Agreement. 3.4 No Personal Liability. The General Partners shall have no personal liability for the original invested capital or any Limited Partner or to repay the Partnership any portion or all of any negative balance in their capital accounts, except as otherwise provided in Article 4. 3.5 Compensation to General Partners. The General Partners shall be entitled to be compensated and reimbursed for expenses incurred in performing its management functions in accordance with the provisions of Article 10 thereof, and may receive compensation from parties other than the Partnership. 3.6 Fiduciary Duty. The General Partners shall have the fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership, and they shall not employ such funds or assets in any manner except for the exclusive benefit of the Partnership. 3.7 Allocation of Time to Partnership Business. The General Partner shall not be required to devote full time to the affairs of the Partnership, but shall devote whatever time, effort and skill they deem to be reasonably necessary for the conduct of the Partnership's business. The General Partners may engage in any other businesses or activities, including businesses related to or competitive with the Partnership. 3.8 Assignment by a General Partner. A General Partner's interest in income, losses and distributions of the Partnership shall be assignable at the discretion of a General Partner, which, if made, may be converted, at a General Partner's option, into a limited partnership interest to the extent of the assignment. 3.9 Partnership Interest of General Partners. The General Partners shall be allocated a total of one percent (1%) of all items of Partnership income, gains, losses, deductions and credits as described in Section 5.1 below, which shall be shared equally among them. 3.10 Removal of General Partners. A General Partner may be removed upon the following conditions: (a) By written consent of a majority of the Limited Partners. Limited Partners may exercise such right by presenting to the General Partner a notice, with their acknowledge signatures thereon, to the effect that the General Partner is removed; the notice shall set forth the grounds for removal and the date on which removal is become effective; (b) Concurrently with such notice or within thirty (30) days thereafter by notice similarly given, a majority of the Limited Partners may also designate a successor as General Partner; (c) Substitution of a new General Partner, if any, shall be effective upon written acceptance of the duties and responsibilities of a general partner by the new General Partner. Upon effective substitution of a new General Partner, this Agreement shall remain in full force and effect, except for the change in the General Partner, and business of the Partnership shall be continued by the new General Partner. The new General Partner shall thereupon execute, file and record an amendment to the Certificate of Limited Partnership in the manner required by law. (d) Failure of the Limited Partners giving notice of removal to designate a new General Partner within the time specified herein or failure of the new General Partner so designated to execute written acceptance of the duties and responsibilities of a General Partner hereunder within ten (10) days after such designation shall dissolve and terminate the Partnership, unless the business of the Partnership is continued by the remaining General Partners, if any. In the event that all of the General Partners are removed, no other General Partners are elected, the Partnership is liquidated and Redwood Mortgage is no longer receiving payments for services rendered, the debt on the Formation Loan shall be forgiven by the Partnership and Redwood Mortgage will be immediately released from any further obligation under the Formation Loan. 3.11 Commingling of Funds. The funds of the Partnership shall not be commingled with funds of any other person or entity. 3.12 Right to Rely on General Partners. Any person dealing with the Partnership may rely (without duty of further inquiry) upon a certificate signed by the General Partners as to: (a) The identity of any General Partner or Limited Partner; (b) The existence or nonexistence of any fact or facts which constitute a condition precedent to acts by a General Partner or which are in any further manner germane to the affairs of the Partnership; (c) The persons who are authorized to execute and deliver any instrument or document of the Partnership; or (d) Any act or failure to act by the Partnership or any other matter whatsoever involving the Partnership or any Partner. 3.13 Sole and Absolute Discretion. Except as otherwise provided in this Agreement, all actions which any General Partner may take and all determinations which any General Partner may take and all determinations which any General Partners may make pursuant to this Agreement may be taken and made at the sole and absolute discretion of such General Partner. 3.14 Merger or Reorganization of the General Partners. The following is not prohibited and will not cause a dissolution of the Partnership: (a) a merger or reorganization of the General Partners or the transfer of the ownership interest of the General Partners; and (b) the assumption of the rights and duties of the General Partners by the transferee of the rights and duties of the General Partners by the transferee entity so long as such transferee is an affiliate under the control of the General Partners. 3.15 Dissenting Limited Partners' Rights. If the Partnership participates in any acquisition of the Partnership by another entity, any combination of the Partnership with another entity through a merger or consolidation, or any conversion of the Partnership into another form of business entity through (such as a corporation) that requires the approval of the outstanding limited partnership interest, the result of which would cause the other entity to issue securities to the Limited Partners, then each Limited Partner who does not approve of such reorganization (the "Dissenting Limited Partner") may require the Partnership to purchase for cash, at its fair market value, the interest of the Dissenting Limited Partner in the Partnership in accordance with Section 15679.2 of the California Corporations Code. The Partnership, however, may itself convert to another form of business entity (such as a corporation, trust or association) if the conversion will not result in a significant adverse change in (i) the voting rights of the Limited Partners, (ii) the termination date of the Partnership (currently, December 31, 2032, unless terminated earlier in accordance with the Partnership Agreement), (iii) the compensation payable to the General Partners or their Affiliates, or (iv) the Partnership's investment objectives. The General Partners will make the determination as to whether or not any such conversion will result in a significant adverse change in any of the provisions listed in the preceding paragraph based on various factors relevant at the time of the proposed conversion, including an analysis of the historic and projected operations of the Partnership; the tax consequences (from the standpoint of the Limited Partners) of the conversion of the Partnership to another form of business entity and of an investment in a limited partnership as compared to an investment in the type of business entity into which the Partnership would be converted; the historic and projected operating results of the Partnership's Mortgage Investments, and the then-current value and marketability of the Partnership's Mortgage Investments. In general, the General Partners would consider any material limitation on the voting rights of the Limited Partners or any substantial increase in the compensation payable to the General Partners or their Affiliates to be a significant adverse change in the listed provisions. 3.16 Exculpation and Indemnification. The General Partners shall have no liability whatsoever to the Partnership or to any Limited Partner, so long as a General Partner determined in good faith, that the course of conduct which caused the loss or liability was in the best interests of the Partnership, and such loss or liability did not result from the gross negligence or gross misconduct of the General Partner being held harmless. The General Partners or any Partnership employee or agent shall be entitled to be indemnified by the Partnership, at the expense of the Partnership, against any loss or liability (including attorneys' fees, which shall be paid as incurred) resulting from assertion of any claim or legal proceeding relating to the activities of the Partnership, including claims, or legal proceedings brought by a third party or by Limited Partners, on their own behalf or as a Partnership derivative suit, so long as the party to be indemnified determined in good faith that the course of conduct which gave rise to such claim or proceeding was in the best interests of the Partnership and such course of conduct did not constitute gross negligence or gross misconduct; provided, however, any such indemnification shall only be recoverable out of the assets of the Partnership and not from Limited Partners. Nothing herein shall prohibit the Partnership from paying in whole or in part the premiums or other charge for any type of indemnity insurance by which the General Partners or other agents or employees of the Partnership are indemnified or insured against liability or loss arising out of their actual or asserted misfeasance or nonfeasance in the performance of their duties or out of any actual or asserted wrongful act against the Partnership including, but not limited to judgments, fines, settlements and expenses incurred in the defense of actions, proceedings and appeals therefrom. Notwithstanding the foregoing, neither the General Partners nor their affiliates shall be indemnified for any liability imposed by judgment (including costs and attorneys' fees) arising from or out of a violation of state or federal securities laws associated with the offer and sale of Units offered hereby. However, indemnification will be allowed for settlements and related expenses of lawsuits alleging securities law violations and for expenses incurred in successfully defending such lawsuits provided that (a) a court either approves indemnification of litigation costs if the General Partners are successful in defending the action; or (b) the settlement and indemnification is specifically approved by the court of law which shall have been advised as to the current position of the Securities and Exchange Commission (as to any claim involving allegations that the Securities Act of 1933 was violated) and California Commissioner of Corporations or the applicable state authority (as to any claim involving allegations that the applicable state's securities laws were violated). ARTICLE 4 CAPITAL CONTRIBUTIONS; THE LIMITED PARTNERS 4.1 Capital Contribution by General Partners. The General Partners, collectively, shall contribute to the Partnership an amount in cash equal to 1/10 of 1% of the aggregate capital contributions of the Limited Partners. 4.2 Other Contributions. (a) Capital Contribution by Initial Limited Partner. Upon the execution of this Agreement, the Initial Limited Partner made a cash capital contribution to the Partnership of $1,000. Upon the admission of additional Limited Partners to the Partnership pursuant to Section 4.2(b) of this Agreement, the Partnership promptly refunded to the Initial Limited Partner its $1,000 capital contribution and upon receipt of such sum the Initial Limited Partner was withdrawn from the Partnership as its Initial Limited Partner. (b) Capital Contributions of Existing Limited Partners. The Existing Limited Partners have contributed in the aggregate to the capital of the Partnership an amount equal to $12,350,741 as of June 30, 1996. (c) Capital Contributions of New Limited Partners. The New Limited Partners shall contribute to the capital of the Partnership an amount equal to one hundred dollars ($100) for each Unit subscribed for by each such New Limited Partners, with a minimum subscription of twenty (20) Units per Limited Partner (including subscriptions from entities of which such limited partner is the sole beneficial owner). The total additional capital contributions of the New Limited Partners will not exceed $30,000,000. (d) Escrow Account. No escrow account will be established and all proceeds from the sale of Units will be remitted directly to the Partnership. Subscription Agreements shall be accepted or rejected within 30 days of their receipt. All subscription monies deposited by persons whose subscriptions are rejected shall be returned to such subscribers forthwith after such rejection without interest. The public offering of Units shall terminate one year from the effective date of the Prospectus unless fully subscribed at an earlier date or terminated on an earlier date by the General Partners, or unless extended by the General Partners for two additional one year periods. (e) Subscription Account. Subscriptions received after the activation of the Partnership will be deposited into a subscription account at a federally insured commercial bank or other depository and invested in short-term certificates of deposit, a money market or other liquid asset account. Prospective investors whose subscriptions are accepted will be admitted into the Partnership only when their subscription funds are required by the Partnership to fund a Mortgage Investment, or the Formation Loan, to create appropriate reserves or to pay organizational expenses or other proper Partnership purposes. During the period prior to admittance of investors as Limited Partners, proceeds from the sale of Units are irrevocable, and will be held by the General Partners for the account of Limited Partners in the subscription account. Investors' funds will be transferred from the subscription account into the Partnership on a first-in, first-out basis. Upon admission to the Partnership, subscription funds will be released to the Partnership and Units will be issued at the rate of $100 per unit or fraction thereof. Interest earned on subscription funds while in the subscription account will be returned to the subscriber, or if the subscriber elects to compound earnings, the amount equal to such interest will be added to his investment in the Partnership, and the number of Units actually issued shall be increased accordingly. In the event only a portion of a subscribing Limited Partner's funds are required, then all funds invested by such subscribing Limited Partners at the same time shall be transferred. Any subscription funds remaining in the subscription account after the expiration of one (1) year from the date any such subscription funds were first received by the General Partners shall be returned to the subscriber. (f) Admission of Limited Partners. Subscribers shall be admitted as Limited Partners when their subscription funds are required by the Partnership to fund a Mortgage Investment, or the Formation Loan, to create appropriate reserves or to pay organizational expenses, as described in the Prospectus. Subscriptions shall be accepted or rejected by the General Partners on behalf of the Partnership within 30 days of their receipt. Rejected subscriptions and monies shall be returned to subscribers forthwith. The Partnership shall amend Schedule A to the Limited Partnership Agreement from time to time to effect the substitution of substituted Limited Partners in the case of assignments, where the assignee does not become a substituted Limited Partner, the Partnership shall recognize the assignment not later than the last day of the calendar month following acceptance of the assignment by the General Partners. No person shall be admitted as a Limited Partner who has not executed and filed with the Partnership the subscription form specified in the Prospectus used in connection with the public offering, together with such other documents and instruments as the General Partners may deem necessary or desirable to effect such admission, including, but not limited to, the execution, acknowledgment and delivery to the General Partners of a power of attorney in form and substance as described in Section 2.8 hereof. (g) Names, Addresses, Date of Admissions, and Contributions of Limited Partners. The names, addresses, date of admissions and Capital Contributions of the Limited Partners shall be set forth in Schedule A attached hereto, as amended from time to time, and incorporate herein by reference. 4.3 Election to Receive Monthly, Quarterly or Annual Cash Distributions. Upon subscription for Units, a subscribing Limited Partner must elect whether to receive monthly, quarterly or annual cash distributions from the Partnership or to receive additional Units in lieu of cash distributions. If the Limited Partner initially elects to receive monthly, quarterly or annual distributions, such election, once made, is irrevocable. However, a Limited Partner may change his election regarding whether he wants to receive such distributions on a monthly, quarterly or annual basis. If the Limited Partner initially elects to receive additional Units in lieu of cash distributions, he may after three (3) years, change his election and receive monthly, quarterly or annual cash distributions. Earnings allocable to Limited Partners who elect to receive additional Units will be retained by the Partnership for making further Mortgage Investments or for other proper Partnership purposes, and such amounts will be added to such Limited Partners' Capital Accounts. The Earnings from such further Mortgage Investments will be allocated among all Partners; however, Limited Partners who elect to receive additional Units will be credited with an increasingly larger proportionate share of such Earnings than Limited Partners who receive monthly, quarterly or annual distributions since, Limited Partners' Capital Accounts who elect to receive additional Units will increase over time. Annual distributions will be made after the calendar year. 4.4 Interest. No interest shall be paid on, or in respect of, any contribution to Partnership Capital by any Partner, nor shall any Partner have the right to demand or receive cash or other property in return for the Partner's Capital Contribution. 4.5 Loans. Any Partner or Affiliate of a Partner may, with the written consent of the General Partners, lend or advance money to the Partnership. If the General Partners or, with the written consent of the General Partners, any Limited Partner shall make any loans to the Partnership or advance money on its behalf, the amount of any such loan or advance shall not be treated as a contribution to the capital of the Partnership, but shall be a debt due from the Partnership. The amount of any such loan or advance by a lending Partner or an Affiliate of a Partner shall be repayable out of the Partnership's cash and shall bear interest at a rate of not in excess of the greater of (i) the prime rate established, from time to time, by any major bank selected by the General Partners for loans to the bank's most creditworthy commercial borrowers, plus 5% per annum, or (ii) the maximum rate permitted by law. None of the Partners or their Affiliates shall be obligated to make any loan or advance to the Partnership. 4.6 No Participation in Management. Except as expressly provided herein, the Limited Partners shall take no part in the conduct or control of the Partnership business and shall have no right or authority to act for or bind the Partnership; 4.7 Rights and Powers of Limited Partners. In addition to the matters described in Section 3.10 above, the Limited Partners shall have the right to vote upon and take any of the following actions upon the approval of a Majority of the Limited Partners, without the concurrence of the General Partners. (a) Dissolution and termination of the Partnership prior to the expiration of the term of the Partnership as stated in Section 2.7 above (b) Amendment of this Agreement, subject to the limitations set forth in Section 12.4; (c) Disapproval of the sale of all or substantially all the assets of the Partnership (as defined in Subsection 9.1(c) below); or (d) Removal of the General Partners and election of a successor, in the manner and subject to the conditions described in Section 3.10 above. Except as expressly set forth above or otherwise provided for in this Agreement, the Limited Partners shall have no other rights as set forth in the California Act. 4.8 Meetings. The General Partners, or Limited Partners representing ten percent (10%) of the outstanding Limited Partnership Interests, may call a meeting of the Partnership and, if desired, propose an amendment to this Agreement to be considered at such meeting. If Limited Partners representing the requisite Limited Partnership Interests present to the General Partners a statement requesting a Partnership meeting, the General Partners shall fix a date for such meeting and shall, within twenty (20) days after receipt of such statement, notify all of the Limited Partners of the date of such meeting and the purpose for which it has been called. Unless otherwise specified, all meetings of the Partnership shall be held at 2:00 P.M. at the office of the Partnership, upon not less than ten (10) and not more than sixty (60) days written notice. At any meeting of the Partnership, Limited Partners may vote in person or by proxy. A majority of the Limited Partners, present in person or by proxy, shall constitute a quorum at any Partnership meeting. Any question relating to the Partnership which may be considered and acted upon by the Limited Partners hereunder may be considered and acted upon by vote at a Partnership meeting, and any consent required to be in writing shall be deemed given by a vote by written ballot. Except as expressly provided above, additional meeting and voting procedures shall be in conformity with Section 1563 of the California Corporations Code, as amended. 4.9 Limited Liability of Limited Partners. Units are non-assessable, and no Limited Partner shall be personally liable for any of the expenses, liabilities, or obligations of the Partnership or for any of the losses thereof beyond the amount of such Limited Partners' capital contribution to the Partnership and such Limited Partners' share of any undistributed net income and gains of the Partnership, provided, that any return of capital to Limited Partners (plus interest at the legal rate on any such amount from the date of its return) will remain liable for the payment of Partnership debts existing on the date of such return of capital; and, provided further, that such Limited Partner shall be obligated upon demand by the General Partners to pay the Partnership cash equal to the amount of any deficit remaining in his Capital Account upon winding up and termination of the Partnership. 4.10 Representation of Partnership. Each of the Limited Partners hereby acknowledges and agrees that the attorneys representing the Partnership and the General Partners and their Affiliates do not represent and shall not be deemed under the applicable codes of professional responsibility to have represented or be representing any or all of the Limited Partners in any respect at any time. Each of the Limited Partners further acknowledges and agrees that such attorneys shall have no obligation to furnish the Limited Partners with any information or documents obtained, received or created in connection with the representation of the Partnership, the General Partners and/or their Affiliates. ARTICLE 5 PROFITS AND LOSSES; CASH DISTRIBUTIONS 5.1 Income and Losses. All Income and Losses of the Partnership shall be credited to and charged against the Partners in proportion to their respective "Partnership Interests", as hereafter defined. The Partnership Interest of the General Partners shall at all times be a total of one percent (1%), to be shared equally among them and the Partnership Interest of the Limited Partners collectively shall be ninety-nine percent (99%), which shall be allocated among them according to their respective Limited Partnership Interests. Income and Losses realized by the Partnership during any month shall be allocated to the Partners as of the close of business on the last day of each calendar month, in accordance with their respective Limited Partnership Interests and in proportion to the number of days during such month that they owned such Limited Partnership Interests, without regard to Income and Losses realized with respect to time periods within such month. 5.2 Cash Earnings. Earnings as of the close of business on the last day of each calendar month shall be allocated among the Partners in the same proportion as Income and Losses as described in Section 5.1 above. Earnings allocable to those Limited Partners who elect to receive cash distributions as described below shall be distributed to them in cash as soon as practicable after the end of each calendar month. The General Partners' allocable share of Earnings shall also be distributed concurrently with cash distributions to Limited Partners. Earnings allocable to those Limited Partners who elected to receive additional Units shall be retained by the Partnership and credited to their respective Capital Accounts as of the first day of the succeeding calendar month. Earnings to Limited Partners shall be distributed only to those Limited Partners who elect in writing, upon their initial subscription for the purchase of Units or after three (3) years to receive such distributions during the term of the Partnership. Each Limited Partner's decision whether to receive such distributions shall be irrevocable, except as set forth in paragraph 4.3 above. 5.3 Cash Distributions Upon Termination. Upon dissolution and termination of the Partnership, Cash Available for Distribution shall thereafter be distributed to Partners in accordance with the provisions of Section 9.3 below. 5.4 Special Allocation Rules. (a) For purposes of this Agreement, a loss or allocation (or item thereof) is attributable to non-recourse debt which is secured by Partnership property to the extent of the excess of the outstanding principal balance of such debt (excluding any portion of such principal balance which would not be treated as an amount realized under Internal Revenue Code Section 1001 and Paragraph (a) of Section 1.1001-2 if such debt were foreclosed upon over the adjusted basis of such property. This excess is herein defined as "Minimum Gain (whether taxable as capital gain or as ordinary income) as more explicitly set forth in Treasury Regulation T.704 l(b)(4)(iv)(c). Notwithstanding any other provision of Article V, the allocation of loss or deduction (or item thereof, attributable to non-recourse debt which is secured by Partnership property will be allowed only to the extent that such allocation does not cause the sum of the deficit capital account balances of the Limited Partners receiving such allocations to exceed the minimum gain determined at the end of the Partnership able year to which the allocations relate. The balance of such losses shall be allocated to the General Partners. Any Limited Partner with a deficit capital account balance resulting in whole or in part from allocations of loss or deduction (or item thereof) attributable to non-recourse debt which is secured by Partnership property shall, to the extent possible, be allocated income or gain (or item thereof) in an amount not less than the minimum gain at a time no later than the time at which the minimum gain is reduced below the sum if such deficit capital account balances. This section is intended and shall be interpreted to comply with the requirements of Treasury Regulation Section 1.704-l(b)(4)(iv)(e). (b) In the event any Limited Partner receives any adjustments, allocations or distributions, not covered by Section 75.4(a), so as to result in a deficit capital account, items of Partnership income and gain shall be specially allocated to such Limited Partners in an amount and manner sufficient to eliminate the deficit balances in their Capital Accounts created by such adjustments, allocations or distributions as quickly as possible. This Section shall operate a qualified income offset as utilized in Treasury Regulation Section 1.704-1(b)(23)(ii)(d). (c) Syndication expenses for any fiscal year or other period shall be specially allocated to the Limited Partners in proportion to their Units, provided that if additional Limited Partners are admitted to the Partnership on different dates, all Syndication Expenses shall be divided among the Persons who own Units from time to time so that, to the extent possible, the cumulative Syndication Expenses allocated with respect to each Unit at any time is the same amount. In the event the General Partners shall determine that such result is not likely to be achieved through future allocations of Syndication Expenses, the General Partners may allocate a portion of Net Income or Losses so as to achieve the same effect on the Capital Accounts of the Unit Holders, notwithstanding any other provision of this Agreement. (d) For purposes of determining the Net Income, Net Losses, or any other items allocable to any period, Net Income, Net Losses, and any such other items shall be determined on a daily, monthly, or other basis, as determined by the General Partners using any permissible method under Code Section 706 and the Treasury Regulations thereunder. (e) Notwithstanding Section 5.1 and 5.2 hereof, (i) Net Losses allocable to the period prior to the admission of any additional Limited Partners pursuant to Section 4.2(b) and (e) hereof shall be allocated 99% to the General Partners and 1% to the Initial Limited Partner and Net Income during that same period, if any, shall be allocated to the General Partners, and (ii) Profits or Losses allocable to the period commencing with the admission of any additional such Limited Partners and all subsequent periods shall be allocated pursuant to Section 5.1. (f) Except as otherwise provided in this Agreement, all items of Partnership income, gain, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Partners in the same proportions as they share Net Income or Net Losses, as the case may be, for the year. 5.5 704(c) Allocations. In accordance with Code 704(c) and the Treasury Regulations thereunder income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial fair market value. Any elections or other decisions relating to such allocations shall be made by the General Partners in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 5.5 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Person's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. 5.6 Intent of Allocations. It is the intent of the Partnership that this Agreement comply with the safe harbor test set out in Treasury Regulation Sections 1.704-1(b)(2)(ii)(D) and 1.704-l(b)(4)(iv)(D) and the requirements of those Sections, including the qualified income offset and minimum gain chargeback, which are hereby incorporated by reference. If, for whatever reasons, the Partnership is advised by counsel or its accountants that the allocation provisions of this Agreement are unlikely to be respected for federal income tax purposes, the General Partners are granted the authority to amend the allocation provisions of this Agreement, to the minimum extent deemed necessary by counsel or its accountants to effect the plan of Allocations and Distributions provided in this Agreement. The General Partners shall have the discretion to adopt and revise rules, conventions and procedures as it believes appropriate with respect to the admission of Limited Partners to reflect Partners' interests in the Partnership at the close of the years. 5.7 Guaranteed Payment for Offering Period. The Limited Partners shall receive a guaranteed payment from the Earnings of the Partnership during the Guaranteed Payment Period. The Guaranteed Payment for Offering Period, calculated on a monthly basis, shall be equal to the greater of (i) the Partnership's Earnings or (ii) the interest rate established by the Monthly Weighted Average Cost of Funds for the 11th District Savings Institutions, as announced by the Federal Home Loan Bank of San Francisco during the last week of the preceding month, plus two points, up to a maximum interest rate of 12%. The Weighted Average Cost of Funds is derived from the interest paid on savings accounts, Federal Home Loan Bank advances, and other borrowed money adjusted for valuation in the number of days in each month. The adjustment factors are 1.086 for February, 1.024 for 30 day months and 0.981 for 31 day months. As of the date of the Prospectus the Monthly Weighted Average Cost of Funds for the 11th District as announced August 30, 1996 for the period ended May 30, 1996 and in effect until September 30, 1996 is 4.819%. The Guaranteed Payment Period is the period commencing on the day a Limited Partner is admitted to the Partnership and ending three months after the Offering Termination Date. To the extent the interest rate to be paid is in excess of the Partnership's Earnings, the Guaranteed Payment for Offering Period shall be payable by the General Partners out of a Capital Contribution, to the Partnership and/or fees payable to the General Partners or Redwood Mortgage which are lowered or waived. Amounts paid pursuant to this Section 5.7 are intended to constitute guaranteed payments within the meaning of I.R.C. Code Section 707(c) and shall not be treated as distributions for purposes of computing the recipient's Capital Accounts. In the event the Partnership is unable to make any payments required to be made pursuant to this Section 5.7, the General Partners shall promptly make additional Capital Contributions sufficient to enable the Partnership to make such payments on a timely basis; provided however, that the General Partners shall not be obligated to make such Capital Contribution if such amounts would be subject to claims of creditors such that the guaranteed payments would not be available to be made to the Limited Partners. In such event, the General Partners shall pay the interest out of its fees as set forth above. ARTICLE 6 BOOKS AND RECORDS, REPORTS AND RETURNS 6.1 Books and Records. The General Partners shall cause the Partnership to keep the following: (a) Complete books and records of account in which shall be entered fully and accurately all transactions and other matters relating to the Partnership. (b) A current list setting forth the full name and last known business or residence address of each Partner which shall be listed in alphabetical order and stating his respective Capital Contribution to the Partnership and share in Profits and Losses. (c) A copy of the Certificate of Limited Partnership and all amendments thereto. (d) Copies of the Partnership's federal, state and local income tax returns and reports, if any, for the six (6) most recent years. (e) Copies of this Agreement, including all amendments thereto, and the financial statements of the Partnership for the three (3) most recent years. All such books and records shall be maintained at the Partnership's principal place of business and shall be available for inspection and copying by, and at the sole expense of, any Partner, or any Partner's duly authorized representatives, during reasonable business hours. 6.2 Annual Statements. The General Partners shall cause to be prepared at least annually, at Partnership expense, financial statements prepared in accordance with generally accepted accounting principles and accompanied by a report thereon containing an opinion of an independent certified public accounting firm. The financial statements will include a balance sheet, statements of income or loss, partners' equity, and changes in financial position. The General Partners shall have prepared at least annually, at Partnership expense: (i) a statement of Cash Flow; (ii) Partnership information necessary in the preparation of the Limited Partners' federal and state income tax returns; (iii) a report of the business of the Partnership; (iv) a statement as to the compensation received by the General Partners and their Affiliates, during the year from the Partnership which shall set forth the services rendered or to be rendered by the General Partners and their Affiliates and the amount of fees received; and (v) a report identifying distributions from (a) Earnings of that year, (b) Earnings of prior years, (c) Working Capital Reserves and other sources, and (d) a report on the costs reimbursed to the General Partners, which allocation shall be verified by independent public accountants in accordance with generally accepted auditing standards. Copies of the financial statements and reports shall be distributed to each Limited Partner within 120 days after the close of each taxable year of the Partnership; provided, however, all Partnership information necessary in the preparation of the Limited Partners' federal income tax returns shall be distributed to each Limited Partner not later than 90 days after the close of each fiscal year of the Partnership. 6.3 Semi-Annual Report. Until the Partnership is registered under Section 12(g) of the Securities Exchange Act of 1934, the General Partners shall have prepared, at Partnership expense, a semi-annual report covering the first six months of each fiscal year, commencing with the six-month period ending after the Initial Closing Date, and containing unaudited financial statements (balance sheet, statement of income or loss and statement of Cash Flow) and a statement of other pertinent information regarding the Partnership and its activities during the six-month period. Copies of this report shall be distributed to each Limited Partner within 60 days after the close of the six-month period. 6.4 Quarterly Reports. The General Partners shall cause to be prepared quarterly, at Partnership Expense: (i) a statement of the compensation received by the General Partners and Affiliates during the quarter from the Partnership, which statement shall set forth the services rendered by the General Partners and Affiliates and the amount of fees received, and (ii) other relevant information. Copies of the statements shall be distributed to each Limited Partner within 60 days after the end of each quarterly period. The information required by Form 10-Q (if required to be filed with the Securities and Exchange Commission) will be supplied to each Limited Partner within 60 days of each quarterly period. If the Partnership is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended, the General Partners shall cause to be prepared, at Partnership expense, a quarterly report for each of the first three quarters in each fiscal year containing unaudited financial statements (consisting of a balance sheet, a statement of income or loss and a statement of Cash Flow) and a statement of other pertinent information regarding the Partnership and its activities during the period covered by the report. Copies of the statements and other pertinent information shall be distributed to each Limited Partner within 60 days after the close of the quarter covered by the report of the Partnership. The quarterly financial statements shall be accompanied by the report thereon, if any, of the independent accountants engaged by the Partnership or, if there is no such report, the certificate of the General Partners that the financial statements were prepared without audit from the books and records of the Partnership. Copies of the financial statements, if any, filed with the Securities and Exchange Commission shall be distributed to each Limited Partner within 60 days after the close of the quarterly period covered by the report of the Partnership. 6.5 Filings. The General Partners, at Partnership expense, shall cause the income tax returns for the Partnership to be prepared and timely filed with the appropriate authorities. The General Partners, at Partnership expense, shall also cause to be prepared and timely filed, with appropriate federal and state regulatory and administrative bodies, all reports required to be filed with those entities under then current applicable laws, rules and regulations. The reports shall be prepared by the accounting or reporting basis required by the regulatory bodies. Any Limited Partner shall be provided with a copy of any of the reports upon request without expense to him. The General Partners, at Partnership expense, shall file, with the securities administrators for the various states in which this Partnership is registered, as required by such states, a copy of each report referred to this Article VI. 6.6 Suitability Requirements. The General Partners, at Partnership expense, shall maintain for a period of at least four years a record of the information obtained to indicate that a Limited Partner complies with the suitability standards set forth in the Prospectus. 6.7 Fiscal Matters. (a) Fiscal Year. The Partnership shall adopt a fiscal year beginning on the first day of January of each year and ending on the last day of December; provided, however, that the General Partners in their sole discretion may, subject to approval by the Internal Revenue Service and the applicable state taxing authorities at any time without the approval of the Limited Partners change the Partnership's fiscal year to a period to be determined by the General Partners. (b) Method of Accounting. The accrual method of accounting shall be used for both income tax purposes and financial reporting purposes. (c) Adjustment of Tax Basis. Upon the transfer of an interest in the Partnership, the Partnership may, at the sole discretion of the General Partners, elect pursuant to Section 754 of the Internal Revenue Code of 1986, as amended, to adjust the basis of the Partnership property as allowed by Sections 734(b) and 743(b) thereof. 6.8 Tax Matters Partner. In the event the Partnership is subject to administrative or judicial proceedings for the assessment or collection of deficiencies for federal taxes for the refund of overpayments of federal taxes arising out of a Partner's distributive share of profits, Michael R. Burwell, for so long as he is a General Partner, shall act as the Tax-Matters Partner ("TMP") and shall have all the powers and duties assigned to the TMP under Sections 6221 through 6232 of the Code and the Treasury Regulations thereunder. The Partners agree to perform all acts necessary under Section 6231 of the Code and Treasury Regulations thereunder to designate Michael R. Burwell as the TMP. ARTICLE 7 TRANSFER OF PARTNERSHIP INTERESTS 7.1 Interest of General Partners. A successor or additional General Partner may be admitted to the Partnership as follows: (a) With the consent of all General Partners and a Majority of the Limited Partners, any General Partner may at any time designate one or more Persons to be successors to such General Partner or to be additional General Partners, in each case with such participation in such General Partner's Partnership Interest as they may agree upon, provided that the Limited Partnership Interests shall not affected thereby; provided, however, that the foregoing shall be subject to the provisions of Section 9.1(d) below, which shall be controlling in any situation to which such provisions are applicable. (b) Upon any sale or transfer of a General Partner's Partnership Interest, the successor General Partner shall succeed to all the powers, rights, duties and obligations of the assigning General Partner hereunder, and the assigning General Partner shall thereupon be irrevocably released and discharged from any further liabilities or obligations of or to the Partnership or the Limited Partners accruing after the date of such transfer. The sale, assignment or transfer of all or any portion of the outstanding stock of a corporate General Partner, or of any interest therein, or an assignment of a General Partner's Partnership Interest for security purposes only, shall not be deemed to be a sale or transfer of such General Partner's Partnership interest subject to the provisions of this Section 7.1. (c) In the event that all or any one of the initial General Partners are removed by the vote of a majority of Limited Partners and a successor or additional General Partner(s) is designated pursuant to Section 3.10, prior to a Person's admission as a successor or additional General Partner pursuant to this Section 7.1, such Person shall execute a writing (i) acknowledging that Redwood Mortgage, an Affiliate of the General Partners, has been repaying the Formation Loans, which is discussed in Section 10.9, with the proceeds it receives from loan brokerage commissions on Mortgage Investments, fees received from the early withdrawal penalties and fees for other services paid by the Partnership, and (ii) agreeing that if such successor or additional General Partner(s) begins using the services of another mortgage loan broker or, loan servicing agent then Redwood Mortgage shall immediately be released from all further obligations under the Formation Loans (except for a proportionate share of the principal installment due at the end of that year, prorated according to the days elapsed). 7.2 Transfer of Limited Partnership Interest. No assignee of the whole or any portion of a Limited Partnership Interest in the Partnership shall have the right to become a substituted Limited Partner in place of his assignor, unless the following conditions are first met. (a) The assignor shall designate such intention in a written instrument of assignment, which shall be in a form and substance reasonably satisfactory to the General Partners; (b) The written consent of the General Partners to such substitution shall be obtained, which consent shall not be unreasonably withheld, but which, in any event, shall not be given if the General Partners determine that such sale or transfer may jeopardize the continued ability of the Partnership to qualify as a "partnership" for federal income tax purposes or that such sale or transfer may violate any applicable securities laws (including any investment suitability standards); (c) The assignor and assignee named therein shall execute and acknowledge such other instruments as the General Partners may deem necessary to effectuate such substitution, including, but not limited to, a power of attorney with provisions more fully described in Sections 2.8 and 2.9 above; (d) The assignee shall accept, adopt and approve in writing all of the terms and provisions of this Agreement as the same may have been amended; (e) Such assignee shall pay or, at the election of the General Partners, obligate himself to pay all reasonable expenses connected with such substitution, including but not limited to reasonable attorneys' fees associated therewith; and The Partnership has received, if required by the General Partners, a legal opinion satisfactory to the General Partners that such transfer will not violate the registration provisions of the Securities Act of 1933, as amended, which opinion shall be furnished at the Limited Partner's expense. 7.3 Further Restrictions on Transfers. Notwithstanding any provision to the contrary contained herein, the following restrictions shall also apply to any and all proposed sales, assignments and transfer of Limited Partnership Interests, and any proposed sale, assignment or transfer in violation of same to void ab initio. (a) No Limited Partner shall make any transfer or assignment of all or any part of his Limited Partnership Interest if said transfer or assignment would, when considered with all other transfers during the same applicable twelve month period, cause a termination of the Partnership for federal or California state income tax purposes. (b) Instruments evidencing a Limited Partnership Interest shall bear and be subject to legend conditions in substantially the following forms: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OR CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. (c) No Limited Partner shall make any transfer or assignment of all or any of his Limited Partnership Interest if the General Partners determine such transfer or assignment would result in the Partnership being classified as a "publicly traded partnership" with the meaning of Section 7704(b) of the Code or any regulations or rules promulgated thereunder. ARTICLE 8 WITHDRAWAL FROM PARTNERSHIP 8.1 Withdrawal by Limited Partners. No Limited Partner shall have the right to withdraw from the Partnership, receive cash distributions or otherwise obtain the return of all or any portion of his Capital Account balance for a period of one year after such Limited Partner's initial purchase of Units, except for monthly, quarterly or annual distributions of Cash Available for Distribution, if any, to which such Limited Partner may be entitled pursuant to Section 5.2 above. Withdrawal after a minimum one year holding period and before the five year holding period as set forth below shall be permitted in accordance with subsection (a) below. If a Limited Partner elects to withdraw either after the one (1) year holding period or the five (5) year withholding period, he will continue to receive distributions or have those Earnings compounded depending upon his initial election, based upon the balance of his capital account during the withdrawal period. Limited Partners may also withdraw after a five year holding period in accordance with subsection b(i) and (ii). A Limited Partner may withdraw or partially withdraw from the Partnership upon the following terms: (a) A Limited Partner who desires to withdraw from the Partnership after the expiration of the above referenced one year period shall give written notice of withdrawal ("Notice of Withdrawal") to the General Partners, which Notice of Withdrawal shall state the sum or percentage interests to be withdrawn. Subject to the provisions of subsections (e) and (f) below, such Limited Partner may liquidate part or all of his entire Capital Account in four equal quarterly installments beginning the quarter following the quarter in which the Notice of Withdrawal is given, provided that such notice was received thirty (30) days prior to the end of the quarter. An early withdrawal under this subsection (a) shall be subject to a 10% early withdrawal penalty applicable to the sum withdrawn as stated in the Notice of Withdrawal. The 10% penalty shall be subject to and payable upon the terms set forth in subsection (c) below. (b) A Limited Partner who desires to withdraw from the Partnership after the expiration of the above referenced five year period shall give written notice of withdrawal ("Notice of Withdrawal") to the General Partners, and subject to the provisions of subsections (e) and (f) below such Limited Partner's Capital Account shall be liquidated as follows: (i) Except as provided in subsection (b)(ii) below, the Limited Partner's Capital Account shall be liquidated in twenty (20) equal quarterly installments each equal to 5% of the total Capital Account beginning the calendar quarter following the quarter in which the Notice of Withdrawal is given, provided that such notice is received thirty (30) days prior to the end of the preceding quarter. Upon approval by the General Partners, the Limited Partner's Capital Account may be liquidated upon similar terms over a period longer than twenty (20) equal quarterly installments. (ii) Notwithstanding subsection (b)(i) above, any Limited Partner may liquidate part or all of his entire outstanding Capital Account in four equal quarterly installments beginning of the calendar quarter following the preceding quarter in which Notice of Withdrawal is given, provided that such notice was received thirty (30) days prior to the end of the preceding quarter. An early withdrawal under this subsection 8.1(b)(ii) shall be subject to a 10% early withdrawal penalty applicable to any sums prior to the time when such sums could have been withdrawn pursuant to the withdrawal provisions set forth in subsection (a)(i) above. (c) The 10% early withdrawal penalty will be deducted pro rata from the Limited Partner's Capital Account. The 10% early withdrawal penalty will be received by the Partnership, and a portion of the sums collected as such early withdrawal penalty shall be applied by the Partnership toward the next installment(s) of principal under the Formation Loan owed to the Partnership by Redwood Mortgage, an Affiliate of the General Partners and any successor firm, as described in Section 10.9 below. This portion shall be determined by the ratio between the initial amount of the Formation Loan and the total amount of the organizational and syndication costs incurred by the Partnership in this offering of Units. The balance of such early withdrawal penalties shall be retained by the Partnership for its own account. After the Formation Loan has been paid, the 10% early withdrawal penalty will be used to pay the Continuing Servicing Fee, as set forth in Section 10.13 below. The balance of such early withdrawal penalties shall be returned by the Partnership for its own account. (d) Commencing with the end of the calendar month in which such Notice of Withdrawal is given, and continuing on or before the twentieth day after the end of each month thereafter, any Cash Available for Distribution allocable to the Capital Account (or portion thereof) with respect to which Notice of Withdrawal has been given shall also be distributed in cash to the withdrawing Limited Partner in the manner provided in Section 5.2 above. (e) During the liquidation period described in subsections 8.1(a) and (b), the Capital Account of a withdrawing Limited Partner shall remain subject to adjustment as described in Section 1.3 above. Any reduction in said Capital Account by reason of an allocation of Losses, if any, or otherwise shall reduce all subsequent liquidation payments proportionately. In no event shall any Limited Partner receive cash distributions upon withdrawal from the Partnership if the effect of such distribution would be to create a deficit in such Limited Partner's Capital Account. (f) Payments to withdrawing Limited Partners shall at all times be subject to the availability of sufficient cash flow generated in the ordinary course of the Partnership's business, and the Partnership shall not be required to liquidate outstanding Mortgage Investments prior to their maturity dates for the purposes of meeting the withdrawal requests of Limited Partners. For this purpose, cash flow is considered to be available only after all current Partnership expenses have been paid (including compensation to the General Partners and Affiliates) and adequate provision has been made for the payment of all monthly or annual cash distributions on a pro rata basis which must be paid to Limited Partners who elected to receive such distributions upon subscription for Units pursuant to Section 4.3 or who changed their initial election to compound Earnings as set forth in Section 4.3. Furthermore, no more than 20% of the total Limited Partners' Capital Accounts outstanding for the beginning of any calendar year shall be liquidated during any calendar year. Notwithstanding the 20% limitation, the General Partners shall have the discretion to further limit the percentage of the total Limited Partners' Capital Accounts that may be withdrawn in order to comply with any Regulations to be enacted pursuant to Section 7704 of the Code and the safe harbor provisions set forth in Notice 88-75 to avoid the Partnership being taxed as a corporation. If Notices of Withdrawal in excess of these limitations are received by the General Partners, the priority of distributions among Limited Partners shall be determined as follows: first, to those Limited Partners withdrawing Capital Accounts according to the 20 quarter or longer installment liquidation period described under subsection (b)(i) above, then to ERISA plan Limited Partners withdrawing Capital Accounts under subsection (b)(ii) above, then to all other Limited Partners withdrawing Capital Accounts under subsection (b)(ii) above, and finally to all other Limited Partners withdrawing Capital Accounts under subsection (a) above. 8.2 Retirement by General Partners. Any one or all of the General Partners may withdraw ("retire") from the Partnership upon not less than six (6) months written notice of the same to all Limited Partners. Any retiring General Partner shall not be liable for any debts, obligations or other responsibilities of the Partnership or this Agreement arising after the effective date of such retirement. 8.3 Payment to Terminated General Partner. If the business of the Partnership is continued as provided in Section 9.1(d) or 9.1(e) below upon the removal, retirement, death, insanity, dissolution, or bankruptcy of a General Partner, then the Partnership shall pay to such General Partner, or his/its estate, a sum equal to such General Partner's outstanding Capital Account as of the date of such removal, retirement, death, insanity, dissolution or bankruptcy, payable in cash within thirty (30) days after such date. If the business of the Partnership is not so continued, then such General Partner shall receive from the Partnership such sums as he may be entitled to receive in the course of terminating the Partnership and winding up its affairs, as provided in Section 9.3 below. ARTICLE 9 DISSOLUTION OF THIS PARTNERSHIP; MERGER OF THE PARTNERSHIP 9.1 Events Causing Dissolution. The Partnership shall dissolve upon occurrence of the earlier of the following events: (a) Expiration of the term of the Partnership as stated in Section 2.7 above. (b) The affirmative vote of a majority of the Limited Partners. (c) The sale of all or substantially all of the Partnership's assets; provided, for purposes of this Agreement the term "substantially all of the Partnership's assets" shall mean assets comprising not less than seventy percent (70%) of the aggregate fair market value of the Partnership's total assets as of the time of sale. (d) The retirement, death, insanity, dissolution or bankruptcy of a General Partner unless, within ninety (90) days after any such event (i) the remaining General Partners, if any, elect to continue the business of the Partnership, or (ii) if there are no remaining General Partners, all of the Limited Partners agree to continue the business of the Partnership and to the appointment of a successor General Partner who executes a written acceptance of the duties and responsibilities of a General Partner hereunder. (e) The removal of a General Partner, unless within ninety (90) days after the effective date of such removal (i) the remaining General Partners, if any, elect to continue the business of the Partnership, or (ii) if there are no remaining General Partners, a successor General Partner is approved by a majority of the Limited Partners as provided in Section 3.7 above, which successor executes a written acceptance as provided therein and elects to continue the business of the Partnership. (f) Any other event causing the dissolution of the Partnership under the laws of the State of California. 9.2 Winding Up and Termination. Upon the occurrence of an event of dissolution, the Partnership shall immediately be terminated, but shall continue until its affairs have been wound up. Upon dissolution of the Partnership, unless the business of the Partnership is continued as provided above, the General Partners will wind up the Partnership's affairs as follows: (a) No new loans shall be made or purchased; (b) Except as may be agreed upon by a majority of the Limited Partners in connection with a merger or consolidation described in Sections 9.5, 9.6 or 9.7, the General Partners shall liquidate the assets of the Partnership as promptly as is consistent with recovering the fair market value thereof, either by sale to third parties or by servicing the Partnership's outstanding Mortgage Investments in accordance with their terms; provided, however, the General Partners shall liquidate all Partnership assets for the best price reasonably obtainable in order to completely wind up the Partnership's affairs within five (5) years after the date of dissolution; (c) Except as may be agreed upon by a majority of the Limited Partners in connection with a merger or consolidation described in Sections 9.5, 9.6 or 9.7, all sums of cash held by the Partnership as of the date of dissolution, together with all sums of cash received by the Partnership during the winding up process from any source whatsoever, shall be distributed in accordance with Section 9.3 below. 9.3 Order of Distribution of Assets. In the event of dissolution as provided in Section 9.1 above, the cash of the Partnership shall be distributed as follows: (a) All of the Partnership's debts and liabilities to persons other than Partners shall be paid and discharged; (b) All of the Partnership's debts and liabilities to Partners shall be paid and discharged; (c) The balance of the cash of the Partnership shall be distributed to the Partners in proportion to their respective outstanding Capital Accounts. Upon dissolution, each Limited Partner shall look solely to the assets of the Partnership for the return of his Capital Contribution, and if the Partnership assets remaining after the payment or discharge of the debts and liabilities of the Partnership is insufficient to return the Capital Contribution of each Limited Partner, such Limited Partner shall have no recourse against the General Partners or any other Limited Partner. The winding-up of the affairs of the Partnership and the distribution of its assets shall be conducted exclusively by the General Partners. It is hereby authorized to do any and all acts and things authorized by law for these purposes. In the event of insolvency, dissolution, bankruptcy or resignation of all of the General Partners or removal of the General Partners by the Limited Partners, the winding up of the affairs of the Partnership and the distribution of its assets shall be conducted by such person or entity as may be selected by a vote of a majority of the outstanding Units, which person or entity is hereby authorized to do any and all acts and things authorized by law for such purposes. 9.4 Compliance With Timing Requirements of Regulations. In the event the Partnership is "liquidated" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g), (a) distributions shall be made pursuant to this Article 9 (if such liquidation constitutes a dissolution of the Partnership) or Article 5 hereof (if it does not) to the General Partners and Limited Partners who have positive Capital Accounts in compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2) and (b) if the General Partners' Capital Accounts have a deficit balance (after giving effect to all contributions, distributions, and allocations for all taxable years, including the year during which such liquidation occurs), such General Partners shall contribute to the capital of the Partnership the amount necessary to restore such deficit balance to zero in compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(3); 9.5 Merger or Consolidation of the Partnership. The Partnership's business may be merged or consolidated with one or more limited partnerships that are Affiliates of the Partnership, provided the approval of the required percentage in interest of Partners is obtained pursuant to Section 9.6. Any such merger or consolidation may be effected by way of a sale of the assets of, or units in, the Partnership or purchase of the assets of, or units in, another limited partnership(s), or by any other method approved pursuant to Section 9.6. In any such merger or consolidation, the Partnership may be either a disappearing or surviving entity. 9.6 Vote Required. The principal terms of any merger or consolidation described in Section 9.5 must be approved by the General Partners and by the affirmative vote of a Majority of the Limited Partners. 9.7 Sections Not Exclusive. Sections 9.5 and 9.6 shall not be interpreted as setting forth the exclusive means of merging or consolidating the Partnership in the event that the California Revised Limited Partnership Act, or any successor statute, is amended to provide a statutory method by which the Partnership may be merged or consolidated. ARTICLE 10 TRANSACTIONS BETWEEN THE PARTNERSHIP, THE GENERAL PARTNERS AND AFFILIATES 10.1 Loan Brokerage Commissions. The Partnership will enter into Mortgage Investment transactions where the borrower has employed and agreed to compensate the General Partners or an Affiliate of the General Partners to act as a broker in arranging the loan. The exact amount of the Loan Brokerage Commissions are negotiated with prospective borrowers on a case by case basis. It is estimated that such commissions will be approximately three percent (3%) to six percent (6%) of the principal amount of each Mortgage Investment made during that year. The Loan Brokerage Commissions shall be capped at 4% of the Partnership's total assets per year. 10.2 Loan Servicing Fees. A General Partner or an Affiliate of a General Partner may act as servicing agent with respect to all Mortgage Investments, and in consideration for such collection efforts he/it shall be entitled to receive a monthly servicing fee up to one-eighth of one percent (.125%) of the total unpaid principal balance of each Mortgage Investment serviced, or such higher amount as shall be customary and reasonable between unrelated Persons in the geographical area where the property securing the Mortgage Investment is located. The General Partners or an Affiliate may lower such fee for any period of time and thereafter raise it up to the limit set forth above. 10.3 Escrow and Other Loan Processing Fees. The General Partners or an Affiliate of a General Partner may act as escrow agent for Mortgage Investments made by the Partnership, and may also provide certain document preparation, notarial and credit investigation services, for which services the General Partners shall be entitled to receive such fees as are permitted by law and as are generally prevailing in the geographical area where the property securing the Mortgage Investment is located. 10.4 Asset Management Fee. The General Partners shall receive a monthly fee for managing the Partnership's Mortgage Investment portfolio and general business operations in an amount up to 1/32 of one percent (.03125%) of the total "net asset value" of all Partnership assets (as hereafter defined), payable on the first day of each calendar month until the Partnership is finally wound up and terminated. "Net asset value" shall mean total Partner's capital, determined in accordance with generally accepted accounting principles as of the last day of the preceding calendar month. The General Partners, in their discretion, may lower such fee for any period of time and thereafter raise it up to the limit set forth above. 10.5 Reconveyance Fees. The General Partners may receive a fee from a borrower for reconveyance of a property upon full payment of a loan in an amount as is generally prevailing in the geographical area where the property is located. 10.6 Assumption Fees. An Affiliate of the General Partners may receive a fee payable by a borrower for assuming a loan in an amount equal to a percentage of the loan or a set fee. 10.7 Extension Fee. An Affiliate of the General Partners may receive a fee payable by a borrower for extending the loan period in an amount equal to a percentage of the loan. 10.8 Prepayment and Late Fees. Any prepayment and late fees collected by an Affiliate of the General Partners in connection with Mortgage Investments shall be paid by the Affiliate to the Partnership. 10.9 Formation Loans to Affiliate of General Partners. The Partnership may lend to Redwood Mortgage, an Affiliate of the General Partners, a sum not to exceed 10% of the total amount of Capital Contributions to the Partnership by the Limited Partners, the proceeds of which shall be used solely for the purpose of paying selling commissions (not including the Continuing Servicing Fee) and all amounts payable in connection with unsolicited orders received by the General Partners. The Formation Loans shall be unsecured and shall be evidenced by a non-interest bearing promissory note executed by Redwood Mortgage in favor of the Partnership. The First Formation Loan will be repaid in ten (10) equal annual installments of principal without interest, commencing on December 31 of the year in which the offering terminates. The Second Formation Loan will be repaid as follows: Upon the commencement of this offering, Redwood Mortgage shall make annual installments of one-tenth of the principal balance of the Formation loan as of December 31 of each year. Such payment shall be due and payable by December 31 of the following year with the first payment due by December 31, 1997 assuming this offering commences in 1996. The principal balance of the Second Formation Loan will increase as additional sales of Units are made each year. The amount of the annual installment payment to be made by Redwood Mortgage during the offering stage, will be determined by the principal balance of the Second Formation Loan on December 31 of each year. Upon the completion of this offering the balance of the Second Formation Loan will be repaid in ten (10) equal annual installments of principal, without interest, commencing on December 31 of the year following the year the offering terminates. Redwood Mortgage at its option may prepay all or any part of the Formation Loans. Redwood Mortgage will repay the Formation Loans principally from loan brokerage commissions earned on Mortgage Investments, early withdrawal penalties and other fees paid by the Partnership. Since Redwood Mortgage will use the proceeds from loan brokerage commissions on Mortgage Investments to repay the Formation Loans, if all or any one of the initial General Partners is removed as a General Partner by the vote thereafter designated, and if such successor or additional General Partner(s) begins using any other loan brokerage firm for the placement of Mortgage Investments, Redwood Mortgage will be immediately released from any further obligation under the Formation Loans (except for a proportionate share of the principal installment due at the end of that year, pro rated according to the days elapsed.) In addition, if all of the General Partners are removed, no successor General Partners are elected, the Partnership is liquidated and Redwood Mortgage is no longer receiving any payments for services rendered, the debt on the Formation Loans shall be forgiven and Redwood Mortgage will be immediately released from any further obligations under the Formation Loans. 10.10 Sale of Mortgage Investments and Loans Made to General Partners or Affiliates. The Partnership may sell existing Mortgage Investments to the General Partners or their Affiliates, but only so long as the Partnership receives net sales proceeds from such sales in an amount equal to the total unpaid balance of principal, accrued interest and other charges owing under such Mortgage Investment, or the fair market value of such Mortgage Investment, whichever is greater. Notwithstanding the foregoing, the General Partners shall be under no obligation to purchase any Mortgage Investment from the Partnership or to guarantee any payments under any Mortgage Investment. Generally, Mortgage Investments will not be made to the General Partners or their Affiliates. However, the Partnership may make the Formation Loans to Redwood Mortgage and may in certain limited circumstances, loan funds to Affiliates to purchase real estate owned by the Partnership as a result of foreclosure. 10.11 Purchase of Mortgage Investments from General Partners or Affiliates. The Partnership may purchase existing Mortgage Investments from the General Partners or Affiliates, provided that the following conditions are met: (a) At the time of purchase the borrower shall not be in default under the Mortgage Investment; (b) No brokerage commissions or other compensation by way of premiums or discounts shall be paid to the General Partners or their Affiliates by reason of such purchase; and (c) If such Mortgage Investment was held by the seller for more than 180 days, the seller shall retain a ten percent (10%) interest in such Mortgage Investment. 10.12 Interest. Redwood Mortgage shall be entitled to keep interest if any, earned on the Mortgage Investments between the date of deposit of borrower's funds into Redwood Mortgage's trust account and date of payment of such funds by Redwood Mortgage. 10.13 Sales Commissions; Continuing Servicing Fee. The Units are being offered to the public on a best efforts basis through the Participating Broker-Dealers. The Participating Broker-Dealers may receive commissions under one of the two following options: (i) at the rate of either 5% or 9% (depending upon the investor's election to receive cash distributions or to compound earnings in the Partnership) of the Gross Proceeds on all of their sales; or (ii) at the rate of 4% or 7% (depending upon the investor's election to receive cash distributions or to compound earnings in the Partnership) of the Gross Proceeds on all of their sales together with the Continuing Servicing Fee. The Continuing Servicing Fee is equal to one quarter of one percent (0.25% payable annually in quarterly installments) of a Partner's Capital Account. In the event the Partnership receives any unsolicited orders directly from an investor who did not utilize the services of a Participating Broker Dealer, Redwood Mortgage through the Formation Loans will pay to the Partnership an amount equal to the amount of the sales commissions otherwise attributable to a sale of a Unit through a Participating Broker Dealer assuming no Continuing Servicing Fee is paid. The Partnership will in turn credit such amounts received from Redwood Mortgage to the account of the Investor who placed the unsolicited order. Sales commissions will not be paid by the Partnership out of the offering proceeds. All sales commissions will be paid by Redwood Mortgage, an affiliate of the General Partners, which will also act as the mortgage loan broker for all Mortgage Investments as set forth in Section 10.7 above. The Continuing Servicing Fee will be paid by Redwood Mortgage, but will not be included in the Formation Loans. The Partnership will loan to Redwood Mortgage funds in an amount equal to the sales commissions (not including any Continuing Servicing Fees) and all amounts payable in connection with unsolicited sales by the General Partners, as a Formation Loan. Units may also be offered or sold directly by the General Partners for which they will receive no sales commissions. The Partnership shall reimburse Participating Broker-Dealers for bona fide due diligence expenses in an amount up to .5% of the Gross Proceeds. 10.14 Reimbursement. The Partnership shall reimburse the General Partners or their Affiliates for the actual cost to the General Partners or their Affiliates (or pay directly the cost) of goods and materials used for or by the Partnership and obtained from entities unaffiliated with the General Partners or their Affiliates. The Partnership shall also pay or reimburse the General Partners or their Affiliates for the cost of administrative services necessary to the prudent operation of the Partnership, provided that such reimbursement will be at the lower of (A) the actual cost to the General Partners or their Affiliates of providing such services, or (B) 90% of the amount the Partnership would be required to pay to non affiliated persons rendering similar services in the same or comparable geographical location. The cost of administrative services as used in this subsection shall mean the pro rata cost of personnel, including an allocation of overhead directly attributable to such personnel, based on the amount of time such personnel spent on such services, or other method of allocation acceptable to the program's independent certified public accountant. 10.15 Non-reimbursable Expenses. The General Partners will pay and will not be reimbursed by the Partnership for any general or administrative overhead incurred by the General Partners in connection with the administration of the Partnership which is not directly attributable to services authorized by Sections 10.15 or 10.17. 10.16 Operating Expenses. Subject to Sections 10.15 and 10.16 all expenses of the Partnership shall be billed directly to and paid by the Partnership which may include, but are not limited to: (i) all salaries, compensation, travel expenses and fringe benefits of personnel employed by the Partnership and involved in the business of the Partnership. including persons who may also be employees of the General Partners or Affiliates of the General Partners, but excluding control persons of either the General Partners or Affiliates of the General Partners, (ii) all costs of borrowed money, taxes and assessments on Partnership properties foreclosed upon and other taxes applicable to the Partnership, (iii) legal, audit, accounting, and brokerage fees, (iv) printing, engraving and other expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and recording of documents evidencing ownership of an interest in the Partnership or in connection with the business of the Partnership, (v) fees and expenses paid to leasing agents, consultants, real estate brokers, insurance brokers, and other agents, (vi) costs and expenses of foreclosures, insurance premiums, real estate brokerage and leasing commissions and of maintenance of such property, (vii) the cost of insurance as required in connection with the business of the Partnership, (viii) expenses of organizing, revising, amending, modifying or terminating the Partnership, (ix) expenses in connection with Distributions made by the Partnership, and communications, bookkeeping and clerical work necessary in maintaining relations with the Limited Partners and outside parties, including the cost of printing and mailing to such persons certificates for Units and reports of meetings of the Partnership, and of preparation of proxy statements and solicitations of proxies in connection therewith, (x) expenses in connection with preparing and mailing reports required to be furnished to the Limited Partners for investor, tax reporting or other purposes, or other reports to the Limited Partners which the General Partners deem to be in the best interests of the Partnership, (xi) costs of any accounting, statistical or bookkeeping equipment and services necessary for the maintenance of the books and records of the Partnership including, but not limited to, computer services and time, (xii) the cost of preparation and dissemination of the information relating to potential sale, refinancing or other disposition of Partnership property, (xiii) costs incurred in connection with any litigation in which the Partnership is involved, as well as in the examination, investigation or other proceedings conducted by any regulatory agency with jurisdiction over the Partnership including legal and accounting fees incurred in connection therewith. (xiv) costs of any computer services used for or by the Partnership, (xv) expenses of professionals employed by the Partnership in connection with any of the foregoing, including attorneys, accountants and appraisers. For the purposes of Sections 10.17(i), a control person is someone holding a 5% or greater equity interest in the General Partners or affiliate or a person having the power to direct or cause the direction of the General Partners or Affiliate, whether.through the ownership of voting securities, by contract or otherwise. 10.17 Deferral of Fees and Expense Reimbursement. The General Partners may defer payment of any fee or expense reimbursement provided for herein. The amount so deferred shall be treated as a non-interest bearing debt of the Partnership and shall be paid from any source of funds available to the Partnership, including cash available for Distribution prior to the distributions to Limited Partners provided for in Article 5. 10.18 Payment upon Termination. Upon the occurrence of a terminating event specified in Article 9 of the termination of an affiliate's agreement, any portion of any reimbursement or interest in the Partnership payable according to the provisions of this Agreement if accrued, but not yet paid, shall be paid by the Partnership to the General Partners or Affiliates in cash, within thirty (30) days of the terminating event or termination date set forth in the written notice of termination. ARTICLE 11 ARBITRATION 11.1 Arbitration. As between the parties hereto, all questions as to rights and obligations arising under the terms of this Agreement are subJect to arbitration, including any question concerning any right or duty under the Securities Act of 1933, the Securities Exchange Act of 1934 and the securities laws of any state in which Units are offered, and such arbitration shall be governed by the rules of the American Arbitration Association. 11.2 Demand for Arbitration. If a dispute should arise under this Agreement, any Partner may within 60 days make a demand for arbitration by filing a demand in writing for the other. 11.3 Appointment of Arbitrators. The parties may agree upon one arbitrator, but in the event that they cannot agree) there shall be three, one named in writing by each of the parties within five (5) days after demand for arbitration is given and a third chosen by the two appointed. Should either party refuse or neglect to join in the appointment of the arbitrator(s) or to furnish the arbitrator(s) with any papers or information demanded, the arbitrator(s) are empowered by both parties to proceed ex parte. 11.4 Hearing. Arbitration shall take place in San Mateo, California, and the hearing before the arbitrator(s) of the matter to be arbitrated shall be at the time and place within said city as is selected by the arbitrator(s). The arbitrator(s) shall select such time and place promptly after his (or their) appointment and shall give written notice thereof to each party at least sixty (60) days prior to the date so fixed. At the hearing any relevant evidence may be presented by either party, and the formal rules of evidence applicable to judicial proceedings shall not govern. Evidence may be admitted or excluded in the sole discretion of the arbitrator(s). Said arbitrator(s) shall hear and determine the matter and shall execute and acknowledge their award in writing and cause a copy thereof to be delivered to each of the parties. 11.5 Arbitration Award. If there is only one arbitrator, his decision shall be binding and conclusive on the parties, and if there are three arbitrators the decision of any two shall be binding and conclusive. The submission of a dispute to the arbitrator(s) and the rendering of his (or their) decision shall be a condition precedent to any right of legal action on the dispute. A judgment confirming the award of the arbitrator(s) may be rendered by any Court having Jurisdiction; or such Court may vacate, modify, or correct the award in accordance with the prevailing sections of California State Law. 11.6 New Arbitrators. If three arbitrators are selected under the foregoing procedure but two of the three fail to reach an Agreement in the determination of the matter in question, the matter shall be decided by three new arbitrators who shall be appointed and shall proceed in the same manner, and the process shall be repeated until a decision is finally reached by two of the three arbitrators selected. 11.7 Costs of Arbitration. The costs of such arbitration shall be borne by the losing party or in such proportions as the arbitrators shall determine. ARTICLE 12 MISCELLANEOUS 12.1 Covenant to Sign Documents. Without limiting the power granted by Sections 2.8 and 2.9, each Partner covenants, for himself and his successors and assigns, to execute, with acknowledgment or verification, if required, any and all certificates, documents and other writings which may be necessary or expedient to form the Partnership and to achieve its purposes, including, without limitation, the Certificate of Limited Partnership and all amendments thereto, and all such filings, records or publications necessary or appropriate laws of any jurisdiction in which the Partnership shall conduct its business. 12.2 Notices. Except as otherwise expressly provided for in this Agreement, all notices which any Partner may desire or may be required to give any other Partners shall be in writing and shall be deemed duly given when delivered personally or when deposited in the United States mail, first-class postage pre-paid. Notices to Limited Partners shall be addressed to the Limited Partners at the last address shown on the Partnership records. Notices to the General Partners or to the Partnership shall be delivered to the Partnership's principal place of business, as set forth in Section 2.3 above or as hereafter charged as provided herein. Notice to any General Partner shall constitute notice to all General Partners. 12.3 Right to Engage in Competing Business. Nothing contained herein shall preclude any Partner from purchasing or lending money upon the security of any other property or rights therein, or in any manner investing in, participating in, developing or managing any other venture of any kind, without notice to the other Partners, without participation by the other Partners, and without liability to them or any of them. Each Limited Partner waives any right he may have against the General Partners for capitalizing on information received as a consequence of the General Partners management of the affairs of this Partnership. 12.4 Amendment. This Agreement is subject to amendment by the affirmative vote of a Majority of the Limited Partners in accordance with Section 4.5; provided, however, that no such amendment shall be permitted if the effect of such amendment would be to increase the duties or liabilities of any Partner or materially change any Partner's interest in Profits, Losses, Partnership assets, distributions, management rights or voting rights, except as agreed by that Partner. In addition, and notwithstanding anything to the contrary contained in this Agreement the General Partners shall have the right to amend this Agreement, without the vote or consent of any of the Limited Partnership, when: (a) There is a change in the name of the Partnership or the amount of the contribution of any Limited Partner; (b) A Person is substituted as a Limited Partner; (c) An Additional Limited Partner is admitted; (d) A Person is admitted as a successor or additional General Partner in accordance with the terms of this Agreement; (e) A General Partner retires, dies, files a petition in bankruptcy, becomes insane or is removed, and the Partnership business is continued by a remaining or replacement General Partner; (f) There is a change in the character of the business of the Partnership; (g) There is a change in the time as stated in the Agreement for the dissolution of the Partnership, or the return of a Partnership contribution; (h) To cure any ambiguity, to correct or supplement any provision which may be inconsistent with any other provision, or to make any other provisions with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement; (i) To delete or add any provision of this Agreement required to be so deleted or added by the Staff of the Securities and Exchange Commission or by a State "Blue Sky" Administrator or similar official, which addition or deletion is deemed by the Administrator or official to be for the benefit or protection of the Limited Partners; (j) To elect for the Partnership to be governed by any successor California statute governing limited partnerships; and (k) To modify provisions of this Agreement as noted in Sections 1.3 and 5.6 to cause this Agreement to comply with Treasury Regulation Section 1.704-1(b). The General Partners shall notify the Limited Partners within a reasonable time of the adoption of any such amendment. 12.5 Entire Agreement. This Agreement constitutes the entire Agreement between the parties and supersedes any and all prior agreements and representations, either oral or in writing, between the parties hereto with respect to the subject matter contained herein. 12.6 Waiver. No waiver by any party hereto of any breach of, or default under, this Agreement by any other party shall be construed or deemed a waiver of any other breach of or default under this Agreement, and shall not preclude any party from exercising or asserting any rights under this Agreement with respect to any other. 12.7 Severability. If any term, provision, covenant or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 12.8 Application of California law; Venue. This Agreement and the application or interpretation thereof shall be governed, construed, and enforced exclusively by its terms and by the law of the State of California and the appropriate Courts in the County of San Mateo, State of California shall be the appropriate forum for any litigation arising hereunder. 12.9 Captions. Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement. 12.10 Number and Gender. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders. 12.11 Counterparts. This Agreement may be executed in counterparts, any or all of which may be signed by a General Partner on behalf of the Limited Partners as their attorney-in-fact. 12.13 Waiver of Action for Partition. Each of the parties hereto irrevocably waives during the term of the Partnership any right that it may have to maintain any action for partition with respect to any property of the Partnership. 12.14 Defined Terms. All terms used in this Agreement which are defined in the Prospectus of Redwood Mortgage Investors VIII, dated _______________, 1996 shall have the meanings assigned to them in said Prospectus, unless this Agreement shall provide for a specific definition in Article 2. 12.15 Assignability. Each and all of the covenants, terms, provisions and arguments herein contained shall be binding upon and inure to the benefit of the successors and assigns of the respective parties hereto, subject to the requirements of Article 7. IN WITNESS WHEREOF, the parties hereto have hereunto set their hand the day and year first above written. GENERAL PARTNERS: ____________________________________________ D. Russell Burwell --------------------------------------------- Michael R. Burwell GYMNO CORPORATION A California Corporation By: --------------------------------------------- D. Russell Burwell, President LIMITED PARTNERS: By: Gymno Corporation, (General Partner and Attorney-in-Fact) By: --------------------------------------------- D. Russell Burwell, President SCHEDULE A LIMITED PARTNERS OF REDWOOD MORTGAGE INVESTORS VIII, A California Limited Partnership Name and Address Date of Admission Capital Contribution EX-3.2 5 CERTIFICATE OF LIMITED PARTNERSHIP INTEREST Exhibit 3.2 CERTIFICATE OF LIMITED PARTNERSHIP INTEREST REDWOOD MORTGAGE INVESTORS VIII The undersigned General Partner of REDWOOD MORTGAGE INVESTORS VIII, a California limited partnership (the Partnership), hereby certifies that - ------------------------------------------------------------------------------ is the owner of _______Units of the Partnership, which has been formed pursuant to the California Revised Limited Partnership Act. Income with respect to these Units shall be (check one): compounded ------------------------ distributed monthly ------------------------ distributed quarterely ------------------------ distributed annually ------------------------ The Units represented by this Certificate are transferable only on the books of the Partnership by the registered owner hereof in person or by his attorney, upon surrender of this Certificate properly endorsed after compliance with all conditions to such sale or transfer. Reference is made to the Limited Partnership Agreement of the Partnership for a statement of the rights, preferences and privileges of the Limited Partners, including restrictions on the transferability of Units. TO CERTIFY WHICH, the undersigned General Partner of the Partnership has executed this Certificate on ________________. GENERAL PARTNER: ------------------------------------------- D. Russell Burwell IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED BY THE COMMISIONERS RULES. Back page of Exhibit 3.2 SPECIAL NOTICE FOR CALIFORNIA RESIDENTS ONLY COMMISSIONERS RULE 260.141.11 260.141.11 Restriction on Transfer (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferors ancestors, descendants or spouse or anycustodian or trustee for the account of the transferor or the transferors ancestors, descendants or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferees ancestors, descendants or spouse; (5) to the holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioners written consent is obtained or under this rule is not required; (10) by way of a sale qualified under Sections 25111, 25112, or 25113, or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112, or 25113 of the Code, provided that no order under Section 25140 or Subdivision (a) of Section 25148 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or (15) by the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state, if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities, provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer,whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR,WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONERS RULES. EX-5.1 6 OPINION OF COUNSEL AS TO SECURITES Exhibit 5.1 September ___, 1996 D. Russell Burwell Michael R. Burwell GYMNO CORPORATION REDWOOD MORTGAGE INVESTORS VIII 650 El Camino Real, Suite G Redwood City, California 94063 Re: Redwood Mortgage Investors VIII; Securities Opinion; Our File No. BUR03-009 ------------------------------------------ Gentlemen: We have acted as special counsel for Redwood Mortgage Investors VIII, a limited partnership formed pursuant to the California Revised Limited Partnership Act (the "Partnership"), and its General Partners, D. Russell Burwell, Michael R. Burwell and Gymno Corporation (the "General Partners"), in connection with the public offering of up to 300,000 units of limited partnership interests on the Partnership, at $100 per Unit, as described more fully in the Registration Statement and Prospectus of Redwood Mortgage Investors VIII, as filed on Form S-11. We have not represented the Limited Partners or any other party regarding the preparation of this opinion or the offering of units in the Partnership. We have been requested by the Partnership to furnish our opinion as to the legality of units of limited partnership interests (the "Units") being offered by the Partnership. In connection therewith, we have examined (i) the Prospectus; (ii) the Limited Partnership Agreement of the Partnership, which is included as Exhibit A to the Prospectus; (iii) the Certificate of Limited Partnership filed with the California Secretary of State; (iv) the Subscription Package, which is included as Exhibit B to the Prospectus; and (v) such other documents and instruments as we have deemed necessary or appropriate for the purposes of this opinion. We have also conducted various meeting, discussions and conversations with the General Partners regarding the offer and sale of the Units. Nothing has come to our attention in the representation of the General Partners or the Partnership that would make it unreasonable to assume that the foregoing documents will be utilized in the manner intended as set forth in those documents. However, we have not independently verified any of the facts or representations contained in such documents. In our examination, we have assumed the authenticity of the original documents, the conformity to the originals of all documents purporting to be copies thereof, the accuracy of the copies and genuineness and due authority of all signatures. We have relied upon the representations and statements of the General Partners (without making any independent investigation of the facts) with respect to the factual determinations underlying the legal conclusions set forth herein. We have not attempted to verify independently such representations and statements. In rendering this Opinion, we have assumed that: (i) each other party that has executed or will execute a document, instrument or agreement to which the Partnership is a party duly and validly executed and delivered each document, instrument or agreement to which such party is a signatory and that such party's obligations set forth therein are its legal, valid and binding obligations, enforceable in accordance with their respective terms; (ii) each person executing any document, instrument or agreement on behalf of any such party is duly authorized to do so; and (iii) each natural person executing any instrument, document or agreement referred to herein is legally competent to do so. We are members of the Bar of the State of California and do not purport to be conversant with the laws of jurisdictions other than California and the United States of America. Accordingly, we do not express any opinion as to the effect on the transactions described herein of the laws of any state or jurisdiction other than the federal laws of the United States of America and the laws of the State of California. Based upon the foregoing, we are of the opinion that: The Partnership, as described in the Prospectus, has been duly formed and is a validly existing limited partnership under the laws of the State of California. Subject to obtaining any necessary government approvals or authorizations prior to the issue and sale of the units in the manner described in the Prospectus, and to the issue and sale of the units in such manner, upon the execution of the Limited Partnership Agreement by the Limited Partners, the Units will be legally and validly issued, fully paid and non-assessable, to the extent described in the Prospectus under the heading "SUMMARY OF PARTNERSHIP AGREEMENT". The Partnership will have all authority necessary to own and manage its Mortgage Investments as and when required, and to conduct the business which it proposes to conduct as described in the Limited Partnership Agreement. The opinions expressed herein have been carefully considered and reflect what we regard as the likely manner in which the Units in the Partnership will be issued based upon the statutory provisions, regulations promulgated thereunder, and interpretations thereof by the Commission and the courts having jurisdiction over such matters as of the date of this opinion. However, a number of questions raised by the matters on which we have not expressed an opinion herein have not been definitely answered by statute, regulations, Commission interpretations or court decisions. We assume no obligation to revise or supplement this Opinion Letter should applicable law be changed by legislative, judicial or administrative action or otherwise. Except as set forth herein, we have made no independent attempts to verify the facts or representations or assumptions made herein except to the extent we deem reasonable under ABA Formal Opinion 335 and in connection with our position as counsel to the issuer. Where we render an opinion "to the best of our knowledge" or concerning an item that "has come to our attention" or our opinion otherwise refers to knowledge it means a conscious awareness of facts or other information based upon: (i) an inquiry of attorneys within this firm; (ii) receipt of a certificate executed by the General Partners covering such matters or (iii) such other actual investigation, if any, that we specifically set forth herein, Reference to "us" or "our" is limited to a reference to the lawyer who signs this Opinion Letter or any lawyer of this firm who has been active in preparing the relevant documents. Any inaccuracy in any fact or representation by the General Partners, or any amendment to any documents or any materials cited herein, or any changes in the affairs of the Partnership or General Partners after the date of this opinion may affect all or part of this opinion. Except as expressly set forth below, this opinion may not be filed with or furnished to any other person or any governmental agency, and may not be quoted in whole or in part or otherwise referred to in any context, without, in each instance, our prior written consent, and without in each instance, the exercise of due diligence on the part of the Partnership and the General Partners to verify that there are no material errors or omissions of fact and no changes in the facts or in the text of the materials provided to us. We hereby consent to the inclusion of this Opinion in the Registration Statement as an exhibit thereto and to any reference to our firm included or made a part thereof. Very truly yours, WILSON, RYAN & CAMPILONGO EX-5.2 7 OPINION OF COUNSEL AS TO ERISA MATTERS Exhibit 5.2 __________________________, 1996 D. Russell Burwell Michael R. Burwell Gymno Corporation Redwood Mortgage Investors VIII 650 El Camino Real, Suite G Redwood City, CA 94063 Re: Redwood Mortgage Investors VIII; ERISA Opinion; Our File No.: BUR03-009 Gentlemen: We are acting as counsel for Redwood Mortgage Investors VIII, a limited partnership formed under the California Revised Limited Partnership Act, with respect to its Registration Statement on Form S-11, Registration No.________, as may be amended (the "Registration Statement") and the Preliminary Prospectus (the "Prospectus") included therein, filed by you with the Securities and Exchange Commission in connection with the registration under the Securities Act of 1933, as amended, of up to 300,000 Units of Limited Partnership Interests (the "Units"). Unless otherwise stated herein, capitalized terms not otherwise defined shall have the meanings ascribed to them in the Prospectus. You have requested our opinion as to certain questions arising under the Employee Retirement Income Security Act of 1974 involved in the operation of the referenced Partnership. This opinion is based upon the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), the applicable Department of Labor Regulations (DOL Regulations"), proposed DOL Regulations, the Internal Revenue Code of 1986, as amended (the "Code"), the applicable Treasury Regulations promulgated thereunder (the "Regulations"), and proposed Treasury Regulations (the "Proposed Treasury Regulations"), current administrative rulings and judicial interpretations of the foregoing, all existing as of the date of this letter. It must be emphasized, however, that all such authority is subject to modification at any time by legislative, judicial and/or administrative action and that any such modification could be applied on a retroactive basis. The Partnership will not request (and would not likely obtain) a ruling from the Department of Labor as to any matters related to ERISA and the herein described transactions. While the Partnership will receive this opinion, it is not binding upon the Department of Labor. Thus, there can be no assurance that the Department of Labor will not contest one or more of the conclusions reached herein, or one or more matters as to which no opinion is expressed herein, nor can there be any assurance that the Department of Labor will not prevail in any such contest. Further, even if the Department of Labor were not successful in any such contest, the Partnership, or the Limited Partners in opposing the Department of Labor's position, could incur substantial legal, accounting and other expenses. OPINION Our opinion is limited to a consideration of the following matters: (1) Whether the underlying assets of the Partnership will, under ERISA, be considered "plan assets" of a Tax-Exempt Investor that invests in the Partnership, and (2) Whether various proposed transactions involving the Partnership, the General Partners, their Affiliates and the Tax-Exempt Investors will violate either (1) the prohibitions against fiduciary self-dealing in Section 406(b) of ERISA and Sections 4975(c)(1)(E) and (F) of the Code, or (2) the prohibitions against transactions with parties in interest in Section 406(a) of ERISA and Sections 4975(c)(1)(A) through (D) of the Code. Section 406(b) of ERISA and Sections 4975(c)(1)(E) and (F) of the Code prohibit a fiduciary of a Tax-Exempt Investor from engaging with the Tax-Exempt Investor in various acts of self-dealing. If the General Partners or their Affiliates are fiduciaries with respect to Tax-Exempt Investors, investment by those plans in the Partnership could constitute a violation of Section 406(b) of ERISA and Section 4975(c)(1)(E) and (F) of the Code. Therefore, the critical issue is to what extent, if any, the General Partners or their Affiliates meet the definition of "fiduciary" under ERISA. Under Section 3(21)(A) of ERISA, . . . a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. Section 4975(e)(3) of the Code contains a substantially similar definition. Based on the facts presented in the Prospectus, we are of the opinion that the General Partners and their Affiliates are not fiduciaries with respect to Tax-Exempt Investors for the reasons discussed below. First, the General Partners and their Affiliates will not permit Tax-Exempt Investors to purchase Units with assets of any plans (i) if the General Partners and their Affiliates have investment discretion with respect to such assets or (ii) if they regularly give individualized investment advice which serves as the primary basis for the investment decisions made with respect to such assets. In rendering this opinion, we assume that no transaction will be entered into in violation of these restrictions. Second, the activities of the General Partners and their Affiliates with respect to the Partnership will not make the General Partners and their Affiliates fiduciaries with respect to any Tax-Exempt Investors. None of their activities with respect to the Partnership, as described in the Prospectus, involve management or administration of a plan or rendering investment advice to a plan. Therefore, the General Partners and their Affiliates would be fiduciaries only if they were involved in "management or disposition" of "plan assets." The term "plan assets" is not defined by statue; however, in 1975, the Department of Labor1 issued Interpretive Bulletin 75-2 ("I.B 75-2") on the question of whether a transaction between a "party in interest"2 to a plan and a corporation or partnership in which the plan has invested would constitute a prohibited transaction. The Department of Labor stated, in part, that: Generally, investment by a plan in securities . . . of a corporation or partnership will not, solely by reason of such investment, be considered to be an investment in the underlying assets of such corporation or partnership so as to make the assets "plan assets" and thereby make a subsequent transaction between the party-in-interest and a corporation or partnership a prohibited transaction under Section 40-6 of [ERISA]. It is our opinion that the underlying assets of the Partnership will not be considered assets of Tax-Exempt Investors under the law currently in effect. On January 8, 1985, the Department of Labor issued proposed regulations concerning the definition of what constitutes the assets of a plan. "Proposed Regulations Relating to the Definition of Plan Assets", 50 Fed. Reg. 961 (Jan. 8, 1985). An amendment to such proposed regulations was issued by the Department of Labor on February 15, 1985 (50 Fed. Reg. 6361) (such proposed regulations, as so amended, are referred to herein as the "Proposed DOL Regulations"). The Proposed DOL Regulations were published in final form on November 13, 1986 (51 Fed. Reg. 41262, (November 13, 1986)) and are generally effective on or after March 13, 1987 (the "Final DOL Regulations"). Under the Final DOL Regulations, when a Tax-Exempt Investor acquires an equity interest in another entity, the plan's assets include its investment but do not, solely by reason of such investment, include any of the underlying assets of the entity where the equity interest is of an entity that is a "publicly offered security." 29 CFR 2510.3-101(a)(2). An "equity interest" means any interest in an equity other than an instrument that is treated as indebtedness under applicable local law. A profits interest in a partnership is considered an equity interest. 29 CFR 2510.3-101(b)(1). Accordingly, based upon counsel's opinion attached as Exhibit 5.1 to the Registration Statement, we are of the opinion that the Units in the Partnership will be "equity interests." The Units will be considered a "publicly offered security" only if they are: (i) "freely transferable," (ii) part of a class of securities that is "widely held," and (ii) sold pursuant to an effective registration statement under the Securities Act of 1933 and is later registered under the Securities Exchange Act of 1934. 29 CFR 2510.3-101(b)(2). The determination of whether the Partnership Units are "freely transferable" is a factual one. Nevertheless, where the minimum required investment is $10,000 or less, the securities are likely to be considered freely transferable. 29 CFR 2510.3-101(b)(4) and 51 Fed. Reg. 41268. The presence of any of the following restrictions governing the transferability of Units will not affect this finding: (1) Any requirement that not less than a minimum number of shares or units of such security be transferred or assigned by any investor, provided that such requirement does not prevent transfer of all of the then remaining shares or units held by an investor; -------- 1 The Department of Labor has authority to interpret Section 406 of ERISA and Section 4975(c)(1) of the Code. Section 102(a). Reorganization Plan No. 1978. 2 As used herein, the phrase "party in interest" refers to both a party in interest under Section 3(14) of ERISA and a disqualified person under Section 4975(e)(2) of the Code. (2) Any prohibition against transfer or assignment of such security or rights in respect thereof to an ineligible or unsuitable investor; (3) Any restriction on, or prohibition against, any transfer or assignment which would either result in a termination or reclassification of the entity for federal or state tax purposes or which would violate any state or federal statute, regulation, court order, Judicial decree, or rule of law; (4) Any requirement that reasonable transfer or administrative fees be paid in connection with a transfer or assignment; (5) Any requirement that advance notice of a transfer or assignment be given to the entity and any requirement regarding execution of documentation evidencing such transfer or assignment (including documentation setting forth representations from either or both of the transferor or transferee as to compliance with any restriction or requirement described in this paragraph of this section or requiring compliance with the entity's governing instruments); (6) Any restriction on substitution of an assignee as a limited partner of a partnership, includIng a general partner consent requirement, provided that the economic benefits of ownership of the assignor may be transferred or assigned without regard to such restriction or consent (other than compliance with any other restriction described in this paragraph of this section; (7) Any administrative procedure which establishes an effective date, or an event, such as the completion of the offering, prior to which a transfer or assignment will not be effective; and (8) Any limitation or restriction on transfer or assignment which is not s created or imposed by the issuer or any person acting for or on behalf of such issuer. Accordingly, while a factual matter, we are of the opinion that the Units will be considered freely transferable within the meaning of the Final DOL Regulations. Whether the Units are considered "widely held" is determined by a bright-line test that the Units be held by 100 or more investors, independent from each other and management. 29 CFR 2510.3-101(b)(3). Based upon the representations of the General Partners, it is our opinion that the Partnership will meet this test. Finally, pursuant to the registration of the Units with the Securities and Exchange Commission and the undertakings required therewith, we are of the opinion that the Partnership will meet the "registration" requirements of 29 CFR 2510 3-101(b)(2). Therefore, we are of the opinion that only the Units of the Partnership, rather than the underlying investments of the Partnership, will be considered the plan assets by the Tax-Exempt Investors subscribing for Units in the Partnership. If, on the other hand, the underlying assets of the Partnership were deemed to be "plan assets" under ERISA (i) the prudence standards and other provisions of Part 4 of Title 1 of ERISA applicable to investments by employee benefit plans and their fiduciaries would extend (as to all plan fiduciaries) to investments made by the Partnership and (ii) certain transactions that the Partnership might seek to enter into might constitute "prohibited transactions" under ERISA. Based on and subject to the foregoing opinion regarding the status of the Partnership's underlying assets as other than plan assets, the activities of the General Partners and their Affiliates with respect to management and disposition of those assets do not make the General Partners and their Affiliates fiduciaries with respect to any Tax-Exempt Investors. Therefore, we are of the opinion that the prohibitions against fiduciary self-dealing contained in Section 406(b) of ERISA and Sections 4975(c)(1)(E) and (F) of the Code would not be violated by the dealings of the General Partners and their Affiliates with the Partnership or the Tax-Exempt Investor's investment in the Partnership. Under Section 406(a)(1) of ERISA, a fiduciary of a plan may not cause the plan to enter into a transaction with a party in interest to the plan if that transaction constitutes a direct or indirect -- (1) sale or exchange, or leasing, of any property between the plan and a party in interest; (2) lending of money or other extension of credit between the plan and a party in interest; (3) furnishing of goods, services, or facilities between the plan and a party in interest; (4) transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan; or (5) acquisition, on behalf of the plan, of any employer security or employer real property in violation of Section 407(a). Sections 4975(c)(1)(A) through (D) of the Code describe prohibited transactions that are identical to those described in Sections 406(a)(1)(A) through (D)) of ERISA (substituting the term "disqualified person" for "party in interest"). There is no indication that the General Partners or their Affiliates will be parties in interest or disqualified persons with respect to any Tax-Exempt Investors as those terms are defined in Section 3(14) of ERISA and Section 4975(e)(2) of the Code. SCOPE OF OPINION The current state of the law with respect to many issues which might be raised in connection with the activities described herein is unsettled. Several of the relevant statutory provisions discussed above have been enacted only recently; few or no judicial interpretation of these provisions. Therefore, the consequences to the Partnership cannot be predicted with a high degree of assurance. There is no assurance that the Department of Labor will not raise issues that have not been discussed herein. The Department of Labor may disagree with our conclusions and may be upheld by a court. The Department of Labor has indicated that it will closely scrutinize activities such as those in which the Partnership will be engaged, and there is a very substantial possibility that the Department of Labor will examine the Partnership's activities and take position adverse to the Partnership. No opinion is expressed with respect to Federal or state securities laws, state and local taxes, and Federal or State income tax issues or any other Federal or state laws not explicitly referred to or discussed herein. Further, we have assumed no obligation to revise or supplement this Opinion letter should applicable law be changed by legislative, judicial or administrative law or otherwise. Except as set forth herein, we have made no independent attempt to verify the facts or representations or assumption made herein except to the extent we deem reasonable under ABA Formal Opinion 335 and in connection with our position as counsel to the Partnership. Where we render an opinion "to the best of our knowledge" or concerning an item that "has come to our attention" or our opinion otherwise refers to knowledge it means a conscious awareness of facts or other information based upon: (i) an inquiry of attorneys within this firm, (ii) receipt of a certificate executed by the General Partners covering such matters; (iii) such other actual investigation, if any, that we specifically set forth herein. Reference to "us" or "our" is limited to a reference to the lawyer who signs this Opinion Letter or any lawyer of this firm who has been actively involved in preparing the relevant documents. The opinions expressed in this letter are based solely upon the information and representations set forth above and we have not attempted, nor deemed it necessary, to verify independently the relevant or pertinent facts or representations. If there have been any misstatements of facts or omissions of any material facts, or any amendment or change in any document referred to herein, please notify us, since any misstatement, omission or change may effect all or part of this opinion. This opinion is furnished solely to advise the Partnership, the Limited Partners, and you concerning the certain issues arising under ERISA involved in the operation of the Partnership. We have not represented the Limited Partners in connection with the preparation of the Registration Statement. Limited Partners should consult their own advisors and counsel with respect to the matters discussed herein. Except as expressly set forth below, this opinion may not be filed with or furnished to any other person, or any governmental agency, except for registered broker dealers who have executed selling agreements, and may not be quoted in whole or in part or otherwise referred to in any context, without, in each instance, out prior written consent, and without, in each instance, the exercise of due diligence on your part to verify that there are no material errors or omissions of fact and no changes in the facts or in the text of the documents you have provided us. We hereby consent to the inclusion of this opinion as an exhibit to the Registration Statement and to the references to this firm contained therein concerning this opinion and under the headings "ERISA CONSIDERATIONS" and "EXPERTS" in the Prospectus. Sincerely, WILSON, RYAN & CAMPILONGO EX-8.1 8 OPINION OF COUNSEL ON TAX MATTERS Exhibit 8.1 September ___, 1996 D. Russell Burwell Michael R. Burwell Gymno Corporation Redwood Mortgage Investors VIII 650 El Camino Real, Suite G Redwood City, California 94063 Re: Redwood Mortgage Investors VIII; Tax Opinion; Our File No. BUR03-009 --------------------------------------- Gentlemen: This is an opinion which you have requested as to the summary of federal income tax consequences set forth in the section entitled "RISKS FACTORS," under the subheading "Tax Risks" and in the section entitled "FEDERAL INCOME TAX CONSEQUENCES" of the prospectus ("Prospectus") contained in the Form S-11 Registration Statement for Redwood Mortgage Investors VIII (the "Partnership") to be filed with the Securities and Exchange Commission in connection with the registration under the Securities Act of 1933, as amended, of up to 300,000 Units of Limited Partnership Interests (the "Units" or "Securities"). We have been retained to represent the General Partners and the Partnership in connection with the offering of the Units. We have not represented the Limited Partners, or any other party in connection with the preparation of this opinion or the offering of Securities by the Partnership. In rendering this opinion, we have examined the following: 1. The Amended and Restated Limited Partnership Agreement of the Partnership, dated _____________, 1996, as amended (the "Partnership Agreement"). 2. The Certificate of Limited Partnership of the Partnership filed with the Limited Partnership Division of the California Secretary of State's Office (the "Certificate"). 3. The Prospectus. 4. Such other documents and instruments we have considered necessary for rendering the opinions hereinafter set forth. In our examination of the forgoing, we have assumed the authenticity of original documents, the accuracy of copies and the genuineness of signatures. We have relied upon the representations and statements of the General Partners, that they currently have and intend to maintain substantial assets, other than their interest in the Partnership, that could be reached by a creditor of the Partnership within the meaning of Income Tax Regulation Section 301.7701-2(d). We have also conducted various meetings, discussions and conversations with the General Partners regarding the offer and sale of the Securities. Nothing has come to our attention in our representation of the Partnership that would make it unreasonable to assume that the above documents will be utilized in the manner intended as set forth those documents. However, we have not independently verified any of the facts or representations contained in such documents. As to matters of fact, we have relied upon certificates of the General Partners, public officials or other persons and other documents and have assumed the genuineness of all signatures, the authenticity of all documents purporting to be originals, and the conformity to the originals of all documents purporting to be copies thereof. In rendering this Opinion, we have assumed that: (1) each other party that has executed or will execute a document, instrument or agreement to which the Partnership is a party duly and validly executed and delivered each document, instrument or agreement to which such party is a signatory and that such party's obligations set forth therein are its legal, valid and binding obligations, enforceable in accordance with their respective terms; (2) each person executing any document, instrument or agreement on behalf of any such party is duly authorized to do so; and (3) each natural person executing any instrument, document or agreement referred to herein is legally competent to do so. We are lawyers admitted to practice in California and have reviewed such laws of the United States and California as we have deemed necessary for the purpose of providing the opinions set forth herein. We have not reviewed the laws of any jurisdiction other than the United States and California, and accordingly, we express no opinion herein as to the laws of any other state or jurisdiction. Capitalized terms used herein and not otherwise defined in this opinion shall have the same meaning as they have in the Partnership Agreement, as the context requires. We have made the following observations and assumptions for purposes of our opinion: 1. We assume for purposes of this opinion generally that (i) the Partnership has an objective to carry on business for profit and derive the gains therefrom; (ii) the Partnership has taken, and will in the future continue to take all action necessary under the laws of California and any other applicable jurisdiction to permit it to conduct business in those states as contemplated by the Partnership Agreement; and (iii) the offer and sale of the units have been made in strict compliance with the terms of the Prospectus; 2. We note that the Partnership will keep its books on an accrual basis and we assume that (i) income and losses of the Partnership each year will be computed in accordance with the applicable provisions of the Code and the regulations promulgated thereunder, and (ii) no actions will be taken by the Partnership or by any of the Partners after the date of this opinion which would have the effect of changing the tax results set forth below. 3. We have assumed that the Partnership Agreement has been duly executed and the Certificate of Limited Partnership and all amendments thereto have been duly executed and filed. 4. The Partnership will be organized and operated in accordance with the Revised Uniform Limited Partnership Act, as adopted by, and in effect in, the State of California. 5. The Partnership will be operated in accordance with the Partnership Agreement, and the Partnership will have the characteristics described in the Prospectus and will be operated as described in the Prospectus. 6. The Partnership will not participate in any Loan on terms other than those described in "INVESTMENT OBJECTIVES AND CRITERIA" without first receiving certain advice of Counsel. 7. The Loans will be made by on substantially the terms and conditions described in the Prospectus in "INVESTMENT OBJECTIVES AND CRITERIA." 8. The net worth of the individual General Partners will continue to exceed an amount that is intended to assure that the Partnership may qualify as a partnership for federal income tax purposes. 9. The General Partners will take certain steps in connection with the transfer of Units to decrease the likelihood that the Partnership will be treated as a publicly traded partnership for purposes of Sections 7704, 469(k), and 512(c) of the Code. This opinion is based upon the provisions of the Internal Revenue Code of 1986 (the "Code"), as amended the applicable Treasury Regulations promulgated thereunder (the "Regulations') and proposed Treasury Regulations (the "Proposed Treasury Regulations"), current administrative rulings and judicial opinions of the foregoing, all existing as of the date of this letter. It must be emphasized,however, that all such authority is subject to modification at any time by legislative, judicial and/or administrative action and that any such modification could be applied on a retroactive basis. Future tax reform proposals may have a material adverse effect on the potential tax benefits that may be expected to be realized from an investment in the Partnership. Even under current law, the existence and amount of deductions expected to be claimed by the Partnership involve complex legal and factual issues and will depend on certain factual determinations, characterizations, expenditures and other matters, all or any of which may be subject to challenge and passable disallowance by the Internal Revenue Service (the "Service") upon an audit of the personal tax return of a Partner. Although it is our opinion that the Partnership will not be considered a "tax shelter" in rendering this opinion, we have considered the relevant professional standards, including the requirements of Revised Formal Opinion 346 issued on January 29, 1982 by the American Bar Association's Standing Committee on Ethics and Professional Responsibility and Treasury Department Circular 230, as modified by 31 C.F.R. Part 10, 10.7 (February 14, 1984). Generally speaking, under Opinion 346 and Circular 230, counsel must consider all material tax issues in light of the facts and must fully and fairly address all such issues. Further, where possible, an opinion should be formulated as to the likely outcome on the merits of all material tax issues. In addition, an overall evaluation should be made of the extent to which tax benefits of the proposed investment in the aggregate are likely to be realized. The Partnership will not request (and would not likely obtain) a ruling from the Service as to any tax matters related to the herein described transactions. While the Partnership will receive this opinion as to certain tax matters, it is not binding upon the Service. Thus, there can be no assurance that the Service will not contest one or more of the conclusions reached herein, or one or more tax matters as to which no opinion is expressed herein, nor can there be any assurance that the Service will not prevail in any such contest. Further, even if the Service was not successful in any such contest, the Partnership, in opposing the Service's position, could incur substantial legal, accounting and other expenses. OPINION As more fully described in the section of the Prospectus entitled "FEDERAL INCOME TAX CONSEQUENCES" and specifically subject to the qualifications set forth therein, it is our opinion that: 1. The summary of the income tax consequences set forth in the section of the Prospectus entitled "RISKS FACTORS" under the subheading "Tax Risks" and in the sections entitled FEDERAL INCOME TAX CONSEQUENCES" and "ERISA CONSIDERATIONS" is an accurate statement of the matters discussed therein and, to the extent such summary involves matters of law, is correct under the Code, the Regulations, and existing interpretations thereof; 2. It is more likely than not that the Partnership will be treated as a partnership as defined in Sections 7701(a)(2) and 761(a) of the Code and not as an association taxable as a corporation, and that the Limited Partners will be subject to tax as partners pursuant to Sections 701-706 of the Code. 3. Based upon Notice 88-75, the representations of the General Partners, and the provisions of the Partnership Agreement, it is more likely than not that the Partnership will not constitute a publicly traded partnership for purposes of Sections 7704, 469(k) and 512(c) of the Code. 4. Assuming that the Partnership makes the Loans on substantially the terms and conditions described in "INVESTMENT OBJECTIVES AND CRITERIA" it is more likely than not that the income of the Partnership will be treated as portfolio income and not constitute unrelated business taxable income. 5. It is more likely than not a Limited Partner's basis for his or her Units will equal, in the case of those who utilize the services of a Participating Broker Dealer, the purchase price of the Units and, in case of those who acquired Units through unsolicited sales, the purchase price of the Units plus an amount equal to the amount of the sales commissions otherwise due assuming no Continuing Servicing Fee is paid had the Limited Partnership utilized the services of a Participating Broker Dealer. 6. It is more likely than not that all material allocations to the Limited Partners of income, gain, loss and deductions, as provided for in the Partnership Agreement and as discussed in the Prospectus, will be respected under Section 704(b) of the Code, or in the alternative, will be deemed to be in accordance with the Partners' interests in the Partnership. 7. Based solely upon the manner in which the Partnership has in the past extended Mortgage Investments, we have concluded that the sale or disposition of all or a portion of the Partnership's Mortgage Investment portfolio would be treated as a disposition of a capital asset. This letter contains only our opinion as to federal income tax issues which are expected to be of relevance to U.S. taxpayers who are individuals. Thus, no opinion is expressed as to the federal income tax consequences to other taxpayers, including, but not limited to, non-U.S. citizens, foreign corporations, foreign partnerships, foreign trusts or foreign estates. Based upon and subject to the foregoing we wish to advise you that the section of the Prospectus entitled "FEDERAL INCOME TAX CONSEQUENCES" accurately reflects our opinion as to those matters therein as set forth as to which an opinion is specifically attributed to us. SCOPE OF OPINION In the preparation of the Prospectus and in rendition of this Opinion, we have sought to adhere to certain relevant professional standards embodied in federal regulations and in American Bar Association Formal Opinion 346 regarding the rendition of tax opinions. These standards direct a lawyer issuing certain tax opinions to consider all material tax issues and to address fully and fairly in the offering materials all the material tax issues which involve the reasonable possibility of a challenge by the Internal Revenue Service. The foregoing addresses, in our opinion, all material tax issues which involve a reasonable possibility of challenge by the IRS. We believe that this opinion, together with the section in the Prospectus entitled "FEDERAL INCOME TAX CONSEQUENCES," addresses fully and fairly all such issues. It is not feasible to present in this opinion (and in the section of the Prospectus entitled "FEDERAL INCOME TAX CONSEQUENCES") a detailed explanation of the effect of the tax treatment of partnerships originating, investing in, holding, selling and disposing of loans, or the tax treatment of investments in such partnerships. The current state of the law with respect to many issues which might be raised in connection with the activities described herein is unsettled. Several of the relevant statutory provisions discussed above have been enacted only recently; few Regulations have been proposed or promulgated under these provisions, and there is little or no judicial interpretation of these provisions. Therefore, the tax consequences to the Partnership cannot be predicted with a high degree of assurance. Further, although the transactions contemplated by the Prospectus are prospective in nature, we are not assuming an obligation to revise or supplement this Opinion Letter should applicable law be changed by legislative, judicial or administrative action or otherwise. There is no assurance that the Service will not raise issues that have not been discussed herein. The Service may disagree with our conclusions and may be upheld by a court. The Service has indicated that it will closely scrutinize activities such as those in which the Partnership will be engaged, and there is a very substantial possibility that the Service will examine the Partnership's activities and take positions adverse to the Partnership. No opinion is expressed with respect to Federal or state securities laws, state and local taxes, and Federal income tax issues other than those discussed herein, or any other Federal or state laws not explicitly referred to or discussed herein. Except as set forth herein, we have made no independent attempts to verify the facts or representations or assumptions made herein except to the extent we deem reasonable under ABA Formal Opinion 346 and 335 and in connection with our position as counsel to the Partnership. Where we render an opinion "to the best of our knowledge" or concerning an item that "has come to our attention" or our opinion otherwise refers to knowledge it means a conscious awareness of facts or other information based upon: (1) any inquiry of attorneys within this firm; (2) receipt of a certificate executed by the General Partners covering such matters; (3) such other actual investigation, if any, that we specifically set forth herein, Reference to "us" or "our" is limited to a reference to the lawyer who signs this Opinion letter or any lawyer of this firm who has been actively involved in preparing the documents. The opinions expressed in this letter are based solely upon the information and representations set forth above and we have not attempted, nor deemed it necessary, to verify independently the relevant or pertinent facts or representations. If there have been any misstatements of a fact or omission of any material facts, or any amendment or change in any document referred to herein, please notify us, since any misstatement, omission or change, after the date of this Opinion may effect all or part of this letter. This opinion is furnished solely to advise the Partnership, the Limited Partners, and you concerning the federal income tax issues discussed herein. We have not represented the Limited Partners. The Limited Partners should consult their own tax advisors with respect to the tax consequences of the Partnership's activities described and discussed herein. Except as expressly set forth herein, this opinion may not be filed with or furnished to any other person, or any governmental agency, and may not be quoted in whole or in part or otherwise referred to in any context, without, in each instance, our prior written consent, and without, in each instance, the exercise of due diligence on your part to verify that there are no material errors or omissions of fact and no changes in the facts or in the text of the documents you have provided to us. We hereby consent to the inclusion of this opinion in the Registration Statement as an Exhibit thereto and to the references to our firm under the heading "FEDERAL INCOME TAX CONSEQUENCES" and "EXPERTS" in the Prospectus. Sincerely, WILSON, RYAN & CAMPILONGO EX-10.2 9 LOAN SERVICING AGREEMENT Exhibit 10.2 LOAN SERVICING AGREEMENT AND AUTHORIZATION TO COLLECT This Agreement is entered into as of the date set forth below by and between Redwood Home Loan Company, a California corporation dba Redwood Mortgage (BROKER) and BENEFICIARY for the purpose of establishing the terms, conditions and authority for the servicing of a loan evidenced by a promissory note (the Note) and deed of trust (the Deed of Trust), described as follows: Borrower: ____________________________________________________________________ Loan Amount: $ __________ Term: ____________ Interest Rate: _________% Late Charge: $ ___________ Prepayment Bonus: Yes _____ No _____ Deed of Trust Recorded: Instrument No. __________ County _______________, CA Beneficiarys Investment: $ ________ Percentage of Ownership: ___________% It is understood that the BENEFICIARYS interest in said Note may be a partial ownership, and that other lenders (partial beneficiaries) also may own fractional undivided interests in said Note. BENEFICIARY and the other partial beneficiaries (collectively Beneficiaries) are not engaged in a partnership or joint venture, but their relationship is specifically agreed to be that of tenants in common. This Agreement shall be executed in counterpart by all Beneficiaries, each of which shall be deemed an original and all of which together shall constitute one agreement, and the terms hereof shall be uniformly binding upon and enforceable by BENEFICIARY and all other partial beneficiaries, against BROKER and as between themselves. BENEFICIARY hereby appoints BROKER to service the Note on his behalf from and after the close of escrow, to hold the original Note and the original Deed of Trust as BENEFICIARYS agent, and to deliver copies of all other documents as provided in BENEFICIARYS escrow instructions executed in connection with this loan transaction to BENEFICIARY at the address indicated below. Such servicing activities shall include all activities reasonably and customarily required to collect, disburse and account for payment of principal, interest, late charges and prepayment bonuses under the Note and to enforce all the terms and provisions of the Note and Deed of Trust. BROKER accepts such appointment and agrees to use diligence in the performance of its duties hereunder. BROKER further agrees as follows: (1) All loan payments received by BROKER hereunder shall be deposited immediately into BROKERS trust account, which trust account shall be maintained in accordance with the provisions of law and rule for trust accounts of licensed real estate brokers and in accordance with the provisions of Rule 260.105.30 of Title 10 of the California Administrative Code; (2) Such loan payments shall not be commingled with the other assets of BROKER or any affiliate, or used for any transaction other than the transaction for which such funds are received by BROKER; (3) All loan payments received on the Note (less service fees as described below and other costs, charges, and anticipated foreclosure expenses) shall be transmitted to BENEFICIARY and the other partial beneficiaries pro rata according to their respective percentage ownership interests in the Note within 25 days after receipt thereof by BROKER; (4) BROKER shall provide BENEFICIARY with a monthly and annual accounting of BENEFICIARYS interest in the Note; (5) BROKER shall use diligence and care to assure that proper casualty insurance is maintained on the real property covered by the Deed of Trust or Deeds of Trust securing the Note; (6) BROKER shall issue demands for payment and otherwise enforce the terms of the note in accordance with its established policies; (7) BROKER shall request Notices of Default on prior encumbrances pursuant to California Civil Code Section 2924(b) and will promptly notify BENEFICIARY of any such defaults, and (8) To the extent required by 10 Cal.Adm.C. Rule 260.105.30(j)(3), BROKER will arrange for the inspection of BROKERS trust account by an independent certified public accountant and forward the report of such accountant to the California Commissioner of Corporations in the manner required by law. In the event of any default by the obligor or obligors under the Note, Broker shall perform all acts and execute all documents necessary to exercise the power of sale contained in the Deed of Trust or Deeds of Trust securing same, including without limitation the following: Substitute trustees, select a foreclosure agent, give demands, accept reinstatements, commence litigation to enforce the collection of the note, obtain relief from any court-ordered stay of foreclosure proceedings, defend any litigation which may seek to restrain said foreclosure, receive a trustees deed for the benefit of BENEFICIARIES, as tenants-in-common, and otherwise to do all things reasonably necessary or appropriate to enforce BENEFICIARYS rights under the Note and Deed of Trust or Deeds of Trust. BENEFICIARY hereby authorizes BROKER to initiate, maintain and/or defend any such legal actions or proceedings in the name of BENEFICIARY, and to employ attorneys therefor at BENEFICIARYS expense. BENEFICIARY agrees that BROKER shall not be liable for any costs, expenses or damages that may arise from or in connection with any acts or omissions of BROKER or its agents or employees hereunder, so long as any such act or omission shall have been undertaken in good faith, notwithstanding any active or passive negligence (whether sole or contributory) of BROKER or its agents or employees, and BENEFICIARY shall hold BROKER harmless therefrom. In consideration for the services to be rendered hereunder, BROKER shall be entitled to receive an annual service fee equal to one and one half percent (1.5%), or such lesser amount as may be agreed to by BROKER and BENEFICIARY from time to time, of the outstanding principal balance of the Note, payable in equal monthly installments, or in other periodic payments if payments by obligor are made other than monthly. BROKER is hereby authorized to deduct and retain all such service fees from the collected monthly loan payments. In addition, BENEFICIARY hereby assigns to BROKER fifty percent (50%), or such lesser amount as may be agreed to by BROKER and BENEFICIARY from time to time, of all collected late charges that become due and owing under the Note, and, further, in the event BROKER has advanced its own sums to BENEFICIARY shall be deemed to have assigned to BROKER one hundred percent (100%) of all such late charges accruing and paid with respect to such payments. In addition, BENEFICIARY hereby assigns to BROKER twenty percent (20%), or such lesser amount as may be agreed to by BROKER and BENEFICIARY from time to time, of all collected prepayment penalties that become due and owing under the Note. In the event of default in payment of any sum due under the Note, BROKER shall be authorized to advance such payments to BENEFICIARY, but shall have no obligation whatsoever to do so. In the event the source for any payment to BENEFICIARY is not the obligor under the Note, then BROKER shall inform BENEFICIARY of the actual source of such payment. BROKER shall also be authorized to advance monthly payments or other sums to any senior lien holder, to pay insurance and taxes and to pay any other expenses reasonably incurred in connection with the enforcement of the Note and the protection of the security of the Deed of Trust securing same, but shall have no obligation whatsoever to do so. In the event of a default under the Note or Deed of Trust, or any foreclosure action, legal action, sale or any other event in which payments are advanced to BENEFICIARY or any other person or expenses are incurred to protect the rights of BENEFICIARY under the Note and Deed of Trust, then BENEFICIARY agrees to pay (or reimburse BROKER for) his pro rata share of such advances and expenses upon demand therefor by BROKER, according to his respective ownership interest in the Note. In the event BENEFICIARY fails to pay such sums upon demand, then the following provisions shall apply: (1) interest shall accrue on such sums at the same rate as is provided in the Note, and (2) BROKER and the other partial beneficiaries shall have the option, but not the obligation, to advance such sums for the benefit of BENEFICIARY, and in such event the defaulting BENEFICIARY shall and hereby agrees to forfeit, in favor of the other partial Beneficiaries who advance defaulting BENEFICIARYS share of such sums, twenty-five percent (25%) of defaulting BENEFICIARYS ownership interest in the Note and Deed of Trust. It is further agreed that said defaulting BENEFICIARY shall forfeit, in favor of the other partial Beneficiaries, all interest in any profits or excess funds that said defaulting BENEFICIARY may otherwise be entitled to. All sums thereafter collected by BROKER hereunder shall be applied in the following priority; (1) first, to the reinstatement of any senior liens or encumbrances; (2) Second, to reimburse BROKER for any advances made by BROKER hereunder; (3) Third, to reimburse all Beneficiaries for any advances made to enforce the Note or protect the security of the Deed of Trust or Deeds of Trust securing same, in the same order as such advances were make; (4) Fourth, to the payment of principal under the Note; (5) Fifth, to the payment of accrued but unpaid interest under the Note (such principal and interest to be allocated among all BENEFICIARIES after providing for any defaulting BENEFICIARYS partial forfeiture as described above); and (6) Thereafter, any remaining sums shall be allocated only among those BENEFICIARIES who did not default in the advancement of sums upon demand therefor by BROKER. In the event BENEFICIARY assigns his interest in the Note to any person, such assignment shall be evidenced by execution and delivery to BROKER of an Assignment of Note and Deed of Trust in recordable form, and the assignee shall be required to execute a counterpart of this Agreement. BENEFICIARIES holding 50% or more of the unpaid dollar amount of the Note may determine and direct the actions by BROKER on behalf of all BENEFICIARIES in the event of default or with respect to other matters requiring the direction or approval of the BENEFICIARIES. Upon any default under the Note or Deed of Trust BENEFICIARY shall have the right to (1) direct the Trustee under the Deed of Trust to exercise the power of sale contained therein, or (2) to bring an action of judicial foreclosure, in which event all other partial BENEFICIARIES shall be joined therein. BENEFICIARY understands and acknowledges that, if the power of sale under the Deed of Trust securing the Note is exercised, all BENEFICIARIES may acquire fee title to the security property as tenants-in-common. In such event, reasonable cooperation between all BENEFICIARIES will be essential for the protection of this investment, and BENEFICIARY therefore agrees to execute in favor of BROKER a special power of attorney authorizing BROKER on behalf of BENEFICIARY to sell such property on such terms and conditions as BROKER may deem proper and reasonable. BENEFICIARY hereby authorizes BROKER, as BENEFICIARYS agent, to receive and act upon any Notice of Rescission delivered by any borrower under the Truth in Lending Simplification and Reform Act (the Act) with respect to the Note or any refinancing thereof. In the event that BENEFICIARY is a creditor as defined in the Act, BENEFICIARY hereby agrees that BROKER shall comply with all requirements of the Act and regulations issued thereunder, and to give all written disclosures required thereby. In the event at the time of maturity of this Note, the borrower is in the process of refinancing the loan with the assistance of BROKER, the BENEFICIARY agrees to extend the term of this loan for an additional period not to exceed (90) days or such other period of time to which the BROKER AND BENEFICIARY agree. All other terms and conditions of the original Promissory Note shall continue in full force and effect during said extension period. This Agreement may be terminated by the parties as follows: (1) by BROKER, at any time, upon 30 days written notice to BENEFICIARY, (2) by BENEFICIARY and/or other partial BENEFICIARIES holding 50% of the outstanding ownership interests in the Note, upon 30 days written notice to BROKER. BENEFICIARY understands that this Agreement may not be terminated by BENEFICIARY alone without the written consent of such 50% interest of all owners of the Note, and further that other partial Beneficiaries have the right to terminate this Agreement as to all Beneficiaries including the undersigned BENEFICIARY, without BENEFICIARYS consent, if such other partial BENEFICIARIES constitute such 50% interest of all owners of the Note. In such event, BENEFICIARY agrees to accept the substitution of any servicing agent chosen by such 50% interest so long as the compensation to be paid shall not exceed the amounts set forth herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the respective dates set forth below. BROKER: REDWOOD HOME LOAN COMPANY, a California corporation, dba REDWOOD MORTGAGE By:____________________________________________ D. Russell Burwell, President Date: __________________________________________ BENEFICIARY: _______________________________________________ _______________________________________________ By: ____________________________________________ D. Russell Burwell, General Partner Date: __________________________________________ EX-10.3(A) 10 FORM OF NOTE FOR CONSTRUCTION LOAN P&I ONLY Exhibit 10.3(a) PROMISSORY NOTE Loan No.: _______________________ __________________, 19______ Redwood City, California FOR VALUABLE CONSIDERATION, ___________________________________________________ (herein "Maker"), hereby promises to pay to ______________________________________________________, or order (herein "Payee"), at the address set forth below, or at such other address as the holder hereof may, from time to time designate, the sum of ___________________________ ____________________________ ($_______________) with interest on the unpaid balance of the principal sum disbursed by Lender to or for the account of Borrower at the interest rate specified below. 1. Interest Maker agrees that interest earned by and payable to Payee hereunder (Interest) shall be a fixed rate per annum equal to ______________ percent (___%). Interest shall be calculated for actual days elapsed on the basis of a 360-day year, which results in higher interest payments than if a 365-day were used. Interest shall be payable monthly on the first day of each consecutive month beginning on the first such date after the first advance under this Note and continuing through ________________ ("Maturity Date"), on which date the entire balance of the unpaid principal sum then disbursed and all interest accrued and unpaid shall be due and payable. 2. Prepayment The right is reserved by Maker to prepay the outstanding principal amount in whole or in part together with accrued interest thereon. All prepayments shall be applied to the most remote principal installments then unpaid under this Note. 3. Late Charge If Payee fails to receive any payments of interest or principal within ten (10) days after the date the same is due and payable, a late charge to compensate Payee for damages Payee will suffer as a result shall be immediately due and payable. Maker recognizes that a default by Maker in making the payments agreed to be paid when due will result in Payee's incurring additional expenses in servicing the loan, including, but not limited to sending out notices of delinquency, computing interest, and segregating the delinquent sums from not delinquent sums on all accounting, loan and data processing records, in loss to Payee of the use of the money due, and in frustration to Payee in meeting its other financial commitments. Maker agrees that if for any reason Maker fails to pay any amounts due under this Note so that Payee fails to receive such payments within ten (10) days after the same are due and payable, Payee shall be entitled to damages for the detriment caused thereby, but that it is extremely difficult and impractical to ascertain the extent of such damages. Maker therefore agrees that a sum equal to $.06 for each $1.00 of each payment that becomes delinquent ten (10) days after its due date, is a reasonable estimate of the fair average compensation for the loss and damages Payee will suffer, that such amount shall be presumed to be the amount of damages sustained by Payee in such case, and that Maker agrees to pay Payee this sum on demand. 4. Default If there exists any Event of Default, as defined below, under the terms of this Note or under the terms of the Construction Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing ("Deed of Trust"), Holdback Agreement, or any other document executed in connection with this Note (herein called "Loan Documents"), Payee or the holder hereof is expressly authorized without notice or demand of any kind to make all sums of interest and principal and any other sums owing under this Note immediately due and payable and to apply all payments made on this Note or any of the Loan Documents to the payment of any such part of any Event of Default as it may elect. An Event of Default shall be either (1) a default in the payment of the whole or in any part of the several installments of this Note when due and such default continues for five (5) days following written notice from Payee, or (2) any of the Events of Default contained in any of the Loan Documents. At any time after an Event of Default, during the continuance of such Event of Default, the entire unpaid balance of principal, together with interest accrued thereon, shall, at the option of the legal holder hereof and without notice (except as specified in any Loan Documents) and without demand or presentment, become due and payable at the place of payment. Anything contained herein or in any of the Loan Documents to the contrary notwithstanding, the principal balance together with accrued interest thereon so accelerated and declared due as aforesaid shall continue to bear interest and shall include compensation for late payments on any and all overdue installments as described above. If a default has occurred, the failure of Payee or the holder hereof to promptly exercise its rights to declare the indebtedness remaining unpaid hereunder to be immediately due and payable shall not constitute a waiver of such rights while such default continues nor a waiver of such right in connection with any future default. Maker hereby waives presentment for payment, protest and demand, and notice of protest, demand, dishonor, nonpayment and nonperformance including notice of dishonor with respect to any check or draft used in payment of any sum due hereunder. 5. Legal Limits All agreements between Maker and Payee are hereby expressly limited so that in no event whatsoever, whether by reason of deferment in accordance with this Note or under any agreement or by virtue of the advancement of the loan proceeds, acceleration or maturity of the loan, or otherwise, shall the amount paid or agreed to be paid to the Payee for the loan, use, forbearance or detention of the money to be loaned hereunder or to compensate Payee for damages to be suffered by reason of a late payment hereof, exceed the maximum permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof, or of any provision in any of the Loan Documents at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, ipso facto the obligations to be fulfilled shall be reduced to the limit of such validity. This provision shall never be superseded or waived and shall control every other provision of all agreements between Maker and Payee. 6. Attorneys' Fees If an action is instituted on this Note, or if any other judicial or non-judicial action is instituted by the holder hereof or by any other person, and an attorney is employed by the holder hereof to appear in any such action or proceeding or to reclaim, sequester, protect, preserve or enforce the holder's interest in the real property security or any other security for this Note, including, but not limited to, proceedings to foreclose the loan evidenced hereby, proceedings under the United States Bankruptcy Code, or in eminent domain, or under the probate code, or in connection with any state or federal tax lien, or to enforce an assignment of rents, or for the appointment of a receiver, or disputes regarding the proper disbursement of construction loan funds, the Maker and every endorser and guarantor hereof and every person who assumes the obligations evidenced by this Note and the Loan Documents, jointly and severally promise to pay reasonable attorney's fees for services performed by the holder's attorneys, and all costs and expenses incurred incident to such employment. If Maker is the prevailing party in any action by Maker pursuant to this Note, Payee shall pay such attorneys fees as the court may direct. 7. Interest After Expiration If the entire balance of principal and accrued interest is not paid in full on the Maturity Date, without waiving or modifying in any way any of the rights, remedies or recourse, Payee may have under this Note or under any of the Loan Documents by virtue of this default, the entire unpaid balance of principal and accrued interest shall bear interest from the Maturity Date until paid in full at the higher of: (a) _______________ percent (___%) per annum; or (b) a fluctuating rate per annum at all times equal to the discount rate of the Federal Reserve of San Francisco (Discount Rate) plus ______________ percent (___%) ("Maturity Interest Rate"). If at any time after the Maturity Date, the Discount Rate (or any previously substituted alternative index) is no longer available, is unverifiable, or is no longer calculated in substantially the same manner as before, then Payee may, in its sole and absolute discretion, select and substitute an alternative index over which Payee has no control. In addition, the holder hereof shall have any and all other rights and remedies available at law or in equity or under the Deed of Trust. 8. Security This Note is secured by and is entitled to the benefits of the Deed of Trust dated on or about the date of this Note executed by Maker to Gymno Corporation, a California corporation, as Trustee, for the use and benefit of Payee covering and relating to the fee title interest of Maker in certain real property located at __________________________________________________________________ in the County of _______________ , California more particularly described in Exhibit A to the Deed of Trust (Property). The provisions of the Deed of Trust are incorporated herein by reference as if set forth in full, and this Note is subject to all of the covenants and conditions therein contained. 9. Acceleration Without limiting the obligations of Maker or the rights and remedies of Payee or the holder hereof under the terms and covenants of this Note and the Deed of Trust, Maker agrees that Payee shall have the right, at its sole option, to declare any indebtedness and obligations hereunder or under the Deed of Trust, irrespective of the Maturity Date specified herein, due and payable in full if: (1) Maker or any one or more of the tenants-in-common, joint tenants, or other persons comprising Maker sells, enters into a contract of sale, conveys, alienates or encumbers the Property or any portion thereof or any fractional undivided interest therein, or suffers Maker's title or any interest therein to be divested or encumbered, whether voluntarily or involuntarily, or leases with an option to sell, or changes or permits to be changed the character or use of the Property, or drills or extracts or enters into a lease for the drilling for or extracting of oil, gas or other hydrocarbon substances or any mineral of any kind or character on the Property; (2) The interest of any general partner of Maker (or the interest of any general partner in a partnership that is a partner) is assigned or transferred; (3) More than twenty-five percent (25%) of the corporate stock of Maker (or of any corporate partner or other corporation comprising Maker) is sold, transferred or assigned; (4) There is a change in beneficial ownership with respect to more than twenty-five percent (25%) of Maker (if Maker is a trust or other legal entity) or of any partner or tenant-in-common of Maker which is a trust or other legal entity; or (5) a default has occurred hereunder or under any Loan Document and is continuing. In such case, Payee or other holder of this Note may exercise any and all of the rights and remedies and recourses set forth in the Deed of Trust and as granted by law. Maker and any successor who acquires any record interest in the Property agrees to notify Payee promptly in writing of any transaction or event described in this section. 10. Governing Law and Severability This Note is made pursuant to, and shall be construed and governed by, the laws of the State of California. If any paragraph, clause or provision of this Note or any of the Loan Documents is construed or interpreted by a court of competent jurisdiction to be void, invalid or unenforceable, such decision shall affect only those paragraphs, clauses or provisions so construed or interpreted and shall not affect the remaining paragraphs, clauses and provisions of this Note or the other Loan Documents. 11. Time of Essence Time is of the essence of this Note. 12. Payment Without Offset Principal and interest shall be paid without deduction or offset in immediately available funds in lawful money of the United States of America. Payments shall be deemed received only upon actual receipt by Payee and upon Payee's application of such payments as provided herein. 13. Notices All notices under this Note shall be in writing and shall be effective upon personal delivery to the authorized representatives of either party or upon being sent by certified mail, return receipt requested, postage prepaid, addressed to the following respective parties as follows: MAKER: ________________________________ ________________________________ ________________________________ Attn: ________________________________ PAYEE: ________________________________ 650 El Camino Real, Suite G Redwood City, California 94063-1394 Attn: Michael Burwell 14. Collection Any remittances by check or draft may be handled for collection in accordance with the practices of the collecting party and any receipt issued therefor shall be void unless the amount due is actually received by Payee. 15. Assignment Payee or other holder of this Note may assign all of its rights, title and interest in this Note to any person, firm, corporation or other entity without the consent of Maker. 16. Relationship The relationship of the parties hereto is that of borrower and lender and it is expressly understood and agreed that nothing contained herein or in any of the Loan Documents shall be interpreted or construed to make the parties partners, joint venturers or participants in any other legal relationship except for borrower and lender. 17. Remedies No right, power or remedy given Payee by the terms of this Note, or in the Loan Documents is intended to be exclusive of any right, power or remedy, and each and every such right, power or remedy shall be cumulative and in addition to every other right, power or remedy given to Payee by the terms of any of the Loan Documents or by any statute against Maker or any other person. Every right, power and remedy of Payee shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument in writing, executed by Payee. 18. Headings The subject headings of the paragraphs of this Note are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. Maker: _________________________________ _________________________________ EX-10.3(B) 11 FORM OF NOTE FOR COMMERCIAL LOAN INT ONLY Exhibit 10.3(b) PROMISSORY NOTE Loan No.: _______________________ __________________, 19______ __________________, California FOR VALUABLE CONSIDERATION,_______________________________________________ (herein "Maker"), hereby promises to pay to___________, or order (herein "Payee"), at the address set forth below, or at such other address as the holder hereof may, from time to time designate, the sum of ____________________________________________ ($_______________) with interest on the unpaid balance of the principal sum disbursed by Lender to or for the account of Borrower at the interest rate specified below. 1. Interest and Payments Maker agrees that interest earned by and payable to Payee hereunder (Interest) shall be a fixed rate per annum equal to ______________ percent (___%). Interest shall be calculated for actual days elapsed on the basis of a 360-day year, which results in higher interest payments than if a 365-day were used. Monthly installments of $____________ consisting of interest only shall be payable monthly on the first day of each consecutive month beginning on the first such date after the first advance under this Note and continuing through ________________ ("Maturity Date"), on which date the entire balance of the unpaid principal sum then disbursed and all interest accrued and unpaid shall be due and payable. 2. Prepayment The right is reserved by Maker to prepay the outstanding principal amount in whole or in part together with accrued interest thereon. All prepayments shall be applied to the most remote principal installments then unpaid under this Note. 3. Late Charge If Payee fails to receive any payments of interest or principal within ten (10) days after the date the same is due and payable, a late charge to compensate Payee for damages Payee will suffer as a result shall be immediately due and payable. Maker recognizes that a default by Maker in making the payments agreed to be paid when due will result in Payee's incurring additional expenses in servicing the loan, including, but not limited to sending out notices of delinquency, computing interest, and segregating the delinquent sums from not delinquent sums on all accounting, loan and data processing records, in loss to Payee of the use of the money due, and in frustration to Payee in meeting its other financial commitments. Maker agrees that if for any reason Maker fails to pay any amounts due under this Note so that Payee fails to receive such payments within ten (10) days after the same are due and payable, Payee shall be entitled to damages for the detriment caused thereby, but that it is extremely difficult and impractical to ascertain the extent of such damages. Maker therefore agrees that a sum equal to $.06 for each $1.00 of each payment that becomes delinquent ten (10) days after its due date, is a reasonable estimate of the fair average compensation for the loss and damages Payee will suffer, that such amount shall be presumed to be the amount of damages sustained by Payee in such case, and that Maker agrees to pay Payee this sum on demand. 4. Default If there exists any Event of Default, as defined below, under the terms of this Note or under the terms of the Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing ("Deed of Trust"), or any other document executed in connection with this Note (herein called "Loan Documents"), Payee or the holder hereof is expressly authorized without notice or demand of any kind to make all sums of interest and principal and any other sums owing under this Note immediately due and payable and to apply all payments made on this Note or any of the Loan Documents to the payment of any such part of any Event of Default as it may elect. An Event of Default shall be either (1) a default in the payment of the whole or in any part of the several installments of this Note when due and such default continues for five (5) days following written notice from Payee, or (2) any of the Events of Default contained in any of the Loan Documents. At any time after an Event of Default, during the continuance of such Event of Default, the entire unpaid balance of principal, together with interest accrued thereon, shall, at the option of the legal holder hereof and without notice (except as specified in any Loan Documents) and without demand or presentment, become due and payable at the place of payment. Anything contained herein or in any of the Loan Documents to the contrary notwithstanding, the principal balance together with accrued interest thereon so accelerated and declared due as aforesaid shall continue to bear interest and shall include compensation for late payments on any and all overdue installments as described above. If a default has occurred, the failure of Payee or the holder hereof to promptly exercise its rights to declare the indebtedness remaining unpaid hereunder to be immediately due and payable shall not constitute a waiver of such rights while such default continues nor a waiver of such right in connection with any future default. Maker hereby waives presentment for payment, protest and demand, and notice of protest, demand, dishonor, nonpayment and nonperformance including notice of dishonor with respect to any check or draft used in payment of any sum due hereunder. 5. Legal Limits All agreements between Maker and Payee are hereby expressly limited so that in no event whatsoever, whether by reason of deferment in accordance with this Note or under any agreement or by virtue of the advancement of the loan proceeds, acceleration or maturity of the loan, or otherwise, shall the amount paid or agreed to be paid to the Payee for the loan, use, forbearance or detention of the money to be loaned hereunder or to compensate Payee for damages to be suffered by reason of a late payment hereof, exceed the maximum permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof, or of any provision in any of the Loan Documents at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, ipso facto the obligations to be fulfilled shall be reduced to the limit of such validity. This provision shall never be superseded or waived and shall control every other provision of all agreements between Maker and Payee. 6. Attorneys' Fees If an action is instituted on this Note, or if any other judicial or non-judicial action is instituted by the holder hereof or by any other person, and an attorney is employed by the holder hereof to appear in any such action or proceeding or to reclaim, sequester, protect, preserve or enforce the holder's interest in the real property security or any other security for this Note, including, but not limited to, proceedings to foreclose the loan evidenced hereby, proceedings under the United States Bankruptcy Code, or in eminent domain, or under the probate code, or in connection with any state or federal tax lien, or to enforce an assignment of rents, or for the appointment of a receiver, or disputes regarding the proper disbursement of loan funds, the Maker and every endorser and guarantor hereof and every person who assumes the obligations evidenced by this Note and the Loan Documents, jointly and severally promise to pay reasonable attorney's fees for services performed by the holder's attorneys, and all costs and expenses incurred incident to such employment. If Maker is the prevailing party in any action by Maker pursuant to this Note, Payee shall pay such attorneys fees as the court may direct. 7. Interest After Expiration If the entire balance of principal and accrued interest is not paid in full on the Maturity Date, without waiving or modifying in any way any of the rights, remedies or recourse, Payee may have under this Note or under any of the Loan Documents by virtue of this default, the entire unpaid balance of principal and accrued interest shall bear interest from the Maturity Date until paid in full at the higher of: (a) _______________ percent (___%) per annum; or (b) a fluctuating rate per annum at all times equal to the discount rate of the Federal Reserve of San Francisco (Discount Rate) plus ______________ percent (___%) ("Maturity Interest Rate"). If at any time after the Maturity Date, the Discount Rate (or any previously substituted alternative index) is no longer available, is unverifiable, or is no longer calculated in substantially the same manner as before, then Payee may, in its sole and absolute discretion, select and substitute an alternative index over which Payee has no control. In addition, the holder hereof shall have any and all other rights and remedies available at law or in equity or under the Deed of Trust. 8. Security This Note is secured by and is entitled to the benefits of the Deed of Trust dated on or about the date of this Note executed by Maker to Gymno Corporation, a California corporation, as Trustee, for the use and benefit of Payee covering and relating to the fee title interest of Maker in certain real property located at ___________________________________________________________ in the County of __________________ , California more particularly described in Exhibit A to the Deed of Trust (Property). The provisions of the Deed of Trust are incorporated herein by reference as if set forth in full, and this Note is subject to all of the covenants and conditions therein contained. 9. Acceleration Without limiting the obligations of Maker or the rights and remedies of Payee or the holder hereof under the terms and covenants of this Note and the Deed of Trust, Maker agrees that Payee shall have the right, at its sole option, to declare any indebtedness and obligations hereunder or under the Deed of Trust, irrespective of the Maturity Date specified herein, due and payable in full if: (1) Maker or any one or more of the tenants-in-common, joint tenants, or other persons comprising Maker sells, enters into a contract of sale, conveys, alienates or encumbers the Property or any portion thereof or any fractional undivided interest therein, or suffers Maker's title or any interest therein to be divested or encumbered, whether voluntarily or involuntarily, or leases with an option to sell, or changes or permits to be changed the character or use of the Property, or drills or extracts or enters into a lease for the drilling for or extracting of oil, gas or other hydrocarbon substances or any mineral of any kind or character on the Property; (2) The interest of any general partner of Maker (or the interest of any general partner in a partnership that is a partner) is assigned or transferred; (3) More than twenty-five percent (25%) of the corporate stock of Maker (or of any corporate partner or other corporation comprising Maker) is sold, transferred or assigned; (4) There is a change in beneficial ownership with respect to more than twenty-five percent (25%) of Maker (if Maker is a trust or other legal entity) or of any partner or tenant-in-common of Maker which is a trust or other legal entity; or (5) a default has occurred hereunder or under any Loan Document and is continuing. In such case, Payee or other holder of this Note may exercise any and all of the rights and remedies and recourses set forth in the Deed of Trust and as granted by law. Maker and any successor who acquires any record interest in the Property agrees to notify Payee promptly in writing of any transaction or event described in this section. 10. Governing Law and Severability This Note is made pursuant to, and shall be construed and governed by, the laws of the State of California. If any paragraph, clause or provision of this Note or any of the Loan Documents is construed or interpreted by a court of competent jurisdiction to be void, invalid or unenforceable, such decision shall affect only those paragraphs, clauses or provisions so construed or interpreted and shall not affect the remaining paragraphs, clauses and provisions of this Note or the other Loan Documents. 11. Time of Essence Time is of the essence of this Note. 12. Payment Without Offset Principal and interest shall be paid without deduction or offset in immediately available funds in lawful money of the United States of America. Payments shall be deemed received only upon actual receipt by Payee and upon Payee's application of such payments as provided herein. 13. Notices All notices under this Note shall be in writing and shall be effective upon personal delivery to the authorized representatives of either party or upon being sent by certified mail, return receipt requested, postage prepaid, addressed to the following respective parties as follows: MAKER: ________________________________ ________________________________ ________________________________ Attn: ________________________________ PAYEE: ________________________________ 650 El Camino Real, Suite G Redwood City, California 94063-1394 Attn: Michael Burwell 14. Collection Any remittances by check or draft may be handled for collection in accordance with the practices of the collecting party and any receipt issued therefor shall be void unless the amount due is actually received by Payee. 15. Assignment Payee or other holder of this Note may assign all of its rights, title and interest in this Note to any person, firm, corporation or other entity without the consent of Maker. 16. Relationship The relationship of the parties hereto is that of borrower and lender and it is expressly understood and agreed that nothing contained herein or in any of the Loan Documents shall be interpreted or construed to make the parties partners, joint venturers or participants in any other legal relationship except for borrower and lender. 17. Remedies No right, power or remedy given Payee by the terms of this Note, or in the Loan Documents is intended to be exclusive of any right, power or remedy, and each and every such right, power or remedy shall be cumulative and in addition to every other right, power or remedy given to Payee by the terms of any of the Loan Documents or by any statute against Maker or any other person. Every right, power and remedy of Payee shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument in writing, executed by Payee. 18. Headings The subject headings of the paragraphs of this Note are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. Maker: _________________________________ _________________________________ EX-10.3(C) 12 FORM OF NOTE FOR COMMERCIAL LOAN P&I ONLY Exhibit 10.3(c) PROMISSORY NOTE Loan No.: _______________________ __________________, 19______ __________________, California FOR VALUABLE CONSIDERATION, __________________________________________ (herein "Maker"), hereby promises to pay to ______________________________, or order (herein "Payee"), at the address set forth below, or at such other address as the holder hereof may, from time to time designate, the sum of ____________________________________ ($_______________) with interest on the unpaid balance of the principal sum disbursed by Lender to or for the account of Borrower at the interest rate specified below. 1. Interest and Payments Maker agrees that interest earned by and payable to Payee hereunder (Interest) shall be a fixed rate per annum equal to ______________ percent (___%). Interest shall be calculated for actual days elapsed on the basis of a 360-day year, which results in higher interest payments than if a 365-day were used. Monthly installments of principal and interest of $_______________ shall be payable monthly on the first day of each consecutive month beginning on the first such date after the first advance under this Note and continuing through ________________ ("Maturity Date"), on which date the entire balance of the unpaid principal sum then disbursed and all interest accrued and unpaid shall be due and payable. 2. Prepayment The right is reserved by Maker to prepay the outstanding principal amount in whole or in part together with accrued interest thereon. All prepayments shall be applied to the most remote principal installments then unpaid under this Note. 3. Late Charge If Payee fails to receive any payments of interest or principal within ten (10) days after the date the same is due and payable, a late charge to compensate Payee for damages Payee will suffer as a result shall be immediately due and payable. Maker recognizes that a default by Maker in making the payments agreed to be paid when due will result in Payee's incurring additional expenses in servicing the loan, including, but not limited to sending out notices of delinquency, computing interest, and segregating the delinquent sums from not delinquent sums on all accounting, loan and data processing records, in loss to Payee of the use of the money due, and in frustration to Payee in meeting its other financial commitments. Maker agrees that if for any reason Maker fails to pay any amounts due under this Note so that Payee fails to receive such payments within ten (10) days after the same are due and payable, Payee shall be entitled to damages for the detriment caused thereby, but that it is extremely difficult and impractical to ascertain the extent of such damages. Maker therefore agrees that a sum equal to $.06 for each $1.00 of each payment that becomes delinquent ten (10) days after its due date, is a reasonable estimate of the fair average compensation for the loss and damages Payee will suffer, that such amount shall be presumed to be the amount of damages sustained by Payee in such case, and that Maker agrees to pay Payee this sum on demand. 4. Default If there exists any Event of Default, as defined below, under the terms of this Note or under the terms of the Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing ("Deed of Trust"), or any other document executed in connection with this Note (herein called "Loan Documents"), Payee or the holder hereof is expressly authorized without notice or demand of any kind to make all sums of interest and principal and any other sums owing under this Note immediately due and payable and to apply all payments made on this Note or any of the Loan Documents to the payment of any such part of any Event of Default as it may elect. An Event of Default shall be either (1) a default in the payment of the whole or in any part of the several installments of this Note when due and such default continues for five (5) days following written notice from Payee, or (2) any of the Events of Default contained in any of the Loan Documents. At any time after an Event of Default, during the continuance of such Event of Default, the entire unpaid balance of principal, together with interest accrued thereon, shall, at the option of the legal holder hereof and without notice (except as specified in any Loan Documents) and without demand or presentment, become due and payable at the place of payment. Anything contained herein or in any of the Loan Documents to the contrary notwithstanding, the principal balance together with accrued interest thereon so accelerated and declared due as aforesaid shall continue to bear interest and shall include compensation for late payments on any and all overdue installments as described above. If a default has occurred, the failure of Payee or the holder hereof to promptly exercise its rights to declare the indebtedness remaining unpaid hereunder to be immediately due and payable shall not constitute a waiver of such rights while such default continues nor a waiver of such right in connection with any future default. Maker hereby waives presentment for payment, protest and demand, and notice of protest, demand, dishonor, nonpayment and nonperformance including notice of dishonor with respect to any check or draft used in payment of any sum due hereunder. 5. Legal Limits All agreements between Maker and Payee are hereby expressly limited so that in no event whatsoever, whether by reason of deferment in accordance with this Note or under any agreement or by virtue of the advancement of the loan proceeds, acceleration or maturity of the loan, or otherwise, shall the amount paid or agreed to be paid to the Payee for the loan, use, forbearance or detention of the money to be loaned hereunder or to compensate Payee for damages to be suffered by reason of a late payment hereof, exceed the maximum permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof, or of any provision in any of the Loan Documents at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, ipso facto the obligations to be fulfilled shall be reduced to the limit of such validity. This provision shall never be superseded or waived and shall control every other provision of all agreements between Maker and Payee. 6. Attorneys' Fees If an action is instituted on this Note, or if any other judicial or non-judicial action is instituted by the holder hereof or by any other person, and an attorney is employed by the holder hereof to appear in any such action or proceeding or to reclaim, sequester, protect, preserve or enforce the holder's interest in the real property security or any other security for this Note, including, but not limited to, proceedings to foreclose the loan evidenced hereby, proceedings under the United States Bankruptcy Code, or in eminent domain, or under the probate code, or in connection with any state or federal tax lien, or to enforce an assignment of rents, or for the appointment of a receiver, or disputes regarding the proper disbursement of loan funds, the Maker and every endorser and guarantor hereof and every person who assumes the obligations evidenced by this Note and the Loan Documents, jointly and severally promise to pay reasonable attorney's fees for services performed by the holder's attorneys, and all costs and expenses incurred incident to such employment. If Maker is the prevailing party in any action by Maker pursuant to this Note, Payee shall pay such attorneys fees as the court may direct. 7. Interest After Expiration If the entire balance of principal and accrued interest is not paid in full on the Maturity Date, without waiving or modifying in any way any of the rights, remedies or recourse, Payee may have under this Note or under any of the Loan Documents by virtue of this default, the entire unpaid balance of principal and accrued interest shall bear interest from the Maturity Date until paid in full at the higher of: (a) ______ percent (___%) per annum; or (b) a fluctuating rate per annum at all times equal to the discount rate of the Federal Reserve of San Francisco (Discount Rate) plus _____________ percent (___%) ("Maturity Interest Rate"). If at any time after the Maturity Date, the Discount Rate (or any previously substituted alternative index) is no longer available, is unverifiable, or is no longer calculated in substantially the same manner as before, then Payee may, in its sole and absolute discretion, select and substitute an alternative index over which Payee has no control. In addition, the holder hereof shall have any and all other rights and remedies available at law or in equity or under the Deed of Trust. 8. Security This Note is secured by and is entitled to the benefits of the Deed of Trust dated on or about the date of this Note executed by Maker to Gymno Corporation, a California corporation, as Trustee, for the use and benefit of Payee covering and relating to the fee title interest of Maker in certain real property located at ____________ in the County of ______________ , California more particularly described in Exhibit A to the Deed of Trust (Property). The provisions of the Deed of Trust are incorporated herein by reference as if set forth in full, and this Note is subject to all of the covenants and conditions therein contained. 9. Acceleration Without limiting the obligations of Maker or the rights and remedies of Payee or the holder hereof under the terms and covenants of this Note and the Deed of Trust, Maker agrees that Payee shall have the right, at its sole option, to declare any indebtedness and obligations hereunder or under the Deed of Trust, irrespective of the Maturity Date specified herein, due and payable in full if: (1) Maker or any one or more of the tenants-in-common, joint tenants, or other persons comprising Maker sells, enters into a contract of sale, conveys, alienates or encumbers the Property or any portion thereof or any fractional undivided interest therein, or suffers Maker's title or any interest therein to be divested or encumbered, whether voluntarily or involuntarily, or leases with an option to sell, or changes or permits to be changed the character or use of the Property, or drills or extracts or enters into a lease for the drilling for or extracting of oil, gas or other hydrocarbon substances or any mineral of any kind or character on the Property; (2) The interest of any general partner of Maker (or the interest of any general partner in a partnership that is a partner) is assigned or transferred; (3) More than twenty-five percent (25%) of the corporate stock of Maker (or of any corporate partner or other corporation comprising Maker) is sold, transferred or assigned; (4) There is a change in beneficial ownership with respect to more than twenty-five percent (25%) of Maker (if Maker is a trust or other legal entity) or of any partner or tenant-in-common of Maker which is a trust or other legal entity; or (5) a default has occurred hereunder or under any Loan Document and is continuing. In such case, Payee or other holder of this Note may exercise any and all of the rights and remedies and recourses set forth in the Deed of Trust and as granted by law. Maker and any successor who acquires any record interest in the Property agrees to notify Payee promptly in writing of any transaction or event described in this section. 10. Governing Law and Severability This Note is made pursuant to, and shall be construed and governed by, the laws of the State of California. If any paragraph, clause or provision of this Note or any of the Loan Documents is construed or interpreted by a court of competent jurisdiction to be void, invalid or unenforceable, such decision shall affect only those paragraphs, clauses or provisions so construed or interpreted and shall not affect the remaining paragraphs, clauses and provisions of this Note or the other Loan Documents. 11. Time of Essence Time is of the essence of this Note. 12. Payment Without Offset Principal and interest shall be paid without deduction or offset in immediately available funds in lawful money of the United States of America. Payments shall be deemed received only upon actual receipt by Payee and upon Payee's application of such payments as provided herein. 13. Notices All notices under this Note shall be in writing and shall be effective upon personal delivery to the authorized representatives of either party or upon being sent by certified mail, return receipt requested, postage prepaid, addressed to the following respective parties as follows: MAKER: ________________________________ ________________________________ ________________________________ Attn: ________________________________ PAYEE: ________________________________ 650 El Camino Real, Suite G Redwood City, California 94063-1394 Attn: Michael Burwell 14. Collection Any remittances by check or draft may be handled for collection in accordance with the practices of the collecting party and any receipt issued therefor shall be void unless the amount due is actually received by Payee. 15. Assignment Payee or other holder of this Note may assign all of its rights, title and interest in this Note to any person, firm, corporation or other entity without the consent of Maker. 16. Relationship The relationship of the parties hereto is that of borrower and lender and it is expressly understood and agreed that nothing contained herein or in any of the Loan Documents shall be interpreted or construed to make the parties partners, joint venturers or participants in any other legal relationship except for borrower and lender. 17. Remedies No right, power or remedy given Payee by the terms of this Note, or in the Loan Documents is intended to be exclusive of any right, power or remedy, and each and every such right, power or remedy shall be cumulative and in addition to every other right, power or remedy given to Payee by the terms of any of the Loan Documents or by any statute against Maker or any other person. Every right, power and remedy of Payee shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument in writing, executed by Payee. 18. Headings The subject headings of the paragraphs of this Note are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. Maker: _________________________________ _________________________________ EX-10.3(D) 13 FORM OF NOTE FOR RESIDENTIAL LOAN INT ONLY Exhibit 10.3(d) NOTE SECURED BY DEED OF TRUST Loan No. ___________________________ ___________________________, 19_____ _____________________, California 1. BORROWERS PROMISE TO PAY LOAN AND INTEREST In return for a loan I promise to pay $________________ (this amount will be called Principal), plus interest at a yearly rate of _____________ percent (_______%) to the order of_______________________ (who will be called Lender). I understand that the Lender may transfer this Note. The Lender or anyone who takes an interest in this Note by transfer and who is entitled to receive payments under this Note will be called the Note Holder(s). All payments received on this Note shall be applied pro rata in proportion to the interest held by each of the Note Holder(s). Interest will be charged on that part of Principal which has not been paid. Interest will be charged beginning on _________________, 19_____ and continuing until the full amount of Principal and interest has been paid. I also agree to pay interest at the above rate on the prepaid finance charges which are a part of the Principal. 2. PAYMENTS I will pay interest only by making payments each month of $_________________. I will make my payments on the _______ day of each month beginning on _____________________, 19____. I will make these payments every month until ________________, 19____ (the Due Date). On the Due Date I will still owe the Principal; on the Due Date I will pay all amounts I owe under this Note, in full, on that date. I will make my monthly payments at P.O. Box 5096, Redwood City, CA 94063-0096 or at a different place if I am notified by the Note Holder(s). 3. BORROWERS FAILURE TO PAY AS REQUIRED (A) LATE CHARGE FOR OVERDUE PAYMENTS If the Note Holder(s) has not received the full amount of any of my monthly payments by the end of 10th calendar days after the date it is due, I will pay a late charge to the Note Holder(s). The amount of the charge will be 6% of the amount overdue or $5.00, whichever is more. I will pay this late charge only once on any late payment. (B) NONPAYMENT - DEFAULT If I do not pay any payment of Principal or interest by the date stated in Section 2 above, I will be in default, and the Lender and the Note Holder may demand that I pay immediately all amounts that I owe under this Note. Even if, at a time which I am in default, the Note Holder does not demand that I pay immediately in full as described above, the Note Holder will still have the right to do so if I am in default at a later time. If there is more than one Note Holder, any one Note Holder may exercise any right under this Note in the event of a default. A default upon any interest of any Note Holder shall be a default upon all interests. (C) ADVANCES All advances made pursuant to the terms of the Deed of Trust securing this Note shall bear interest from the date of advance at the rate of interest in this Note. (D) PAYMENT OF NOTE HOLDERS COSTS AND EXPENSES If the Note Holder has required me to pay immediately in full as described above, the Note Holder will have the right to be paid back for all of its costs and expenses to the extent not prohibited by applicable law. Those expenses include, for example, reasonable attorneys fees. (E) INTEREST INCREASE IF NOTE NOT PAID ON DUE DATE If the Note Holder has not received all amounts owed under this Note on the Due Date, I will pay interest on the full amount of unpaid Principal at ________ % per annum plus the loan or forbearance rate established by the Federal Reserve Bank of San Francisco on advances to member banks under Section 13 and 13a of the Federal Reserve Act, on the Due Date, or the rate of interest called for in this Note, whichever is greater. 4. THIS NOTE IS SECURED BY A DEED OF TRUST This Note is secured by a Deed of Trust upon real property in _______________________ County, California. 5. BORROWERS REQUIRED REPAYMENT IN FULL BEFORE THE SCHEDULED DATE In the event of any sale or conveyance of any part of the real property described in the Deed of Trust securing this Note, then the Note Holder(s) may demand payment in full of all amounts that I owe under this Note, as allowed by law. 6. BORROWERS PAYMENTS BEFORE THEY ARE DUE - PREPAYMENT PENALTY. I have the right to make payments of principal at any time before they are due. There shall be no prepayment penalty. 7. INTENT TO COMPLY WITH LAW It is the intent of all of the parties to this Note to abide by all of the provisions of the California Business and Professions Code governing Real Property Loans and any terms of this Note inconsistent with that law are hereby waived by the Lender and Note Holder(s). _______________________________________________ ________________________ (Borrower) (Date) _______________________________________________ ________________________ (Borrower) (Date) EX-10.3(E) 14 FORM OF NOTE FOR RESIDENTIAL LOAN P&I ONLY Exhibit 10.3(e) NOTE SECURED BY DEED OF TRUST Loan No. ___________________________ _____________________, 19_____ _______________________, California 1. BORROWERS PROMISE TO PAY LOAN AND INTEREST In return for a loan I promise to pay $________________ (this amount will be called Principal), plus interest at a yearly rate of ______________________________ percent (_______%) to the order of ______________________________________________________________________ (who will be called Lender). I understand that the Lender may transfer this Note. The Lender or anyone who takes an interest in this Note by transfer and who is entitled to receive payments under this Note will be called the Note Holder(s). All payments received on this Note shall be applied pro rata in proportion to the interest held by each of the Note Holder(s). Interest will be charged on that part of Principal which has not been paid. Interest will be charged beginning on _________________, 19_____ and continuing until the full amount of Principal and interest has been paid. I also agree to pay interest at the above rate on the prepaid finance charges which are a part of the Principal. 2. PAYMENTS I will pay Principal and interest by making payments each month of $_________________. I will make my payments on the _______ day of each month beginning on _____________________, 19____. I will make these payments every month until ________________, 19____ (the Due Date). On the Due Date I will pay remaining Principal plus accrued interest that I owe under this Note, in full, on that date. I will make my monthly payments at P.O. Box 5096, Redwood City, CA 94063-0096 or at a different place if I am notified by the Note Holder(s). 3. BORROWERS FAILURE TO PAY AS REQUIRED (A) LATE CHARGE FOR OVERDUE PAYMENTS If the Note Holder(s) has not received the full amount of any of my monthly payments by the end of 10th calendar days after the date it is due, I will pay a late charge to the Note Holder(s). The amount of the charge will be 6% of the amount overdue or $5.00, whichever is more. I will pay this late charge only once on any late payment. (B) NONPAYMENT - DEFAULT If I do not pay any payment of Principal or interest by the date stated in Section 2 above, I will be in default, and the Lender and the Note Holder may demand that I pay immediately all amounts that I owe under this Note. Even if, at a time which I am in default, the Note Holder does not demand that I pay immediately in full as described above, the Note Holder will still have the right to do so if I am in default at a later time. If there is more than one Note Holder, any one Note Holder may exercise any right under this Note in the event of a default. A default upon any interest of any Note Holder shall be a default upon all interests. (C) ADVANCES All advances made pursuant to the terms of the Deed of Trust securing this Note shall bear interest from the date of advance at the rate of interest in this Note. (D) PAYMENT OF NOTE HOLDERS COSTS AND EXPENSES If the Note Holder has required me to pay immediately in full as described above, the Note Holder will have the right to be paid back for all of its costs and expenses to the extent not prohibited by applicable law. Those expenses include, for example, reasonable attorneys fees. (E) INTEREST INCREASE IF NOTE NOT PAID ON DUE DATE If the Note Holder has not received all amounts owed under this Note on the Due Date, I will pay interest on the full amount of unpaid Principal at ________ % per annum plus the loan or forbearance rate established by the Federal Reserve Bank of San Francisco on advances to member banks under Section 13 and 13a of the Federal Reserve Act, on the Due Date, or the rate of interest called for in this Note, whichever is greater. 4. THIS NOTE IS SECURED BY A DEED OF TRUST This Note is secured by a Deed of Trust upon real property in _______________________ County, California. 5. BORROWERS REQUIRED REPAYMENT IN FULL BEFORE THE SCHEDULED DATE In the event of any sale or conveyance of any part of the real property described in the Deed of Trust securing this Note, then the Note Holder(s) may demand payment in full of all amounts that I owe under this Note, as allowed by law. 6. BORROWERS PAYMENTS BEFORE THEY ARE DUE - PREPAYMENT PENALTY. I have the right to make payments of principal at any time before they are due. There shall be no prepayment penalty. 7. INTENT TO COMPLY WITH LAW It is the intent of all of the parties to this Note to abide by all of the provisions of the California Business and Professions Code governing Real Property Loans and any terms of this Note inconsistent with that law are hereby waived by the Lender and Note Holder(s). _______________________________________________ ________________________ (Borrower) (Date) _______________________________________________ ________________________ (Borrower) (Date) EX-10.4(A) 15 CONSTRUCTION DEED OF TRUST Exhibit 10.4(a) RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: Redwood Home Loan Company 650 El Camino Real, Suite G Redwood City, California 94063-1394 Attn: Michael Burwell ________________________________________________________________ LOAN NO.: CONSTRUCTION DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND FIXTURE FILING THIS CONSTRUCTION DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND FIXTURE FILING (this "Deed of Trust") is made as of ______________, 19___, by ____________________________________________________, the owner of the property described hereinbelow, whose address is _____________________________________________________________ (herein "Trustor"), to GYMNO CORPORATION, a California corporation, whose address is 650 El Camino Real, Suite G Redwood City, California 94063-1394, (herein "Trustee"), in favor of _____________________________________________ whose address is 650 El Camino Real, Suite G, Redwood City, California 94063-1394 (herein "Beneficiary"). Trustor, in consideration of the loan described below, irrevocably grants, conveys, transfers and assigns to Trustee, its successors and assigns, in trust, with power of sale and right of entry and possession, all of Trustor's estate, right, title and interest in and to that certain real property located in the City of ________________, County of _______________, State of California, more particularly described in Exhibit A attached hereto and incorporated herein by this reference; TOGETHER WITH all structures and improvements now existing or hereafter erected on the aforesaid real property, all easements, rights and appurtenances thereto or used in connection therewith, all rents, royalties, issues, profits, revenues, income and other benefits thereof or arising from the use or enjoyment of all or any portion thereof (subject to the rights given below to Trustor to collect and apply such rents, royalties, issues, profits, revenues, income and other benefits), all interests in and rights, royalties and profits in connection with all minerals, oil and gas and other hydrocarbon substances thereon or therein, development rights or credits, air rights, water, water rights (whether riparian, appropriative or otherwise, and whether or not appurtenant) and water stock, all intangible property and rights relating to the aforesaid real property or the operation thereof, or used in connection therewith, including, without limitation, tradenames and trademarks, all fixtures, machinery, equipment, building materials, appliances and goods of every nature whatsoever (herein collectively called "equipment" and other "personal property") now or hereafter located in, or on, attached or affixed to, or used or intended to be used in connection with, the aforesaid real property, including, but without limitation, all heating, lighting, laundry, incinerating, gas, electric and power equipment, engines, pipes, pumps, tanks, motors, conduits, switchboards, plumbing, lifting, cleaning, fire prevention, fire extinguishing, refrigerating, ventilating and communications apparatus, air cooling and air conditioning apparatus, elevators and escalators and related machinery and equipment, pool and pool operation and maintenance equipment and apparatus, shades, awnings, blinds, curtains, drapes, attached floor coverings, including rugs and carpeting, television, radio and music cable antennae and systems, screens, storm doors and windows, stoves, refrigerators, dishwashers and other installed appliances, attached cabinets, partitions, ducts and compressors, and trees, plants and other items of landscaping (except that the foregoing equipment and other personal property covered hereby shall not include machinery, apparatus, equipment, fittings and articles of personal property used in the business of Trustor (commonly referred to as "trade fixtures") whether the same are annexed to said real property or not, unless the same are also used in the operation of any building or other improvement located thereon or unless the same cannot be removed without materially damaging said real property or any such building or other improvement, all of which, including replacements and additions thereto, shall, to the fullest extent permitted by law and for the purposes of this Deed of Trust, be deemed to be part and parcel of, and appropriated to the use of, said real property and, whether affixed or annexed thereto or not, be deemed conclusively to be real property and conveyed by this Deed of Trust, and all proceeds and products of any and all thereof, and Trustor agrees to execute and deliver, from time to time, such further instruments and documents as may be required by Beneficiary to confirm the lien of this Deed of Trust on any of the foregoing; all of the foregoing property referred to in this section, together with said described real property, are herein referred to as the "Mortgaged Property"; FOR THE PURPOSE OF SECURING, in such order of priority as Beneficiary may elect: (a) The repayment of the indebtedness evidenced by Trustor's promissory note of even date herewith payable to the order of Beneficiary in the original principal sum of _____________________($_____________), with interest thereon, as provided therein, and all prepayment charges, late charges and loan fees required thereunder, and all extensions, renewals, modifications, amendments and replacements thereof (herein "Note"); (b) The payment of all other sums which may be advanced by or otherwise be due to Trustee or Beneficiary under any provision of this Deed of Trust or under any other instrument or document referred to in subsection (c) below, with interest thereon at the rate provided herein or therein; (c) The performance of each and every of the covenants and agreements of Trustor contained (1) herein, in the Note, and in any note evidencing a Future Advance (as hereinafter defined), (2) in the Environmental Agreement and Indemnity executed by Trustor concurrently herewith, (3) a Holdback Agreement executed by Trustor concurrently herewith, and in any and all pledge agreements, supplemental agreements, assignments and all instruments of indebtedness or security now or hereafter executed by Trustor in connection with any indebtedness referred to in subsection (a) above or subsection (d) below or for the purpose of supplementing or amending this Deed of Trust or any instrument secured hereby (all of the foregoing in this Clause (2) and (3), as the same may be amended, modified or supplemented from time to time, being referred to hereinafter as "Related Agreements"); and (d) The repayment of any other loans or advances, with interest thereon, hereafter made to Trustor (or any successor in interest to Trustor as the owner of the Mortgaged Property or any part thereof) by Beneficiary when the promissory note evidencing the loan or advance specifically states that said note is secured by this Deed of Trust, together with all extensions, renewals, modifications, amendments and replacements thereof (herein "Future Advance"). ARTICLE I COVENANTS OF TRUSTOR To protect the security of this Deed of Trust, Trustor covenants and agrees as follows: 1.01 Performance of Obligations Secured. Trustor shall promptly pay when due the principal of and interest on the indebtedness evidenced by the Note, the principal of and interest on any Future Advances, and any prepayment, late charges and loan fees provided for in the Note or in any note evidencing a Future Advance or provided for herein, and shall further perform fully and in a timely manner all other obligations of Trustor contained herein or in the Note or in any note evidencing a Future Advance or in any of the Related Agreements. All sums payable by Trustor hereunder shall be paid without demand, counterclaim, offset, deduction or defense and Trustor waives all rights now or hereinafter conferred by statute or otherwise to any such demand, counterclaim, offset, deduction or defense. 1.02 Insurance. Trustor shall keep the Mortgaged Property insured with an all-risk policy insuring against loss or damage by fire with extended coverage and against any other risks or hazards which, in the opinion of Beneficiary, should be insured against, in an amount not less than 100% of the full insurable value thereof on a replacement cost basis, with an inflation guard endorsement, with a company or companies and in such form and with such endorsements as may be approved or required by Beneficiary, including, if applicable, boiler explosion coverage and sprinkler leakage coverage. All losses under said insurance shall be payable to Beneficiary and shall be applied in the manner provided in Section 1.03 hereof. Trustor shall also carry comprehensive general public liability insurance and twelve (12) months' rent loss insurance in such form and amounts and with such companies as are satisfactory to Beneficiary. Trustor shall also carry insurance against flood if required by the Federal Flood Disaster Protection Act of 1973 and regulations issued thereunder. All hazard, flood and rent loss insurancepolicies shall be endorsed with a standard noncontributory mortgagee clause in favor of and in form acceptable to Beneficiary, and may be canceled or modified only upon not less than ten (10) days' prior written notice to Beneficiary. All of the above-mentioned insurance policies or certificates of such insurance satisfactory to Beneficiary, together with receipts for the payment of premiums thereon, shall be delivered to and held by Beneficiary, which delivery shall constitute assignment to Beneficiary of all return premiums to be held as additional security hereunder. All renewal and replacement policies shall be delivered to Beneficiary at least thirty (30) days before the expiration of the expiring policies. Beneficiary shall not by the fact of approving, disapproving, accepting, preventing, obtaining or failing to obtain any insurance, incur any liability for or with respect to the amount of insurance carried, the form or legal sufficiency of insurance contracts, solvency of insurance companies, or payment or defense of lawsuits, and Trustor hereby expressly assumes full responsibility therefor and all liability, if any, with respect thereto. 1.03 Condemnation and Insurance Proceeds. (a) The proceeds of any award or claim for damages, direct or consequential, in connection with any condemnation or other taking of or damage or injury to the Mortgaged Property, or any part thereof, or for conveyance in lieu of condemnation, are hereby assigned to and shall be paid to Beneficiary. In addition, all causes of action, whether accrued before or after the date of this Deed of Trust, of all types for damages or injury to the Mortgaged Property or any part thereof, or in connection with any transaction financed by funds loaned to Trustor by Beneficiary and secured hereby, or in connection with or affecting the Mortgaged Property or any part thereof, including, without limitation, causes of action arising in tort or contract and causes of action for fraud or concealment of a material fact, are hereby assigned to Beneficiary as additional security, and the proceeds thereof shall be paid to Beneficiary. Beneficiary may at its option appear in and prosecute in its own name any action or proceeding to enforce any such cause of action and may make any compromise or settlement thereof. Trustor, immediately upon obtaining knowledge of any casualty damage to the Mortgaged Property or damage in any other manner in excess of $25,000.00 or knowledge of the institution of any proceedings relating to condemnation or other taking of or damage or injury to the Mortgaged Property or any portion thereof, will immediately notify Beneficiary in writing. Beneficiary, in its sole discretion, may participate in any such proceedings and may join Trustor in adjusting any loss covered by insurance. (b) All compensation, awards, proceeds, damages, claims, insurance recoveries, rights of action and payments which Trustor may receive or to which Trustor may become entitled with respect to the Mortgaged Property in the event of any damage or injury to or a partial condemnation or other partial taking of the Mortgaged Property shall be paid over to Beneficiary and shall be applied first toward reimbursement of all costs and expenses of Beneficiary in connection with recovery of the same, and then shall be applied, as follows: (1) Beneficiary shall consent to the application of such payments to the restoration of the Mortgaged Property so damaged if and only if Trustor fulfills all of the following conditions (a breach of any one of which shall constitute an Event of Default under this Deed of Trust and shall entitle Beneficiary to exercise all rights and remedies Beneficiary may have in such event): (a) that no default or Event of Default is then outstanding under this Deed of Trust, the Note, or any Related Agreement; (b) that Trustor is not in default under any of the terms, covenants and conditions of any of the Leases (hereinafter defined); (c) that the Leases shall continue in full force and effect; (d) that Trustor has in force rental continuation and business interruption insurance covering the Mortgaged Property for the longer of twelve (12) months or the time Beneficiary reasonably estimates will be necessary to complete such restoration and rebuilding; (e) Beneficiary is satisfied that during the period from the time of damage or taking until restoration and rebuilding of the Mortgaged Property is completed (the "Gap Period") Trustor's net income from (1) all leases, subleases, licenses and other occupancy agreements affecting the Mortgaged Property (the "Leases") which may continue without abatement of rent during such Gap Period, plus (2) all leases, subleases, licenses and other occupancy agreements in effect during the Gap Period without abatement of rent which Trustor may obtain in substitution for any of the same which did not continue during such Gap Period, plus (3) the proceeds of rental continuation and business interruption insurance, is sufficient to satisfy Trustor's obligations under this Deed of Trust as they come due; (f) Beneficiary is satisfied that the insurance or award proceeds shall be sufficient to fully restore and rebuild the Mortgaged Property free and clear of all liens except the lien of this Deed of Trust, or, in the event that such proceeds are in Beneficiary's sole judgment insufficient to restore and rebuild the Mortgaged Property, then Trustor shall deposit promptly with Beneficiary funds which, together with the insurance or award proceeds, shall be sufficient in Beneficiary's sole judgment to restore and rebuild the Mortgaged Property; (g)construction and completion of restoration and rebuilding of the Mortgaged Property shall be completed in accordance with plans and specifications and drawings submitted to and approved by Beneficiary, which plans, specifications and drawings shall not be substantially modified, changed or revised without the Beneficiary's prior written consent; (h) Beneficiary shall also have approved all prime and subcontractors, and the general contract or contracts the Trustor proposes to enter into with respect to the restoration and rebuilding; and (i) any and all monies which are made available for restoration and rebuilding hereunder shall be disbursed through Beneficiary, the Trustee or a title insurance and trust company satisfactory to Beneficiary, in accord with standard construction lending practice, including, if requested by Beneficiary, monthly lien waivers and title insurance datedowns, and the provision of payment and performance bonds by Trustor, or in any other manner approved by Beneficiary in Beneficiary's sole discretion; or (2) If less than all of conditions (a) through (i) in subsection (1) above are satisfied, then such payments shall be applied in the sole and absolute discretion of Beneficiary (a) to the payment or prepayment with any applicable prepayment premium of any indebtedness secured hereby in such order as Beneficiary may determine, or (b) to the reimbursement of Trustor's expenses incurred in the rebuilding and restoration of the Mortgaged Property. In the event Beneficiary elects under this subsection (2) to make any monies available to restore the Mortgaged Property, then all of conditions (a) through (i) in subsection (1) above shall apply, except such conditions which Beneficiary, in its sole discretion, may waive. (c) If any material part of the Mortgaged Property is damaged or destroyed and the loss is not adequately covered by insurance proceeds collected or in the process of collection, Trustor shall deposit, within ten (10) days of the Beneficiary's request therefor, the amount of the loss not so covered. (d) All compensation, awards, proceeds, damages, claims, insurance recoveries, rights of action and payments which Trustor may receive or to which Trustor may become entitled with respect to the Mortgaged Property in the event of a total condemnation or other total taking of the Mortgaged Property shall be paid over to Beneficiary and shall be applied first toward reimbursement of all costs and expenses of Beneficiary in connection with recovery of the same, and then shall be applied to the payment or prepayment with any applicable prepayment premium of any indebtedness secured hereby in such order as Beneficiary may determine, until the indebtedness secured hereby has been paid and satisfied in full. Any surplus remaining after payment and satisfaction of the indebtedness secured hereby shall be paid to Trustor as its interest may then appear. (e) Any application of such amounts or any portion thereof to any indebtedness secured hereby shall not be construed to cure or waive any default or notice of default hereunder or invalidate any act done pursuant to any such default or notice. (f) If any part of any automobile parking areas included within the Mortgaged Property is taken by condemnation or before such areas are otherwise reduced, Trustor shall provide parking facilities in kind, size and location to comply with all leases, and before making any contract for such substitute parking facilities, Trustor shall furnish to Beneficiary satisfactory assurance of completion thereof, free of liens and in conformity with all governmental zoning, land use and environmental regulations. 1.04 Taxes, Liens and Other Items. Trustor shall pay at least ten days before delinquency, all taxes, bonds, assessments, special assessments, common area charges, fees, liens, charges, fines, penalties, impositions and any and all other items which are attributable to or affect the Mortgaged Property and which may attain a priority over this Deed of Trust by making payment prior to delinquency directly to the payee thereof, unless Trustor shall be required to make payment to Beneficiary on account of such items pursuant to Section 1.05 hereof. Prior to the delinquency of any such taxes or other items, Trustor shall furnish Beneficiary with receipts indicating such taxes and other items have been paid. Trustor shall promptly discharge any lien which has attained or may attain priority over this Deed of Trust. In the event of the passage after the date of this Deed of Trust of any law deducting from the value of real property for the purposes of taxation any lien thereon, or changing in any way the laws for the taxation of deeds of trust or debts secured by deeds of trust for state, federal or any other purposes, or the manner of the collection of any such taxes, so as to affect this Deed of Trust, the Beneficiary and holder of the debt which it secures shall have the right to declare the principal sum and the interest due on a date to be specified by not less than thirty (30) days written notice to be given to Trustor by Beneficiary; provided, however, that such election shall be ineffective if Trustor is permitted by law to pay the whole of such tax in addition to all other payments required hereunder and if, prior to such specified date, does pay such taxes and agrees to pay any such tax when hereafter levied or assessed against the Mortgaged Property, and such agreement shall constitute a modification of this Deed of Trust. 1.05 Funds for Taxes and Insurance. If an Event of Default has occurred under this Deed of Trust or under any of the Related Agreements, regardless of whether the same has been cured, then thereafter at any time Beneficiary may, at its option to be exercised upon thirty (30) days' written notice to Trustor, require the deposit with Beneficiary or its designee by Trustor, at the time of each payment of an installment of interest or principal under the Note, of an additional amount sufficient to discharge the obligations of Trustor under Sections 1.02 and 1.04 hereof as and when they become due. The determination of the amount payable and of the fractional part thereof to be deposited with Beneficiary shall be made by Beneficiary in its sole discretion. These amounts shall be held by Beneficiary or its designee not in trust and not as agent of Trustor and shall not bear interest, and shall be applied to the payment of the obligations in such order or priority as Beneficiary shall determine. If at any time within thirty (30) days prior to the due date of any of the aforementioned obligations the amounts then on deposit therefor shall be insufficient for the payment of such obligation in full, Trustor shall within ten (10) days after demand deposit the amount of the deficiency with Beneficiary. If the amounts deposited are in excess of the actual obligations for which they were deposited, Beneficiary may refund any such excess, or, at its option, may hold the same in a reserve account, not in trust and not bearing interest, and reduce proportionately the required monthly deposits for the ensuing year. Nothing herein contained shall be deemed to affect any right or remedy of Beneficiary under any other provision of this Deed of Trust or under any statute or rule of law to pay any such amount and to add the amount so paid to the indebtedness hereby secured. All amounts so deposited shall be held by Beneficiary or its designee as additional security for the sums secured by this Deed of Trust and upon the occurrence of an Event of Default hereunder Beneficiary may, in its sole and absolute discretion and without regard to the adequacy of its security hereunder, apply such amounts or any portion thereof to any part of the indebtedness secured hereby. Any such application of said amounts or any portion thereof to any indebtedness secured hereby shall not be construed to cure or waive any default or notice of default hereunder. If Beneficiary requires deposits to be made pursuant to this Section 1.05, Trustor shall deliver to Beneficiary all tax bills, bond and assessment statements, statements of insurance premiums, and statements for any other obligations referred to above as soon as such documents are received by Trustor. If Beneficiary sells or assigns this Deed of Trust, Beneficiary shall have the right to transfer all amounts deposited under this Section 1.05 to the purchaser or assignee, and Beneficiary shall thereupon be released and have no further liability hereunder for the application of such deposits, and Trustor shall look solely to such purchaser or assignee for such application and for all responsibility relating to such deposits. 1.06 Assignment of Rents and Profits. (a) All of Trustor's interest in any leases or other occupancy agreements pertaining to the Mortgaged Property now existing or hereafter entered into, and all of the rents, royalties, issues, profits, revenue, income and other benefits of the Mortgaged Property arising from the use or enjoyment of all or any portion thereof or from any lease or agreement pertaining to occupancy of any portion of the Mortgaged Property now existing or hereafter entered into whether now due, past due, or to become due, and including all prepaid rents and security deposits (the "Rents and Profits"), are hereby absolutely, presently and unconditionally assigned, transferred and conveyed to Beneficiary to be applied by Beneficiary in payment of the principal and interest and all other sums payable on the Note, and of all other sums payable under this Deed of Trust subject to the rights of residential tenants under California Civil Code Section 1950.5(d). Prior to the occurrence of any Event of Default (hereinafter defined), Trustor shall have a license to collect and receive all Rents and Profits, which license shall be terminable at the sole option of Beneficiary, without regard to the adequacy of its security hereunder and without notice to or demand upon Trustor, upon the occurrence of any Event of Default. It is understood and agreed that neither the foregoing assignment of Rents and Profits to Beneficiary nor the exercise by Beneficiary of any of its rights or remedies under Article IV hereof shall be deemed to make Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in any manner with respect to the Mortgaged Property or the use, occupancy, enjoyment or operation of all or any portion thereof, unless and until Beneficiary, in person or by agent, assumes actual possession thereof. Nor shall appointment of a receiver for the Mortgaged Property by any court at the request of Beneficiary or by agreement with Trustor, or the entering into possession of the Mortgaged Property or any part thereof by such receiver, be deemed to make Beneficiary a mortgagee-in-possession or otherwise responsible or liable in any manner with respect to the Mortgaged Property or the use, occupancy, enjoyment or operation of all or any portion thereof. Upon the occurrence of any Event of Default, this shall constitute a direction to and full authority to each lessee under any lease and each guarantor of any lease to pay all Rents and Profits to Beneficiary without proof of the default relied upon. Trustor hereby irrevocably authorizes each lessee and guarantor to rely upon and comply with any notice or demand by Beneficiary for the payment to Beneficiary of any Rents and Profits due or to become due. (b) Trustor shall apply the Rents and Profits to the payment of all necessary and reasonable operating costs and expenses of the Mortgaged Property, debt service on the indebtedness secured hereby, and a reasonable reserve for future expenses, repairs and replacements for the Mortgaged Property, before using the Rents and Profits for Trustor's personal use or any other purpose not for the direct benefit of the Mortgaged Property. (c) Trustor warrants as to each lease now covering all or any part of the Mortgaged Property: (1) that each lease is in full force and effect; (2) that no default exists on the part of the lessees or Trustor under leases constituting more than 5%, in the aggregate, of all units in the Mortgaged Property; (3) that no rent has been collected more than one month in advance; (4) that no lease or any interest therein has been previously assigned or pledged; (5) that no lessee under any lease has any defense, setoff or counterclaim against Trustor; (6) that all rent due to date under each lease has been collected and no concession has been granted to any lessee in the form of a waiver, release, reduction, discount or other alteration of rent due or to become due; and (7) that the interest of the lessee under each lease is as lessee only, with no options to purchase or rights of first refusal. All the foregoing warranties shall be deemed to be reaffirmed and to continue until performance in full of the obligations under this Deed of Trust. (d) Trustor shall at all times perform the obligations of lessor under all such leases. Trustor shall not execute any further assignment of any of the Rents and Profits or any interest therein or suffer or permit any such assignment to occur by operation of law. Trustor shall at any time or from time to time, upon request of Beneficiary, transfer and assign to Beneficiary in such form as may be satisfactory to Beneficiary, Trustor's interest in any lease, subject to and upon the condition, however, that prior to the occurrence of any Event of Default hereunder Trustor shall have a license to collect and receive all Rents and Profits under such lease upon accrual, but not prior thereto, as set forth in subsection (a) above. Whenever requested by Beneficiary, Trustor shall furnish to Beneficiary a certificate of Trustor setting forth the names of all lessees under any leases, the terms of their respective leases, the space occupied, the rents payable thereunder, and the dates through which any and all rents have been paid. (e) Without the prior written consent of Beneficiary, Trustor shall not (1) accept prepayments of rent exceeding one month under any leases of any part of the Mortgaged Property; (2) take any action under or with respect to any such leases which would decrease the monetary obligations of the lessee thereunder or otherwise materially decrease the obligations of the lessee or the rights or remedies of the lessor, including, without limitation, any reduction in rent or granting of an option to renew for a term greater than one year; (3) modify or amend any such leases or, except where the lessee is in default, cancel or terminate the same or accept a surrender of the leased premises, provided, however, that Trustor may renew, modify or amend leases in the ordinary course of business so long as such actions do not decrease the monetary obligations of the lessee thereunder, or otherwise decrease the obligations of the lessee or the rights and remedies of the lessor; (4) consent to the assignment or subletting of the whole or any portion of the lessee's interest under any lease which has a term of more than five years; (5) create or permit any lien or encumbrance which, upon foreclosure, would be superior to any such leases; or (6) in any other manner impair Beneficiary's rights and interest with respect to the Rents and Profits. (f) Each lease of the Mortgaged Property, or any part thereof, shall make provision for the attornment of the lessee thereunder to any person succeeding to the interest of Trustor as the result of any foreclosure or transfer in lieu of foreclosure hereunder, said provision to be in form and substance approved by Beneficiary. If any lease provides for the abatement of rent during repair of the demised premises by reason of fire or other casualty, Trustor shall furnish rental insurance to Beneficiary, the policies to be in amount and form and written by such companies as shall be satisfactory to Beneficiary. Each lease shall remain in full force and effect despite any merger of the interest of Trustor and any lessee thereunder. (g) Beneficiary shall be deemed to be the creditor of each lessee in respect of any assignments for the benefit of creditors and any bankruptcy, arrangement, reorganization, insolvency, dissolution, receivership or other debtor-relief proceedings affecting such lessee (without obligation on the part of Beneficiary, however, to file timely claims in such proceedings or otherwise pursue creditor's rights therein). Beneficiary shall have the right to assign Trustor's right, title and interest in any leases to any subsequent holder of this Deed of Trust or any participating interest therein or to any person acquiring title to all or any part of the Mortgaged Property through foreclosure or otherwise. Any subsequent assignee shall have all the rights and powers herein provided to Beneficiary. Beneficiary shall have the authority, as Trustor's attorney-in-fact, such authority being coupled with an interest and irrevocable, to sign the name of Trustor and to bind Trustor on all papers and documents relating to the operation, leasing and maintenance of the Mortgaged Property. 1.07 Security Agreement. This Deed of Trust is intended to be a security agreement pursuant to the California Uniform Commercial Code for (a) any and all items of personal property specified above as part of the Mortgaged Property which, under applicable law, may be subject to a security interest pursuant to the California Uniform Commercial Code and which are not herein effectively made part of the real property, and (b) any and all items of property specified above as part of the Mortgaged Property which, under applicable law, constitute fixtures and may be subject to a security interest under Section 9-313 of the California Uniform Commercial Code; and Trustor hereby grants Beneficiary a security interest in said property, all of which is referred to herein as "Personal Property," and in all additions thereto, substitutions therefor and proceeds thereof, for the purpose of securing all indebtedness and other obligations of Trustor now or hereafter secured by this Deed of Trust, which shall be a paramount and superior lien on all such Personal Property at all times. Trustor agrees to execute and deliver financing and continuation statements covering the Personal Property from time to time and in such form as Beneficiary may require to perfect and continue the perfection of Beneficiary's lien or security interest with respect to said property. Trustor shall pay all costs of filing such statements and renewals and releases thereof and shall pay all reasonable costs and expenses of any record searches for financing statements Beneficiary may reasonably require. Upon the occurrence of any default of Trustor hereunder, Beneficiary shall have the rights and remedies of a secured party under California Uniform Commercial Code, including, Section 9501(4) thereof, as well as all other rights and remedies available at law or in equity, and, at Beneficiary's option, Beneficiary may also invoke the remedies provided in Article IV of this Deed of Trust as to such property. 1.08 Acceleration. (a) Trustor acknowledges that in making the loan evidenced by the Note and this Deed of Trust (the "Loan"), Beneficiary has relied upon: (1) Trustor's credit rating; (2) Trustor's financial stability; and (3) Trustor's experience in owning and operating real property comparable to the Mortgaged Property. Without limiting the obligations of Trustor or the rights and remedies of Beneficiary, Beneficiary shall have the right, at its option, to declare any indebtedness and obligations under the Note and this Deed of Trust, irrespective of the maturity date specified therein, due and payable in full if: (1) Trustor enters into a contract of sale, conveys, alienates or encumbers the Mortgaged Property or any portion thereof or any fractional undivided interest therein, or suffers Trustor's title or any interest therein to be divested or encumbered, whether voluntarily or involuntarily, or leases with an option to sell, or changes or permits to be changed the character or use of the Mortgaged Property, or drills or extracts or enters into a lease for the drilling for or extracting of oil, gas or other hydrocarbon substances or any mineral of any kind or character on such property; (2) Trustor or any one or more of the persons comprising Trustor is a partnership and the interest of any general partner (or the interest of any general partner in a partnership that is a partner) is assigned or transferred, except for an assignment or transfer resulting from the death or physical or mental incapacity of a general partner; (3) Trustor or any one or more of the persons comprising Trustor is a partnership and more than twenty-five percent (25%) of the corporate stock of any corporation that is a general partner of such partnership is sold, transferred or assigned; (4) Trustor is a corporation and more than twenty-five percent (25%) of the corporate stock is sold, transferred or assigned; (5) Trustor is a trust and there is a change in beneficial ownership with respect to more than twenty-five percent (25%) of the trust; (6) Trustor consists of several persons or entities holding fractional undivided interest in the Mortgaged Property and there is a cumulative change in ownership with respect to more than a twenty-five percent (25%) fractional undivided interest in the Mortgaged Property; or (7) Trustor breaches or fails to comply with any of the covenants and agreements contained in this Deed of Trust. In such case, Beneficiary or other holder of this Note may exercise any and all of the rights and remedies and recourses set forth in Article IV herein, and as granted by law. (b) In order to allow Beneficiary to determine whether enforcement of the foregoing provisions is desirable, Trustor agrees to notify Beneficiary promptly in writing of any transaction or event described in Clauses 1.08(a)(1) through (7) above. In addition to other damages and costs resulting from the breach by Trustor of its obligations under this subsection (b), Trustor acknowledges that failure to give such notice may damage Beneficiary in an amount equal to not less than the difference between the interest payable on the indebtedness specified herein, and the interest and loan fees which Beneficiary could obtain on said sum on the date that the event of acceleration occurred and was enforceable by Beneficiary under applicable law. Trustor shall pay to Beneficiary all damages Beneficiary sustains by reason of the breach of the covenant of notice set forth in this subsection (b) and the amount thereof shall be added to the principal of the Note and shall bear interest and shall be secured by this Deed of Trust. (c) Notwithstanding subsection 1.08(a) above, Trustor may from time to time replace items of personal property and fixtures constituting a part of the Mortgaged Property, provided that: (1) the replacements for such items of personal property or fixtures are of equivalent value and quality; and (2) Trustor has good and clear title to such replacement property free and clear of any and all liens, encumbrances, security interests, ownership interests, claims of title (contingent or otherwise), or charges of any kind, or the rights of any conditional sellers, vendors or any other third parties in or to such replacement property have been expressly subordinated at no cost to Beneficiary to the lien of the Deed of Trust in a manner satisfactory to Beneficiary; and (3) at the option of Beneficiary, Trustor provides at no cost to Beneficiary a satisfactory opinion of counsel to the effect that the Deed of Trust constitutes a valid and subsisting first lien on and security interest in such replacement property and is not subject to being subordinated or the priority thereof affected under any applicable law, including, but not limited, to the provisions of Section 9-313 of the California Uniform Commercial Code. 1.09 Preservation and Maintenance of Mortgaged Property. Trustor shall keep the Mortgaged Property and every part thereof in good condition and repair, and shall not permit or commit any waste, impairment, or deterioration of the Mortgaged Property, or commit, suffer or permit any act upon or use of the Mortgaged Property in violation of law or applicable order of any governmental authority, whether now existing or hereafter enacted and whether foreseen or unforeseen, or in violation of any covenants, conditions or restrictions affecting the Mortgaged Property, or bring or keep any article upon any of the Mortgaged Property or cause or permit any condition to exist thereon which would be prohibited by or could invalidate any insurance coverage maintained, or required hereunder to be maintained, by Trustor on or with respect to any part of the Mortgaged Property, and Trustor further shall do all other acts which from the character or use of the Mortgaged Property may be reasonably necessary to protect the Mortgaged Property. Trustor shall underpin and support, when necessary, any building, structure or other improvement situated on the Mortgaged Property and shall not remove or demolish any building on the Mortgaged Property. Trustor shall complete or restore and repair promptly and in a good workmanlike manner any building, structure or improvement which may be constructed, damaged or destroyed thereon and pay when due all claims for labor performed and materials furnished therefor, whether or not insurance or other proceeds are available to cover in whole or in part the costs of any such completion, restoration or repair; provided, however, that Trustor shall not demolish, remove, expand or extend any building, structure or improvement on the Mortgaged Property, nor construct, restore, add to or alter any such building, structure or improvement, nor consent to or permit any of the foregoing to be done, without in each case obtaining the prior written consent of Beneficiary thereto. If this Deed of Trust is on a condominium or a cooperative apartment or planned development project, Trustor shall perform all of Trustor's obligations under any applicable declaration of condominium or master deed, or any declaration of covenants, conditions and restrictions pertaining to any such project, or any by-laws or regulations of the project or owners' association or constituent documents. Trustor shall not drill or extract or enter into any lease for the drilling for or extraction of oil, gas or other hydrocarbon substances or any mineral of any kind or character on or from the Mortgaged Property or any part thereof without first obtaining Beneficiary's written consent. Unless required by applicable law or unless Beneficiary has otherwise first agreed in writing, Trustor shall not make or allow to be made any changes in the nature of the occupancy or use of the Mortgaged Property or any part thereof for which the Mortgaged Property or such part was intended at the time this Deed of Trust was delivered. 1.10 Financial Statements; Offset Certificates. (a) Trustor, without expense to Beneficiary, shall, upon receipt of written request from Beneficiary, furnish to Beneficiary (1) an annual statement of the operation of the Mortgaged Property prepared and certified by Trustor, showing in reasonable detail satisfactory to Beneficiary total rents received and total expenses together with an annual balance sheet and profits and loss statement, within one hundred twenty (120) days after the close of each fiscal year of Trustor, beginning with the fiscal year first ending after the date of delivery of this Deed of Trust, (2) within 30 days after the end of each calendar quarter (March 31, June 30, September 30, December 31) interim statements of the operation of the Mortgaged Property showing in reasonable detail satisfactory to Beneficiary total rents received and total expenses, for the previous quarter, certified by Trustor, and (3) copies of Trustor's annual state and federal income tax filing within thirty (30) days of filing. Trustor shall keep accurate books and records, and allow Beneficiary, its representatives and agents, upon demand, at any time during normal business hours, access to such books and records, including any supporting or related vouchers or papers, shall allow Beneficiary to make extracts or copies of any thereof, and shall furnish to Beneficiary and its agents convenient facilities for the audit of any such statements, books and records. (b) Trustor, within three (3) days upon request in person or within five (5) days upon request by mail, shall furnish a written statement duly acknowledged of all amounts due on any indebtedness secured hereby, whether for principal or interest on the Note or otherwise, and stating whether any offsets or defenses exist against the indebtedness secured by this Deed of Trust and covering such other matters with respect to any such indebtedness as Beneficiary may reasonably require. 1.11 Trustee's Costs and Expenses; Governmental Charges. Trustor shall pay all costs, fees and expenses of Trustee, its agents and counsel in connection with the performance of its duties under this Deed of Trust, including, without limitation, the cost of any trustee's sale guaranty or other title insurance coverage ordered in connection with any sale or foreclosure proceedings hereunder, and shall pay all taxes (except federal and state income taxes) or other governmental charges or impositions imposed by any governmental authority on Trustee or Beneficiary by reason of its interest in the Note, or any note evidencing a Future Advance, or this Deed of Trust. 1.12 Protection of Security; Costs and Expenses. Trustor agrees that, at any time and from time to time, it will execute and deliver all such further documents and do all such other acts and things as Beneficiary may reasonably request in writing in order to protect the security and priority of the lien created hereby. Trustor shall appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of the Beneficiary or Trustee, and shall pay all costs and expenses, including, without limitation, cost of evidence of title and reasonable attorneys' fees, in any such action or proceeding in which Beneficiary or Trustee may appear, and in any suit brought by Beneficiary to foreclose this Deed of Trust or to enforce or establish any other rights or remedies of Beneficiary hereunder. If Trustor fails to perform any of the covenants or agreements contained in this Deed of Trust, or if any action or proceeding is commenced which affects Beneficiary's interest in the Mortgaged Property or any part thereof, including, but not limited to, eminent domain, code enforcement, or proceedings of any nature whatsoever under any federal or state law, whether now existing or hereafter enacted or amended, relating to bankruptcy, insolvency, arrangement, reorganization or other form of debtor relief, or to a decedent, then Beneficiary or Trustee may, but without obligation to do so and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereunder, make such appearances, commence, defend or appear in any such action or proceeding affecting the Mortgaged Property, pay, contest or compromise any encumbrance, charge or lien which affects the Mortgaged Property, disburse such sums and take such action as Beneficiary or Trustee deems necessary or appropriate to protect Beneficiary's interest, including, but not limited to, disbursement of reasonable attorneys' fees, entry upon the Mortgaged Property to make repairs or take other action to protect the security hereof, and payment, purchase, contest or compromise of any encumbrance, charge or lien which in the judgment of either Beneficiary or Trustee appears to be prior or superior hereto. Trustor further agrees to pay all reasonable expenses of Beneficiary (including fees and disbursements of counsel) incident to the protection of the rights of Beneficiary hereunder, or to enforcement or collection of payment of the Note or any Future Advances, whether by judicial or nonjudicial proceedings, or in connection with any bankruptcy, insolvency, arrangement, reorganization or other debtor relief proceeding of Trustor, or otherwise. Any amounts disbursed by Beneficiary or Trustee pursuant to this Section 1.12 shall be additional indebtedness of Trustor secured by this Deed of Trust and each of the Related Agreements as of the date of disbursement and shall bear interest at the rate set forth in the Note. All such amounts shall be payable by Trustor immediately without demand. Nothing contained in this Section 1.12 shall be construed to require Beneficiary or Trustee to incur any expense, make any appearance, or take any other action. 1.13 Fixture Filing. This Deed of Trust constitutes a financing statement filed as a fixture filing in the Official Records of the County Recorder of the county in which the Mortgaged Property is located with respect to any and all fixtures included within the term "Mortgaged Property" as used herein and with respect to any goods or other personal property that may now be or hereafter become such fixtures. 1.14 Notify Lender of Default. Trustor shall notify Beneficiary in writing within five (5) days of the occurrence of any Event of Default or other event which, upon the giving of notice or the passage of time or both, would constitute an Event of Default. 1.15 Management of Mortgaged Property. Trustor shall manage the Mortgaged Property through its own personnel or a third party manager approved by Beneficiary, and shall not hire, retain or contract with any other third party for property management services without the prior written approval by Beneficiary of such party and the terms of its contract for management services; provided, however, Beneficiary shall not withhold approval of a new manager if the new manager has a reputation and experience in managing properties similar to the Mortgaged Property which are greater than or equal to the present experience and reputation of the current manager. 1.16 Miscellaneous. Trustor shall: (a) make or permit no termination or material amendment of any agreement between Trustor and a third party relating to the Mortgaged Property or the loan secured hereby (including, without limitation, the leases) (the "Third Party Agreements") without the prior written approval of Beneficiary, except amendments to leases permitted by Section 1.06 hereof, (b) perform Trustor's obligations under each Third Party Agreement, and (c) comply promptly with all governmental requirements relating to Trustor, the loan secured hereby and the Mortgaged Property. ARTICLE II REPRESENTATIONS AND WARRANTIES To induce the Beneficiary to make the loan secured hereby, Trustor represents and warrants to Beneficiary, in addition to any representations and warranties in the Note or any Related Agreements, that as of the date hereof and throughout the term of the loan secured hereby until the Note is paid in full and all obligations under this Deed of Trust are performed: 2.01 Power and Authority. Trustor is duly organized and validly existing, qualified to do business and in good standing in the State of California and has full power and due authority to execute, deliver and perform this Deed of Trust, the Note, and any Related Agreements in accordance with their terms. Such execution, delivery and performance has been duly authorized by all necessary trust action and approved by each required governmental authority or other party. 2.02 No Default or Violations. No Event of Default (as defined hereafter) or event which, with notice or passage of time or both, would constitute an Event of Default ("Unmatured Event of Default") has occurred and is continuing under this Deed of Trust, the Note, or any of the Related Agreements. Trustor is not in violation of any governmental requirement (including, without limitation, any applicable securities law) or in default under any agreement to which it is bound, or which affects it or any of its property, and the execution, delivery and performance of this Deed of Trust, the Note, or any of the Related Agreements in accordance with their terms and the use and occupancy of the Mortgaged Property will not violate any governmental requirement (including, without limitation, any applicable usury law), or conflict with, be inconsistent with or result in any default under, any of the provisions of any deed of trust, easement, restriction of record, contract, document, agreement or instrument of any kind to which any of the foregoing is bound or which affects it or any of its property, except as identified in writing and approved by Beneficiary. 2.03 No Limitation or Governmental Controls. There are no proceedings of any kind pending, or, to the knowledge of Trustor, threatened against or affecting Trustor, the Mortgaged Property (including any attempt or threat by any governmental authority to condemn or rezone all or any portion of the Mortgaged Property), any party constituting Trustor or any general partner in any such party, or involving the validity, enforceability or priority of this Deed of Trust, the Note or any of the Related Agreements or enjoining or preventing or threatening to enjoin or prevent the use and occupancy of the Mortgaged Property or the performance by Beneficiary of its obligations hereunder, and there are no rent controls, governmental moratoria or environment controls presently in existence, or, to the knowledge of Trustor, threatened or affecting the Mortgaged Property, except as identified in writing to, and approved by, Beneficiary. 2.04 Liens. Title to the Mortgaged Property, or any part thereof, is not subject to any liens, encumbrances or defects of any nature whatsoever, whether or not of record, and whether or not customarily shown on title insurance policies, except as identified in writing and approved by Beneficiary. 2.05 Financial and Operating Statements. All financial and operating statements submitted to Beneficiary in connection with this loan secured hereby are true and correct in all respects, have been prepared in accordance with generally accepted accounting principles (applied, in the case of any unaudited statement, on a basis consistent with that of the preceding fiscal year) and fairly present the respective financial conditions of the subjects thereof and the results of their operations as of the respective dates shown thereon. No materially adverse changes have occurred in the financial conditions and operations reflected therein since their respective dates, and no additional borrowings have been made since the date thereof other than the borrowing made under this Deed of Trust and any other borrowing approved in writing by Beneficiary. 2.06 Other Statements to Beneficiary. Neither this Deed of Trust, the Note, any Related Agreement, nor any document, agreement, report, schedule, notice or other writing furnished to the Beneficiary by or on behalf of any party constituting Trustor, or any general partner of any such party, contains any omission or misleading or untrue statement of any fact material to any of the foregoing. 2.07 Third Party Agreements. Each Third Party Agreement is unmodified and in full force and effect and free from default on the part of each party thereto, and all conditions required to be (or which by their nature can be) satisfied by any party to date have been satisfied. Trustor has not done or said or omitted to do or say anything which would give to any obligor on any Third Party Agreement any basis for any claims against Beneficiary or any counterclaim to any claim which might be made by Beneficiary against such obligor on the basis of any Third Party Agreement. ARTICLE III EVENTS OF DEFAULT Each of the following shall constitute an event of default ("Event of Default") hereunder: 3.01 Failure to make any payment of principal or interest on the Note or any Future Advance, when and as the same shall become due and payable, whether at maturity or by acceleration or as part of any prepayment or otherwise, or default in the performance of any of the covenants or agreements of Trustor contained herein, or default in the performance of any of the covenants or agreements of Trustor contained in the Note, or in any note evidencing a Future Advance, or in any of the Related Agreements, after the expiration of the period of time, if any, permitted for cure of such default thereunder. 3.02 The appointment, pursuant to an order of a court of competent jurisdiction, of a trustee, receiver or liquidator of the Mortgaged Property or any part thereof, or of Trustor, or any termination or voluntary suspension of the transaction of business of Trustor, or any attachment, execution or other judicial seizure of all or any substantial portion of Trustor's assets which attachment, execution or seizure is not discharged within thirty (30) days. 3.03 Trustor, any trustee of Trustor, any general partner of Trustor, or any trustee of a general partner of Trustor (each of which shall constitute "Trustor" for purposes of this Section 3.03 and Sections 3.04 and 3.05 below) shall file a voluntary case under any applicable bankruptcy, insolvency, debtor relief, or other similar law now or hereafter in effect, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or similar official) of the Trustor or for any part of the Mortgaged Property or any substantial part of Trustor's property, or shall make any general assignment for the benefit of Trustor's creditors, or shall fail generally to pay Trustor's debts as they become due or shall take any action in furtherance of any of the foregoing. 3.04 A court having jurisdiction shall enter a decree or order for relief in respect of the Trustor, in any involuntary case brought under any bankruptcy, insolvency, debtor relief, or similar law now or hereafter in effect, or Trustor shall consent to or shall fail to oppose any such proceeding, or any such court shall enter a decree or order appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Trustor or for any part of the Mortgaged Property or any substantial part of the Trustor's property, or ordering the winding up or liquidation of the affairs of the Trustor, and such decree or order shall not be dismissed within sixty (60) days after the entry thereof. 3.05 Default under the terms of any agreement of guaranty relating to the indebtedness evidenced by the Note or relating to any Future Advance, or the occurrence of any of the events enumerated in Sections 3.02, 3.03 or 3.04 with regard to any guarantor of the Note or any Future Advance, or the revocation, limitation or termination of the obligations of any guarantor of the Note or any Future Advance, except in accordance with the express written terms of the instrument of guaranty. 3.06 The occurrence of any event or transaction described in subsection 1.08(a) above without the prior written consent of Beneficiary. 3.07 Without the prior written consent of Beneficiary in each case, (a) the dissolution or termination of existence of Trustor, voluntarily or involuntarily; (b) the amendment or modification in any respect of Trustor's agreement of partnership or its partnership resolutions relating to this transaction; or (c) the distribution of any of the Trustor's capital, except for distribution of the proceeds of the loan secured hereby and cash from operations; as used herein, cash from operations shall mean any cash of the Trustor earned from operation of the Mortgaged Property, but not from a sale or refinancing of the Mortgaged Property or from borrowing, available after paying all ordinary and necessary current expenses of the Trustor, including expenses incurred in the maintenance of the Mortgaged Property, and after establishing reserves to meet current or reasonably expected obligations of the Trustor. 3.08 The imposition of a tax, other than a state or federal income tax, on or payable by Trustee or Beneficiary by reason of its ownership of the Note, or its ownership of any note evidencing a Future Advance, or this Deed of Trust, and Trustor not promptly paying said tax, or it being illegal for Trustor to pay said tax. 3.09 Any representation, warranty, or disclosure made to Beneficiary by Trustor or any guarantor of any indebtedness secured hereby in connection with or as an inducement to the making of the loan evidenced by the Note or in connection with or as an inducement to the making of any Future Advance, or this Deed of Trust (including, without limitation, the representations and warranties contained in Article II of this Deed of Trust), or any of the Related Agreements, proving to be false or misleading in any material respect as of the time the same was made, whether or not any such representation or disclosure appears as part of this Deed of Trust. 3.10 Any other event occurring which, under this Deed of Trust, or under the Note or any note evidencing a Future Advance, or under any of the Related Agreements constitutes a default by Trustor hereunder or thereunder or gives Beneficiary the right to accelerate the maturity of the indebtedness, or any part thereof, secured hereby. ARTICLE IV REMEDIES Upon the occurrence of any Event of Default, Trustee and Beneficiary shall have the following rights and remedies: 4.01 Acceleration. Beneficiary may declare the entire principal amount of the Note and/or any Future Advances then outstanding (if not then due and payable), and accrued and unpaid interest thereon, and all other sums or payments required thereunder, to be due and payable immediately, and notwithstanding the stated maturity in the Note, or any note evidencing any Future Advance, the principal amount of the Note and/or any Future Advance and the accrued and unpaid interest thereon and all other sums or payments required thereunder shall thereupon become and be immediately due and payable. 4.02 Entry. Irrespective of whether Beneficiary exercises the option provided in Section 4.01 above, Beneficiary in person or by agent or by court-appointed receiver may enter upon, take possession of, manage and operate the Mortgaged Property or any part thereof and do all things necessary or appropriate in Beneficiary's sole discretion in connection therewith, including, without limitation, making and enforcing, and if the same be subject to modification or cancellation, modifying or canceling leases upon such terms or conditions as Beneficiary deems proper, obtaining and evicting tenants, and fixing or modifying rents, contracting for and making repairs and alterations, and doing any and all other acts which Beneficiary deems proper to protect the security hereof; and either with or without so taking possession, in its own name or in the name of Trustor, sue for or otherwise collect and receive the Rents and Profits, including those past due and unpaid, and apply the same less costs and expenses of operation and collection, including reasonable attorneys' fees, upon any indebtedness secured hereby, and in such order as Beneficiary may determine. Upon request of Beneficiary, Trustor shall assemble and make available to Beneficiary at the site of the real property covered hereby any of the Mortgaged Property which has been removed therefrom. The entering upon and taking possession of the Mortgaged Property, or any part thereof, and the collection of any Rents and Profits and the application thereof as aforesaid shall not cure or waive any default theretofore or thereafter occurring or affect any notice or default hereunder or invalidate any act done pursuant to any such default or notice, and, notwithstanding continuance in possession of the Mortgaged Property or any part thereof by Beneficiary, Trustor or a receiver, and the collection, receipt and application of the Rents and Profits, Beneficiary shall be entitled to exercise every right provided for in this Deed of Trust or by law or in equity upon or after the occurrence of a default, including, without limitation, the right to exercise the power of sale. Any of the actions referred to in this Section 4.02 may be taken by Beneficiary irrespective of whether any notice of default or election to sell has been given hereunder and without regard to the adequacy of the security for the indebtedness hereby secured. 4.03 Judicial Action. Beneficiary may bring an action in any court of competent jurisdiction to foreclose this instrument or to enforce any of the covenants and agreements hereof. 4.04 Power of Sale. Beneficiary may elect to cause the Mortgaged Property or any part thereof to be sold under the power of sale herein granted in any manner permitted by applicable law. In connection with any sale or sales hereunder, Beneficiary may elect to treat any of the Mortgaged Property which consists of a right in action or which is property that can be severed from the real property covered hereby or any improvements thereon without causing structural damage thereto as if the same were personal property, and dispose of the same in accordance with applicable law, separate and apart from the sale of real property. Sales hereunder of any personal property only shall be conducted in any manner permitted by the California Uniform Commercial Code. Where the Mortgaged Property consists of real property and personal property located on or within the real property, Beneficiary may elect in its discretion to dispose of both the real and personal property together in one sale pursuant to real property law as permitted by Section 9-501(4) of the California Uniform Commercial Code. Should Beneficiary elect to sell the Mortgaged Property, or any part thereof, which is real property or which Beneficiary has elected to treat as real property as provided above, Beneficiary or Trustee shall give such notice of default and election to sell as may then be required by law. Thereafter, upon the expiration of such time and the giving of such notice of sale as may then be required by law, and without the necessity of any demand on Trustor, Trustee, at the time and place specified in the notice of sale, shall sell said real property or part thereof at public auction to the highest bidder for cash in lawful money of the United States. Trustee may, and upon request of Beneficiary shall, from time to time, postpone any sale hereunder by public announcement thereof at the time and place noticed therefor. If the Mortgaged Property consists of several lots, parcels or items of property, Beneficiary may: (a) designate the order in which such lots, parcels or items shall be offered for sale or sold, or (b) elect to sell such lots, parcels or items through a single sale, or through two or more successive sales, or in any other manner Beneficiary deems in its best interest. Any person, including Trustor, Trustee or Beneficiary, may purchase at any sale hereunder, and Beneficiary shall have the right to purchase at any sale hereunder by crediting upon the bid price the amount of all or any part of the indebtedness hereby secured. Should Beneficiary desire that more than one sale or other disposition of the Mortgaged Property be conducted, Beneficiary may, at its option, cause the same to be conducted simultaneously, or successively, on the same day, or at such different days or times and in such order as Beneficiary may deem to be in its best interests, and no such sale shall terminate or otherwise affect the lien of this Deed of Trust on any part of the Mortgaged Property not sold until all indebtedness secured hereby has been fully paid. In the event Beneficiary elects to dispose of the Mortgaged Property through more than one sale, Trustor agrees to pay the costs and expenses of each such sale and of any judicial proceedings wherein the same may be made, including reasonable compensation to Trustee and Beneficiary, their agents and counsel, and to pay all expenses, liabilities and advances made or incurred by Trustee in connection with such sale or sales, together with interest on all such advances made by Trustee at the lower of the rate set forth in the Note, or the maximum rate permitted by law to be charged by Trustee. Upon any sale hereunder, Trustee shall execute and deliver to the purchaser or purchasers a deed or deeds conveying the property so sold, but without any covenant or warranty whatsoever, express or implied, whereupon such purchaser or purchasers shall be let into immediate possession; and the recitals in any such deed or deeds of facts, such as default, the giving of notice of default and notice of sale, and other facts affecting the regularity or validity of such sale or disposition, shall be conclusive proof of the truth of such facts and any such deed or deeds shall be conclusive against all persons as to such facts recited therein. 4.05 Environmental Default and Remedies. In the event that any portion of the Mortgaged Property is determined to be "environmentally impaired" (as "environmentally impaired" is defined in California Code of Civil Procedure Section 726.5(e)(3)) or to be an "affected parcel" (as "affected parcel" is defined in California Code of Civil Procedure Section 726.5(e)(1)), then, without otherwise limiting or in any way affecting Beneficiary's or Trustee's rights and remedies under this Deed of Trust, Beneficiary may elect to exercise its right under California Code of Civil Procedure Section 726.5(a) to (1) waive its lien on such environmentally impaired or affected portion of the Mortgaged Property and (2) exercise (i) the rights and remedies of an unsecured creditor, including reduction of its claim against Trustor to judgment, and (ii) any other rights and remedies permitted by law. For purposes of determining Beneficiary's right to proceed as an unsecured creditor under California Code of Civil Procedure Section 726.5(a), Trustor shall be deemed to have willfully permitted or acquiesced in a release or threatened release of hazardous materials, within the meaning of California Code of Civil Procedure Section 726.5(d)(1), if the release or threatened release of hazardous materials was knowingly or negligently caused or contributed to by any lessee, occupant or user of any portion of the Mortgaged Property and Trustor knew or should have known of the activity by such lessee, occupant or user which caused or contributed to the release or threatened release. All costs and expenses, including, but not limited to, attorneys' fees, incurred by Beneficiary in connection with any action commenced under this Section 4.05, including any action required by California Code of Civil Procedure Section 726.5(b) to determine the degree to which the Mortgaged Property is environmentally impaired, plus interest thereon at the rate specified in Paragraph 2(b) of the Note, shall be added to the indebtedness secured by this Deed of Trust and shall be due and payable to Beneficiary upon its demand made at any time following the conclusion of such action. 4.06 Proceeds of Sale. The proceeds of any sale made under or by virtue of this Article IV, together with all other sums which then may be held by Trustee or Beneficiary under this Deed of Trust, whether under the provisions of this Article IV or otherwise, shall be applied as follows: FIRST: To the payment of costs and expenses of sale and of any judicial proceedings wherein the same may be made, including reasonable compensation to Trustee and Beneficiary, their agents and counsel, and to the payment of all expenses, liabilities and advances made or incurred by Trustee under this Deed of Trust, together with interest on all advances made by Trustee at the lower of the interest rate set forth in the Note or the maximum rate permitted by law to be charged by Trustee. SECOND: To the payment of any and all sums expended by Beneficiary under the terms of this Deed of Trust, not then repaid, with accrued interest at the rate set forth in the Note, and all other sums (except advances of principal and interest thereon) required to be paid by Trustor pursuant to any provisions of this Deed of Trust, or the Note, or any note evidencing any Future Advance, or any of the Related Agreements, including but not limited to all expenses, liabilities and advances made or incurred by Beneficiary under this Deed of Trust or in connection with the enforcement thereof, together with interest thereon as herein provided except for any amounts incurred under or as a result of the Environmental Agreement. THIRD: To the payment of the entire amount then due, owing or unpaid for principal and interest upon the Note and any notes evidencing any Future Advances, with interest on the unpaid principal at the rate set forth therein from the date of advancement thereof until the same is paid in full. FOURTH: To the payment of any and all expenses, liabilities and advances made or incurred by Beneficiary under this Deed of Trust or otherwise in connection with the Environmental Agreement or in connection with the enforcement thereof, together with interest thereon as herein provided. FIFTH: The remainder, if any, to the person or persons legally entitled thereto. 4.07 Waiver of Marshalling. Trustor, for itself and for all persons hereafter claiming through or under it or who may at any time hereafter become holders of liens junior to the lien of this Deed of Trust, hereby expressly waives and releases all rights to direct the order in which any of the Mortgaged Property shall be sold in the event of any sale or sales pursuant hereto and to have any of the Mortgaged Property and/or any other property now or hereafter constituting security for any of the indebtedness secured by this Deed of Trust marshalled upon any foreclosure of this Deed of Trust or of any other security for any of said indebtedness. 4.08 Remedies Cumulative. No remedy herein conferred upon or reserved to Trustee or Beneficiary is intended to be exclusive of any other remedy herein or by law provided, but each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. No delay or omission of Trustee or Beneficiary to exercise any right or power accruing upon any Event of Default shall impair any right or power or shall be construed to be a waiver of any Event of Default or any acquiescence therein; and every power and remedy given by this Deed of Trust to Trustee or Beneficiary may be exercised from time to time as often as may be deemed expedient by Trustee or Beneficiary. If there exists additional security for the performance of the obligations secured hereby, the holder of the Note, at its sole option, and without limiting or affecting any of its rights or remedies hereunder, may exercise any of the rights and remedies to which it may be entitled hereunder either concurrently with whatever rights and remedies it may have in connection with such other security or in such order as it may determine. Any application of any amounts or any portion thereof held by Beneficiary at any time as additional security hereunder, whether pursuant to Section 1.03 or Section 1.05 hereof or otherwise, to any indebtedness secured hereby shall not extend or postpone the due dates of any payments due from Trustor to Beneficiary hereunder or under the Note, any Future Advances or any of the Related Agreements, or change the amounts of any such payments or otherwise be construed to cure or waive any default or notice of default hereunder or invalidate any act done pursuant to any such default or notice. ARTICLE V MISCELLANEOUS 5.01 Severability. In the event any one or more of the provisions contained in this Deed of Trust shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Deed of Trust, but this Deed of Trust shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 5.02 Certain Charges. Trustor agrees to pay Beneficiary for each statement of Beneficiary as to the obligations secured hereby, furnished at Trustor's request, the maximum fee allowed by law, or if there be no maximum fee, then such reasonable fee as is charged by Beneficiary as of the time said statement is furnished. Trustor further agrees to pay the charges of Beneficiary for any other service rendered Trustor, or on its behalf, connected with this Deed of Trust or the indebtedness secured hereby, including, without limitation, the delivery to an escrow holder of a request for full or partial reconveyance of this Deed of Trust, transmitting to an escrow holder moneys secured hereby, changing its records pertaining to this Deed of Trust and indebtedness secured hereby to show a new owner of the Mortgaged Property, and replacing an existing policy of insurance held hereunder with another such policy. 5.03 Notices. All notices expressly provided hereunder to be given by Beneficiary to Trustor and all notices and demands of any kind or nature whatsoever which Trustor may be required or may desire to give to or serve on Beneficiary shall be in writing and shall be served in person or by first class or certified mail. Any such notice or demand so served by first class or certified mail shall be deposited in the United States mail, with postage thereon fully prepaid and addressed to the party so to be served at its address above stated or at such other address of which said party shall have theretofore notified in writing, as provided above, the party giving such notice. Service of any such notice or demand so made shall be deemed effective on the day of actual delivery as shown by the addressee's return receipt or the expiration of three business days after the date of mailing, whichever is the earlier in time, except that service of any notice of default or notice of sale provided or required by law shall, if mailed, be deemed effective on the date of mailing. 5.04 Trustor Not Released. Extension of the time for payment or modification of the terms of payment of any sums secured by this Deed of Trust granted by Beneficiary to any successor in interest of Trustor shall not operate to release, in any manner, the liability of the original Trustor. Beneficiary shall not be required to commence proceedings against such successor or refuse to extend time for payment or otherwise modify the terms of payment of the sums secured by the Deed of Trust by reason of any demand made by the original Trustor. Without affecting the liability of any person, including Trustor, for the payment of any indebtedness secured hereby, or the lien of this Deed of Trust on the remainder of the Mortgaged Property for the full amount of any such indebtedness and liability unpaid, Beneficiary and Trustee are respectively empowered as follows: Beneficiary may from time to time and without notice (a) release any person liable for the payment of any of the indebtedness, (b) extend the time or otherwise alter the terms of payment of any of the indebtedness, (c) accept additional real or personal property of any kind as security therefor, whether evidenced by deeds of trust, mortgages, security agreement or any other instruments of security, or (d) alter, substitute or release any property securing the indebtedness; Trustee may, at any time, and from time to time, upon the written request of Beneficiary, which Beneficiary may withhold in its sole discretion (1) consent to the making of any map or plat of the Mortgaged Property or any part thereof, (2) join in granting any easement or creating any restriction thereon, (3) join in any subordination or other agreement affecting this Deed of Trust or the lien or charge hereof, or (4) reconvey, without any warranty, all or part of the Mortgaged Property. 5.05 Inspection. Beneficiary may at any reasonable time or times make or cause to be made entry upon and inspection of the Mortgaged Property or any part thereof in person or by agent. 5.06 Reconveyance. Upon the payment in full of all sums secured by this Deed of Trust, Beneficiary shall request Trustee to reconvey the Mortgaged Property and shall surrender this Deed of Trust and all notes evidencing indebtedness secured by this Deed of Trust to Trustee. Upon payment of its fees and any other sums owing to it under this Deed of Trust, Trustee shall reconvey the Mortgaged Property without warranty to the person or persons legally entitled thereto. Trustor shall pay all costs of recordation, if any. The recitals in such conveyance of any matters of facts shall be conclusive proof of the truthfulness thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto." Five years after issuance of such full reconveyance, Trustee may destroy said notes and this Deed of Trust unless otherwise directed by Beneficiary. 5.07 Statute of Limitations. The pleading of any statute of limitations as a defense to any and all obligations secured by this Deed of Trust is hereby waived to the fullest extent permitted by law. 5.08 Interpretation. Wherever used in this Deed of Trust, unless the context otherwise indicates a contrary intent, or unless otherwise specifically provided herein, the word "Trustor" shall mean and include both Trustor and any subsequent owner or owners of the Mortgaged Property, and the word "Beneficiary" shall mean and include not only the original Beneficiary hereunder but also any future owner and holder, including pledgees, of the Note secured hereby. In this Deed of Trust whenever the context so requires, the masculine gender includes the feminine and/or neuter, and the neuter includes the feminine and/or masculine, and the singular number includes the plural and conversely. In this Deed of Trust, the use of the word "including" shall not be deemed to limit the generality of the term or clause to which it has reference, whether or not nonlimiting language (such as "without limitation," or "but not limited to," or words of similar import) is used with reference thereto, but rather shall be deemed to include any word which could reasonably fall within the broadest possible scope of such general statement, term or matter. The captions and headings of the Articles and Sections of this Deed of Trust are for convenience only and are not to be used to interpret, define or limit the provisions of this Deed of Trust. 5.09 Consent; Delegation to Sub-Agents. The granting or withholding of consent by Beneficiary to any transaction as required by the terms hereof shall not be deemed a waiver of the right to require consent to future or successive transactions. Wherever a power of attorney is conferred upon Beneficiary hereunder, it is understood and agreed that such power is conferred with full power of substitution, and Beneficiary may elect in its sole discretion to exercise such power itself or to delegate such power, or any part thereof, to one or more sub-agents. 5.10 Successors and Assigns. All of the grants, obligations, covenants, agreements, terms, provisions and conditions herein shall run with the land and shall apply to, bind and inure to the benefit of, the heirs, administrators, executors, legal representatives, successors and assigns of Trustor and the successors in trust of Trustee and the endorsees, transferees, successors and assigns of Beneficiary. In the event Trustor is composed of more than one party, the obligations, covenants, agreements, and warranties contained herein as well as the obligations arising therefrom are and shall be joint and several as to each such party. 5.11 Governing Law. The loan secured by this Deed of Trust is made pursuant to, and shall be construed and governed by, the laws of the United States of America and the rules and regulations promulgated thereunder, including the federal laws, rules and regulations for federal savings and loan associations. 5.12 Substitution of Trustee. Beneficiary may remove Trustee at any time or from time to time and appoint a successor trustee, and upon such appointment, all powers, rights, duties and authority of Trustee, as aforesaid, shall thereupon become vested in such successor. Such substitute trustee shall be appointed by written instrument duly recorded in the county or counties where the real property covered hereby is located, which appointment may be executed by any authorized agent of Beneficiary or in any other manner permitted by applicable law. 5.13 No Waiver. No failure or delay by Beneficiary in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No waiver, consent or approval of any kind by Beneficiary shall be effective unless contained in writing signed and delivered by Beneficiary. No notice to or demand on Trustor in any case shall entitle Trustor to any other notice or demand in similar or other circumstances, nor shall such notice or demand constitute a waiver of the rights of Beneficiary to any other or further actions. 5.14 Beneficiary Not Partner of Trustor; Trustor to Indemnify Beneficiary. The exercise by Beneficiary of any of its rights, privileges or remedies conferred hereunder or under the Note or any other Related Agreements or under applicable law, shall not be deemed to render Beneficiary a partner or a coventurer with the Trustor or with any other person. Any and all of such actions will be exercised by Beneficiary solely in furtherance of its role as a secured lender advancing funds for use by the Trustor as provided in this Deed of Trust. Trustor shall indemnify Beneficiary against any claim by any third party for any injury, damage or liability of any kind arising out of any failure of Trustor to perform its obligations in this transaction, shall notify Beneficiary of any lawsuit based on such claim, and at Beneficiary's election, shall defend Beneficiary therein at Trustor's own expense by counsel satisfactory to Beneficiary or shall pay the Beneficiary's cost and attorneys' fees if Beneficiary chooses to defend itself on any such claim. 5.15 Time of Essence. Time is declared to be of the essence in this Deed of Trust, the Note and any Related Agreements and of every part hereof and thereof. 5.16 Entire Agreement. Once the Note, this Deed of Trust, and all of the other Related Agreements, if any, have been executed, all of the foregoing constitutes the entire agreement between the parties hereto and none of the foregoing may be modified or amended in any manner other than by supplemental written agreement executed by the parties hereto; provided, however, that all written and oral representations of Trustor, and of any partner, principal or agent of Trustor, previously made to Beneficiary shall be deemed to have been made to induce Beneficiary to make the loan secured hereby and to enter into the transaction evidenced hereby and by the Note and the Related Agreements, and shall survive the execution hereof and the closing pursuant hereto. This Deed of Trust cannot be changed or modified except by written agreement signed by both Trustor and Beneficiary. 5.17 No Third Party Benefits. This Deed of Trust, the Note and the other Related Agreements, if any, are made for the sole benefit of Trustor and Beneficiary and their successors and assigns, and convey no other legal interest to any party under or by reason of any of the foregoing. Whether or not Beneficiary elects to employ any or all of the rights, powers or remedies available to it under any of the foregoing, Beneficiary shall have no obligation or liability of any kind to any third party by reason of any of the foregoing or any of Beneficiary's actions or omissions pursuant thereto or otherwise in connection with this transaction. REQUEST FOR NOTICES Trustor hereby requests that a copy of any Notice of Default and Notice of Sale as may be required by law be mailed to Trustor at its address above stated. IN WITNESS WHEREOF, Trustor has executed this Deed of Trust as of the day and year first hereinabove written. TRUSTOR: _________________________________ _________________________________ EXHIBIT A DESCRIPTION OF THE PROPERTY STATE OF CALIFORNIA COUNTY OF ______________________) On __________________, 19___ before me, ___________________________, a Notary Public in and for said State, personally appeared______________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ___________________________________ (Signature) (SEAL) STATE OF CALIFORNIA COUNTY OF ___________________________) On __________________, 19___ before me, ______________________, a Notary Public in and for said State, personally appeared_______________ _______________________________________________personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ___________________________________ (Signature) (SEAL)~ EX-10.4(B) 16 DEED OF TRUST TO ACCOMPANY EX 10.3 (B) & (C) Exhibit 10.4(b) RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: Redwood Mortgage 650 El Camino Real, Suite G Redwood City, California 94063-1394 Attn: Michael Burwell LOAN NO.: DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND FIXTURE FILING THIS DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND FIXTURE FILING (this "Deed of Trust") is made as of _______, 19___, by ______________________________ __________________, the owner of the property described hereinbelow, whose address is _____________________________________________________________ (herein "Trustor"), to GYMNO CORPORATION, a California corporation, whose address is 650 El Camino Real, Suite G Redwood City, California 94063-1394, (herein "Trustee"), in favor of ___________________________________________________________________ whose address is 650 El Camino Real, Suite G, Redwood City, California 94063-1394 (herein "Beneficiary"). Trustor, in consideration of the loan described below, irrevocably grants, conveys, transfers and assigns to Trustee, its successors and assigns, in trust, with power of sale and right of entry and possession, all of Trustor's estate, right, title and interest in and to that certain real property located in the City of ________________, County of _______________, State of California, more particularly described in Exhibit A attached hereto and incorporated herein by this reference; TOGETHER WITH all structures and improvements now existing or hereafter erected on the aforesaid real property, all easements, rights and appurtenances thereto or used in connection therewith, all rents, royalties, issues, profits, revenues, income and other benefits thereof or arising from the use or enjoyment of all or any portion thereof (subject to the rights given below to Trustor to collect and apply such rents, royalties, issues, profits, revenues, income and other benefits), all interests in and rights, royalties and profits in connection with all minerals, oil and gas and other hydrocarbon substances thereon or therein, development rights or credits, air rights, water, water rights (whether riparian, appropriative or otherwise, and whether or not appurtenant) and water stock, all intangible property and rights relating to the aforesaid real property or the operation thereof, or used in connection therewith, including, without limitation, tradenames and trademarks, all fixtures, machinery, equipment, building materials, appliances and goods of every nature whatsoever (herein collectively called "equipment" and other "personal property") now or hereafter located in, or on, attached or affixed to, or used or intended to be used in connection with, the aforesaid real property, including, but without limitation, all heating, lighting, laundry, incinerating, gas, electric and power equipment, engines, pipes, pumps, tanks, motors, conduits, switchboards, plumbing, lifting, cleaning, fire prevention, fire extinguishing, refrigerating, ventilating and communications apparatus, air cooling and air conditioning apparatus, elevators and escalators and related machinery and equipment, pool and pool operation and maintenance equipment and apparatus, shades, awnings, blinds, curtains, drapes, attached floor coverings, including rugs and carpeting, television, radio and music cable antennae and systems, screens, storm doors and windows, stoves, refrigerators, dishwashers and other installed appliances, attached cabinets, partitions, ducts and compressors, and trees, plants and other items of landscaping (except that the foregoing equipment and other personal property covered hereby shall not include machinery, apparatus, equipment, fittings and articles of personal property used in the business of Trustor (commonly referred to as "trade fixtures") whether the same are annexed to said real property or not, unless the same are also used in the operation of any building or other improvement located thereon or unless the same cannot be removed without materially damaging said real property or any such building or other improvement, all of which, including replacements and additions thereto, shall, to the fullest extent permitted by law and for the purposes of this Deed of Trust, be deemed to be part and parcel of, and appropriated to the use of, said real property and, whether affixed or annexed thereto or not, be deemed conclusively to be real property and conveyed by this Deed of Trust, and all proceeds and products of any and all thereof, and Trustor agrees to execute and deliver, from time to time, such further instruments and documents as may be required by Beneficiary to confirm the lien of this Deed of Trust on any of the foregoing; all of the foregoing property referred to in this section, together with said described real property, are herein referred to as the "Mortgaged Property"; FOR THE PURPOSE OF SECURING, in such order of priority as Beneficiary may elect: (a) The repayment of the indebtedness evidenced by Trustor's promissory note of even date herewith payable to the order of Beneficiary in the original principal sum of ____________________ ($_____________), with interest thereon, as provided therein, and all prepayment charges, late charges and loan fees required thereunder, and all extensions, renewals, modifications, amendments and replacements thereof (herein "Note"); (b) The payment of all other sums which may be advanced by or otherwise be due to Trustee or Beneficiary under any provision of this Deed of Trust or under any other instrument or document referred to in subsection (c) below, with interest thereon at the rate provided herein or therein; (c) The performance of each and every of the covenants and agreements of Trustor contained (1) herein, in the Note, and in any note evidencing a Future Advance (as hereinafter defined), (2) in the Environmental Agreement and Indemnity executed by Trustor concurrently herewith, and in any and all pledge agreements, supplemental agreements, assignments and all instruments of indebtedness or security now or hereafter executed by Trustor in connection with any indebtedness referred to in subsection (a) above or subsection (d) below or for the purpose of supplementing or amending this Deed of Trust or any instrument secured hereby (all of the foregoing in this Clause (2), as the same may be amended, modified or supplemented from time to time, being referred to hereinafter as "Related Agreements"); and (d) The repayment of any other loans or advances, with interest thereon, hereafter made to Trustor (or any successor in interest to Trustor as the owner of the Mortgaged Property or any part thereof) by Beneficiary when the promissory note evidencing the loan or advance specifically states that said note is secured by this Deed of Trust, together with all extensions, renewals, modifications, amendments and replacements thereof (herein "Future Advance"). ARTICLE I COVENANTS OF TRUSTOR To protect the security of this Deed of Trust, Trustor covenants and agrees as follows: 1.01 Performance of Obligations Secured. Trustor shall promptly pay when due the principal of and interest on the indebtedness evidenced by the Note, the principal of and interest on any Future Advances, and any prepayment, late charges and loan fees provided for in the Note or in any note evidencing a Future Advance or provided for herein, and shall further perform fully and in a timely manner all other obligations of Trustor contained herein or in the Note or in any note evidencing a Future Advance or in any of the Related Agreements. All sums payable by Trustor hereunder shall be paid without demand, counterclaim, offset, deduction or defense and Trustor waives all rights now or hereinafter conferred by statute or otherwise to any such demand, counterclaim, offset, deduction or defense. 1.02 Insurance. Trustor shall keep the Mortgaged Property insured with an all-risk policy insuring against loss or damage by fire with extended coverage and against any other risks or hazards which, in the opinion of Beneficiary, should be insured against, in an amount not less than 100% of the full insurable value thereof on a replacement cost basis, with an inflation guard endorsement, with a company or companies and in such form and with such endorsements as may be approved or required by Beneficiary, including, if applicable, boiler explosion coverage and sprinkler leakage coverage. All losses under said insurance and any other insurance obtained by Trustor with respect to the Property whether or not required by Beneficiary shall be payable to Beneficiary and shall be applied in the manner provided in Section 1.03 hereof. Trustor shall also carry comprehensive general public liability insurance and twelve (12) months' rent loss insurance in such form and amounts and with such companies as are satisfactory to Beneficiary. Trustor shall also carry insurance against flood if required by the Federal Flood Disaster Protection Act of 1973 and regulations issued thereunder. All hazard, flood and rent loss insurance policies shall be endorsed with a standard noncontributory mortgagee clause in favor of and in form acceptable to Beneficiary, and may be canceled or modified only upon not less than ten (10) days' prior written notice to Beneficiary. All of the above-mentioned insurance policies or certificates of such insurance satisfactory to Beneficiary, together with receipts for the payment of premiums thereon, shall be delivered to and held by Beneficiary, which delivery shall constitute assignment to Beneficiary of all return premiums to be held as additional security hereunder. All renewal and replacement policies shall be delivered to Beneficiary at least thirty (30) days before the expiration of the expiring policies. Beneficiary shall not by the fact of approving, disapproving, accepting, preventing, obtaining or failing to obtain any insurance, incur any liability for or with respect to the amount of insurance carried, the form or legal sufficiency of insurance contracts, solvency of insurance companies, or payment or defense of lawsuits, and Trustor hereby expressly assumes full responsibility therefor and all liability, if any, with respect thereto. 1.03 Condemnation and Insurance Proceeds. (a) The proceeds of any award or claim for damages, direct or consequential, in connection with any condemnation or other taking of or damage or injury to the Mortgaged Property, or any part thereof, or for conveyance in lieu of condemnation, are hereby assigned to and shall be paid to Beneficiary. In addition, all causes of action, whether accrued before or after the date of this Deed of Trust, of all types for damages or injury to the Mortgaged Property or any part thereof, or in connection with any transaction financed by funds loaned to Trustor by Beneficiary and secured hereby, or in connection with or affecting the Mortgaged Property or any part thereof, including, without limitation, causes of action arising in tort or contract and causes of action for fraud or concealment of a material fact, are hereby assigned to Beneficiary as additional security, and the proceeds thereof shall be paid to Beneficiary. Beneficiary may at its option appear in and prosecute in its own name any action or proceeding to enforce any such cause of action and may make any compromise or settlement thereof. Trustor, immediately upon obtaining knowledge of any casualty damage to the Mortgaged Property or damage in any other manner in excess of $25,000.00 or knowledge of the institution of any proceedings relating to condemnation or other taking of or damage or injury to the Mortgaged Property or any portion thereof, will immediately notify Beneficiary in writing. Beneficiary, in its sole discretion, may participate in any such proceedings and may join Trustor in adjusting any loss covered by insurance. (b) All compensation, awards, proceeds, damages, claims, insurance recoveries, rights of action and payments which Trustor may receive or to which Trustor may become entitled with respect to the Mortgaged Property in the event of any damage or injury to or a partial condemnation or other partial taking of the Mortgaged Property shall be paid over to Beneficiary and shall be applied first toward reimbursement of all costs and expenses of Beneficiary in connection with recovery of the same, and then shall be applied, as follows: (1) Beneficiary shall consent to the application of such payments to the restoration of the Mortgaged Property so damaged if and only if Trustor fulfills all of the following conditions (a breach of any one of which shall constitute an Event of Default under this Deed of Trust and shall entitle Beneficiary to exercise all rights and remedies Beneficiary may have in such event): (a) that no default or Event of Default is then outstanding under this Deed of Trust, the Note, or any Related Agreement; (b) that Trustor is not in default under any of the terms, covenants and conditions of any of the Leases (hereinafter defined); (c) that the Leases shall continue in full force and effect; (d) that Trustor has in force rental continuation and business interruption insurance covering the Mortgaged Property for the longer of twelve (12) months or the time Beneficiary reasonably estimates will be necessary to complete such restoration and rebuilding; (e) Beneficiary is satisfied that during the period from the time of damage or taking until restoration and rebuilding of the Mortgaged Property is completed (the "Gap Period") Trustor's net income from (1) all leases, subleases, licenses and other occupancy agreements affecting the Mortgaged Property (the "Leases") which may continue without abatement of rent during such Gap Period, plus (2) all leases, subleases, licenses and other occupancy agreements in effect during the Gap Period without abatement of rent which Trustor may obtain in substitution for any of the same which did not continue during such Gap Period, plus (3) the proceeds of rental continuation and business interruption insurance, is sufficient to satisfy Trustor's obligations under this Deed of Trust as they come due; (f) Beneficiary is satisfied that the insurance or award proceeds shall be sufficient to fully restore and rebuild the Mortgaged Property free and clear of all liens except the lien of this Deed of Trust, or, in the event that such proceeds are in Beneficiary's sole judgment insufficient to restore and rebuild the Mortgaged Property, then Trustor shall deposit promptly with Beneficiary funds which, together with the insurance or award proceeds, shall be sufficient in Beneficiary's sole judgment to restore and rebuild the Mortgaged Property; (g) construction and completion of restoration and rebuilding of the Mortgaged Property shall be completed in accordance with plans and specifications and drawings submitted to and approved by Beneficiary, which plans, specifications and drawings shall not be substantially modified, changed or revised without the Beneficiary's prior written consent; (h) Beneficiary shall also have approved all prime and subcontractors, and the general contract or contracts the Trustor proposes to enter into with respect to the restoration and rebuilding; and (i) any and all monies which are made available for restoration and rebuilding hereunder shall be disbursed through Beneficiary, the Trustee or a title insurance and trust company satisfactory to Beneficiary, in accord with standard construction lending practice, including, if requested by Beneficiary, monthly lien waivers and title insurance datedowns, and the provision of payment and performance bonds by Trustor, or in any other manner approved by Beneficiary in Beneficiary's sole discretion; or (2) If less than all of conditions (a) through (i) in subsection (1) above are satisfied, then such payments shall be applied in the sole and absolute discretion of Beneficiary (a) to the payment or prepayment with any applicable prepayment premium of any indebtedness secured hereby in such order as Beneficiary may determine, or (b) to the reimbursement of Trustor's expenses incurred in the rebuilding and restoration of the Mortgaged Property. In the event Beneficiary elects under this subsection (2) to make any monies available to restore the Mortgaged Property, then all of conditions (a) through (i) in subsection (1) above shall apply, except such conditions which Beneficiary, in its sole discretion, may waive. (c) If any material part of the Mortgaged Property is damaged or destroyed and the loss is not adequately covered by insurance proceeds collected or in the process of collection, Trustor shall deposit, within ten (10) days of the Beneficiary's request therefor, the amount of the loss not so covered. (d) All compensation, awards, proceeds, damages, claims, insurance recoveries, rights of action and payments which Trustor may receive or to which Trustor may become entitled with respect to the Mortgaged Property in the event of a total condemnation or other total taking of the Mortgaged Property shall be paid over to Beneficiary and shall be applied first toward reimbursement of all costs and expenses of Beneficiary in connection with recovery of the same, and then shall be applied to the payment or prepayment with any applicable prepayment premium of any indebtedness secured hereby in such order as Beneficiary may determine, until the indebtedness secured hereby has been paid and satisfied in full. Any surplus remaining after payment and satisfaction of the indebtedness secured hereby shall be paid to Trustor as its interest may then appear. (e) Any application of such amounts or any portion thereof to any indebtedness secured hereby shall not be construed to cure or waive any default or notice of default hereunder or invalidate any act done pursuant to any such default or notice. (f) If any part of any automobile parking areas included within the Mortgaged Property is taken by condemnation or before such areas are otherwise reduced, Trustor shall provide parking facilities in kind, size and location to comply with all leases, and before making any contract for such substitute parking facilities, Trustor shall furnish to Beneficiary satisfactory assurance of completion thereof, free of liens and in conformity with all governmental zoning, land use and environmental regulations. 1.04 Taxes, Liens and Other Items. Trustor shall pay at least ten days before delinquency, all taxes, bonds, assessments, special assessments, common area charges, fees, liens, charges, fines, penalties, impositions and any and all other items which are attributable to or affect the Mortgaged Property and which may attain a priority over this Deed of Trust by making payment prior to delinquency directly to the payee thereof, unless Trustor shall be required to make payment to Beneficiary on account of such items pursuant to Section 1.05 hereof. Prior to the delinquency of any such taxes or other items, Trustor shall furnish Beneficiary with receipts indicating such taxes and other items have been paid. Trustor shall promptly discharge any lien which has attained or may attain priority over this Deed of Trust. In the event of the passage after the date of this Deed of Trust of any law deducting from the value of real property for the purposes of taxation any lien thereon, or changing in any way the laws for the taxation of deeds of trust or debts secured by deeds of trust for state, federal or any other purposes, or the manner of the collection of any such taxes, so as to affect this Deed of Trust, the Beneficiary and holder of the debt which it secures shall have the right to declare the principal sum and the interest due on a date to be specified by not less than thirty (30) days written notice to be given to Trustor by Beneficiary; provided, however, that such election shall be ineffective if Trustor is permitted by law to pay the whole of such tax in addition to all other payments required hereunder and if, prior to such specified date, does pay such taxes and agrees to pay any such tax when hereafter levied or assessed against the Mortgaged Property, and such agreement shall constitute a modification of this Deed of Trust. 1.05 Funds for Taxes and Insurance. If an Event of Default has occurred under this Deed of Trust or under any of the Related Agreements, regardless of whether the same has been cured, then thereafter at any time Beneficiary may, at its option to be exercised upon thirty (30) days' written notice to Trustor, require the deposit with Beneficiary or its designee by Trustor, at the time of each payment of an installment of interest or principal under the Note, of an additional amount sufficient to discharge the obligations of Trustor under Sections 1.02 and 1.04 hereof as and when they become due. The determination of the amount payable and of the fractional part thereof to be deposited with Beneficiary shall be made by Beneficiary in its sole discretion. These amounts shall be held by Beneficiary or its designee not in trust and not as agent of Trustor and shall not bear interest, and shall be applied to the payment of the obligations in such order or priority as Beneficiary shall determine. If at any time within thirty (30) days prior to the due date of any of the aforementioned obligations the amounts then on deposit therefor shall be insufficient for the payment of such obligation in full, Trustor shall within ten (10) days after demand deposit the amount of the deficiency with Beneficiary. If the amounts deposited are in excess of the actual obligations for which they were deposited, Beneficiary may refund any such excess, or, at its option, may hold the same in a reserve account, not in trust and not bearing interest, and reduce proportionately the required monthly deposits for the ensuing year. Nothing herein contained shall be deemed to affect any right or remedy of Beneficiary under any other provision of this Deed of Trust or under any statute or rule of law to pay any such amount and to add the amount so paid to the indebtedness hereby secured. All amounts so deposited shall be held by Beneficiary or its designee as additional security for the sums secured by this Deed of Trust and upon the occurrence of an Event of Default hereunder Beneficiary may, in its sole and absolute discretion and without regard to the adequacy of its security hereunder, apply such amounts or any portion thereof to any part of the indebtedness secured hereby. Any such application of said amounts or any portion thereof to any indebtedness secured hereby shall not be construed to cure or waive any default or notice of default hereunder. If Beneficiary requires deposits to be made pursuant to this Section 1.05, Trustor shall deliver to Beneficiary all tax bills, bond and assessment statements, statements of insurance premiums, and statements for any other obligations referred to above as soon as such documents are received by Trustor. If Beneficiary sells or assigns this Deed of Trust, Beneficiary shall have the right to transfer all amounts deposited under this Section 1.05 to the purchaser or assignee, and Beneficiary shall thereupon be released and have no further liability hereunder for the application of such deposits, and Trustor shall look solely to such purchaser or assignee for such application and for all responsibility relating to such deposits. 1.06 Assignment of Rents and Profits. (a) All of Trustor's interest in any leases or other occupancy agreements pertaining to the Mortgaged Property now existing or hereafter entered into, and all of the rents, royalties, issues, profits, revenue, income and other benefits of the Mortgaged Property arising from the use or enjoyment of all or any portion thereof or from any lease or agreement pertaining to occupancy of any portion of the Mortgaged Property now existing or hereafter entered into whether now due, past due, or to become due, and including all prepaid rents and security deposits (the "Rents and Profits"), are hereby absolutely, presently and unconditionally assigned, transferred and conveyed to Beneficiary to be applied by Beneficiary in payment of the principal and interest and all other sums payable on the Note, and of all other sums payable under this Deed of Trust subject to the rights of residential tenants under California Civil Code Section 1950.5(d). Prior to the occurrence of any Event of Default (hereinafter defined), Trustor shall have a license to collect and receive all Rents and Profits, which license shall be terminable at the sole option of Beneficiary, without regard to the adequacy of its security hereunder and without notice to or demand upon Trustor, upon the occurrence of any Event of Default. It is understood and agreed that neither the foregoing assignment of Rents and Profits to Beneficiary nor the exercise by Beneficiary of any of its rights or remedies under Article IV hereof shall be deemed to make Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in any manner with respect to the Mortgaged Property or the use, occupancy, enjoyment or operation of all or any portion thereof, unless and until Beneficiary, in person or by agent, assumes actual possession thereof. Nor shall appointment of a receiver for the Mortgaged Property by any court at the request of Beneficiary or by agreement with Trustor, or the entering into possession of the Mortgaged Property or any part thereof by such receiver, be deemed to make Beneficiary a mortgagee-in-possession or otherwise responsible or liable in any manner with respect to the Mortgaged Property or the use, occupancy, enjoyment or operation of all or any portion thereof. Upon the occurrence of any Event of Default, this shall constitute a direction to and full authority to each lessee under any lease and each guarantor of any lease to pay all Rents and Profits to Beneficiary without proof of the default relied upon. Trustor hereby irrevocably authorizes each lessee and guarantor to rely upon and comply with any notice or demand by Beneficiary for the payment to Beneficiary of any Rents and Profits due or to become due. (b) Trustor shall apply the Rents and Profits to the payment of all necessary and reasonable operating costs and expenses of the Mortgaged Property, debt service on the indebtedness secured hereby, and a reasonable reserve for future expenses, repairs and replacements for the Mortgaged Property, before using the Rents and Profits for Trustor's personal use or any other purpose not for the direct benefit of the Mortgaged Property. (c) Trustor warrants as to each lease now covering all or any part of the Mortgaged Property: (1) that each lease is in full force and effect; (2) that no default exists on the part of the lessees or Trustor under leases constituting more than 5%, in the aggregate, of all units in the Mortgaged Property; (3) that no rent has been collected more than one month in advance; (4) that no lease or any interest therein has been previously assigned or pledged; (5) that no lessee under any lease has any defense, setoff or counterclaim against Trustor; (6) that all rent due to date under each lease has been collected and no concession has been granted to any lessee in the form of a waiver, release, reduction, discount or other alteration of rent due or to become due; and (7) that the interest of the lessee under each lease is as lessee only, with no options to purchase or rights of first refusal. All the foregoing warranties shall be deemed to be reaffirmed and to continue until performance in full of the obligations under this Deed of Trust. (d) Trustor shall at all times perform the obligations of lessor under all such leases. Trustor shall not execute any further assignment of any of the Rents and Profits or any interest therein or suffer or permit any such assignment to occur by operation of law. Trustor shall at any time or from time to time, upon request of Beneficiary, transfer and assign to Beneficiary in such form as may be satisfactory to Beneficiary, Trustor's interest in any lease, subject to and upon the condition, however, that prior to the occurrence of any Event of Default hereunder Trustor shall have a license to collect and receive all Rents and Profits under such lease upon accrual, but not prior thereto, as set forth in subsection (a) above. Whenever requested by Beneficiary, Trustor shall furnish to Beneficiary a certificate of Trustor setting forth the names of all lessees under any leases, the terms of their respective leases, the space occupied, the rents payable thereunder, and the dates through which any and all rents have been paid. (e) Without the prior written consent of Beneficiary, Trustor shall not (1) accept prepayments of rent exceeding one month under any leases of any part of the Mortgaged Property; (2) take any action under or with respect to any such leases which would decrease the monetary obligations of the lessee thereunder or otherwise materially decrease the obligations of the lessee or the rights or remedies of the lessor, including, without limitation, any reduction in rent or granting of an option to renew for a term greater than one year; (3) modify or amend any such leases or, except where the lessee is in default, cancel or terminate the same or accept a surrender of the leased premises, provided, however, that Trustor may renew, modify or amend leases in the ordinary course of business so long as such actions do not decrease the monetary obligations of the lessee thereunder, or otherwise decrease the obligations of the lessee or the rights and remedies of the lessor; (4) consent to the assignment or subletting of the whole or any portion of the lessee's interest under any lease which has a term of more than five years; (5) create or permit any lien or encumbrance which, upon foreclosure, would be superior to any such leases; or (6) in any other manner impair Beneficiary's rights and interest with respect to the Rents and Profits. (f) Each lease of the Mortgaged Property, or any part thereof, shall make provision for the attornment of the lessee thereunder to any person succeeding to the interest of Trustor as the result of any foreclosure or transfer in lieu of foreclosure hereunder, said provision to be in form and substance approved by Beneficiary. If any lease provides for the abatement of rent during repair of the demised premises by reason of fire or other casualty, Trustor shall furnish rental insurance to Beneficiary, the policies to be in amount and form and written by such companies as shall be satisfactory to Beneficiary. Each lease shall remain in full force and effect despite any merger of the interest of Trustor and any lessee thereunder. (g) Beneficiary shall be deemed to be the creditor of each lessee in respect of any assignments for the benefit of creditors and any bankruptcy, arrangement, reorganization, insolvency, dissolution, receivership or other debtor-relief proceedings affecting such lessee (without obligation on the part of Beneficiary, however, to file timely claims in such proceedings or otherwise pursue creditor's rights therein). Beneficiary shall have the right to assign Trustor's right, title and interest in any leases to any subsequent holder of this Deed of Trust or any participating interest therein or to any person acquiring title to all or any part of the Mortgaged Property through foreclosure or otherwise. Any subsequent assignee shall have all the rights and powers herein provided to Beneficiary. Beneficiary shall have the authority, as Trustor's attorney-in-fact, such authority being coupled with an interest and irrevocable, to sign the name of Trustor and to bind Trustor on all papers and documents relating to the operation, leasing and maintenance of the Mortgaged Property. 1.07 Security Agreement. This Deed of Trust is intended to be a security agreement pursuant to the California Uniform Commercial Code for (a) any and all items of personal property specified above as part of the Mortgaged Property which, under applicable law, may be subject to a security interest pursuant to the California Uniform Commercial Code and which are not herein effectively made part of the real property, and (b) any and all items of property specified above as part of the Mortgaged Property which, under applicable law, constitute fixtures and may be subject to a security interest under Section 9-313 of the California Uniform Commercial Code; and Trustor hereby grants Beneficiary a security interest in said property, all of which is referred to herein as "Personal Property," and in all additions thereto, substitutions therefor and proceeds thereof, for the purpose of securing all indebtedness and other obligations of Trustor now or hereafter secured by this Deed of Trust, which shall be a paramount and superior lien on all such Personal Property at all times. Trustor agrees to execute and deliver financing and continuation statements covering the Personal Property from time to time and in such form as Beneficiary may require to perfect and continue the perfection of Beneficiary's lien or security interest with respect to said property. Trustor shall pay all costs of filing such statements and renewals and releases thereof and shall pay all reasonable costs and expenses of any record searches for financing statements Beneficiary may reasonably require. Upon the occurrence of any default of Trustor hereunder, Beneficiary shall have the rights and remedies of a secured party under California Uniform Commercial Code, including, Section 9501(4) thereof, as well as all other rights and remedies available at law or in equity, and, at Beneficiary's option, Beneficiary may also invoke the remedies provided in Article IV of this Deed of Trust as to such property. 1.08 Acceleration. (a) Trustor acknowledges that in making the loan evidenced by the Note and this Deed of Trust (the "Loan"), Beneficiary has relied upon: (1) Trustor's credit rating; (2) Trustor's financial stability; and (3) Trustor's experience in owning and operating real property comparable to the Mortgaged Property. Without limiting the obligations of Trustor or the rights and remedies of Beneficiary, Beneficiary shall have the right, at its option, to declare any indebtedness and obligations under the Note and this Deed of Trust, irrespective of the maturity date specified therein, due and payable in full if: (1) Trustor enters into a contract of sale, conveys, alienates or encumbers the Mortgaged Property or any portion thereof or any fractional undivided interest therein, or suffers Trustor's title or any interest therein to be divested or encumbered, whether voluntarily or involuntarily, or leases with an option to sell, or changes or permits to be changed the character or use of the Mortgaged Property, or drills or extracts or enters into a lease for the drilling for or extracting of oil, gas or other hydrocarbon substances or any mineral of any kind or character on such property; (2) Trustor or any one or more of the persons comprising Trustor is a partnership and the interest of any general partner (or the interest of any general partner in a partnership that is a partner) is assigned or transferred, except for an assignment or transfer resulting from the death or physical or mental incapacity of a general partner; (3) Trustor or any one or more of the persons comprising Trustor is a partnership and more than twenty-five percent (25%) of the corporate stock of any corporation that is a general partner of such partnership is sold, transferred or assigned; (4) Trustor is a corporation and more than twenty-five percent (25%) of the corporate stock is sold, transferred or assigned; (5) Trustor is a trust and there is a change in beneficial ownership with respect to more than twenty-five percent (25%) of the trust; (6) Trustor consists of several persons or entities holding fractional undivided interest in the Mortgaged Property and there is a cumulative change in ownership with respect to more than a twenty-five percent (25%) fractional undivided interest in the Mortgaged Property; (7) Trustor breaches or fails to comply with any of the covenants and agreements contained in this Deed of Trust; or (8) Trustor is a limited liability company and the membership or economic interest of any member is assigned or transferred, except for an assignment or transfer resulting from the death or physical or mental incapacity of a member. In such case, Beneficiary or other holder of this Note may exercise any and all of the rights and remedies and recourses set forth in Article IV herein, and as granted by law. (b) In order to allow Beneficiary to determine whether enforcement of the foregoing provisions is desirable, Trustor agrees to notify Beneficiary promptly in writing of any transaction or event described in Clauses 1.08(a)(1) through (8) above. In addition to other damages and costs resulting from the breach by Trustor of its obligations under this subsection (b), Trustor acknowledges that failure to give such notice may damage Beneficiary in an amount equal to not less than the difference between the interest payable on the indebtedness specified herein, and the interest and loan fees which Beneficiary could obtain on said sum on the date that the event of acceleration occurred and was enforceable by Beneficiary under applicable law. Trustor shall pay to Beneficiary all damages Beneficiary sustains by reason of the breach of the covenant of notice set forth in this subsection (b) and the amount thereof shall be added to the principal of the Note and shall bear interest and shall be secured by this Deed of Trust. (c) Notwithstanding subsection 1.08(a) above, Trustor may from time to time replace items of personal property and fixtures constituting a part of the Mortgaged Property, provided that: (1) the replacements for such items of personal property or fixtures are of equivalent value and quality; and (2) Trustor has good and clear title to such replacement property free and clear of any and all liens, encumbrances, security interests, ownership interests, claims of title (contingent or otherwise), or charges of any kind, or the rights of any conditional sellers, vendors or any other third parties in or to such replacement property have been expressly subordinated at no cost to Beneficiary to the lien of the Deed of Trust in a manner satisfactory to Beneficiary; and (3) at the option of Beneficiary, Trustor provides at no cost to Beneficiary a satisfactory opinion of counsel to the effect that the Deed of Trust constitutes a valid and subsisting first lien on and security interest in such replacement property and is not subject to being subordinated or the priority thereof affected under any applicable law, including, but not limited, to the provisions of Section 9-313 of the California Uniform Commercial Code. 1.09 Preservation and Maintenance of Mortgaged Property. Trustor shall keep the Mortgaged Property and every part thereof in good condition and repair, and shall not permit or commit any waste, impairment, or deterioration of the Mortgaged Property, or commit, suffer or permit any act upon or use of the Mortgaged Property in violation of law or applicable order of any governmental authority, whether now existing or hereafter enacted and whether foreseen or unforeseen, or in violation of any covenants, conditions or restrictions affecting the Mortgaged Property, or bring or keep any article upon any of the Mortgaged Property or cause or permit any condition to exist thereon which would be prohibited by or could invalidate any insurance coverage maintained, or required hereunder to be maintained, by Trustor on or with respect to any part of the Mortgaged Property, and Trustor further shall do all other acts which from the character or use of the Mortgaged Property may be reasonably necessary to protect the Mortgaged Property. Trustor shall underpin and support, when necessary, any building, structure or other improvement situated on the Mortgaged Property and shall not remove or demolish any building on the Mortgaged Property. Trustor shall complete or restore and repair promptly and in a good workmanlike manner any building, structure or improvement which may be constructed, damaged or destroyed thereon and pay when due all claims for labor performed and materials furnished therefor, whether or not insurance or other proceeds are available to cover in whole or in part the costs of any such completion, restoration or repair; provided, however, that Trustor shall not demolish, remove, expand or extend any building, structure or improvement on the Mortgaged Property, nor construct, restore, add to or alter any such building, structure or improvement, nor consent to or permit any of the foregoing to be done, without in each case obtaining the prior written consent of Beneficiary thereto. If this Deed of Trust is on a condominium or a cooperative apartment or planned development project, Trustor shall perform all of Trustor's obligations under any applicable declaration of condominium or master deed, or any declaration of covenants, conditions and restrictions pertaining to any such project, or any by-laws or regulations of the project or owners' association or constituent documents. Trustor shall not drill or extract or enter into any lease for the drilling for or extraction of oil, gas or other hydrocarbon substances or any mineral of any kind or character on or from the Mortgaged Property or any part thereof without first obtaining Beneficiary's written consent. Unless required by applicable law or unless Beneficiary has otherwise first agreed in writing, Trustor shall not make or allow to be made any changes in the nature of the occupancy or use of the Mortgaged Property or any part thereof for which the Mortgaged Property or such part was intended at the time this Deed of Trust was delivered. 1.10 Financial Statements; Offset Certificates. (a) Trustor, without expense to Beneficiary, shall, upon receipt of written request from Beneficiary, furnish to Beneficiary (1) an annual statement of the operation of the Mortgaged Property prepared and certified by Trustor, showing in reasonable detail satisfactory to Beneficiary total rents received and total expenses together with an annual balance sheet and profits and loss statement, within one hundred twenty (120) days after the close of each fiscal year of Trustor, beginning with the fiscal year first ending after the date of delivery of this Deed of Trust, (2) within 30 days after the end of each calendar quarter (March 31, June 30, September 30, December 31) interim statements of the operation of the Mortgaged Property showing in reasonable detail satisfactory to Beneficiary total rents received and total expenses, for the previous quarter, certified by Trustor, and (3) copies of Trustor's annual state and federal income tax filing within thirty (30) days of filing. Trustor shall keep accurate books and records, and allow Beneficiary, its representatives and agents, upon demand, at any time during normal business hours, access to such books and records, including any supporting or related vouchers or papers, shall allow Beneficiary to make extracts or copies of any thereof, and shall furnish to Beneficiary and its agents convenient facilities for the audit of any such statements, books and records. (b) Trustor, within three (3) days upon request in person or within five (5) days upon request by mail, shall furnish a written statement duly acknowledged of all amounts due on any indebtedness secured hereby, whether for principal or interest on the Note or otherwise, and stating whether any offsets or defenses exist against the indebtedness secured by this Deed of Trust and covering such other matters with respect to any such indebtedness as Beneficiary may reasonably require. 1.11 Trustee's Costs and Expenses; Governmental Charges. Trustor shall pay all costs, fees and expenses of Trustee, its agents and counsel in connection with the performance of its duties under this Deed of Trust, including, without limitation, the cost of any trustee's sale guaranty or other title insurance coverage ordered in connection with any sale or foreclosure proceedings hereunder, and shall pay all taxes (except federal and state income taxes) or other governmental charges or impositions imposed by any governmental authority on Trustee or Beneficiary by reason of its interest in the Note, or any note evidencing a Future Advance, or this Deed of Trust. 1.12 Protection of Security; Costs and Expenses. Trustor agrees that, at any time and from time to time, it will execute and deliver all such further documents and do all such other acts and things as Beneficiary may reasonably request in writing in order to protect the security and priority of the lien created hereby. Trustor shall appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of the Beneficiary or Trustee, and shall pay all costs and expenses, including, without limitation, cost of evidence of title and reasonable attorneys' fees, in any such action or proceeding in which Beneficiary or Trustee may appear, and in any suit brought by Beneficiary to foreclose this Deed of Trust or to enforce or establish any other rights or remedies of Beneficiary hereunder. If Trustor fails to perform any of the covenants or agreements contained in this Deed of Trust, or if any action or proceeding is commenced which affects Beneficiary's interest in the Mortgaged Property or any part thereof, including, but not limited to, eminent domain, code enforcement, or proceedings of any nature whatsoever under any federal or state law, whether now existing or hereafter enacted or amended, relating to bankruptcy, insolvency, arrangement, reorganization or other form of debtor relief, or to a decedent, then Beneficiary or Trustee may, but without obligation to do so and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereunder, make such appearances, commence, defend or appear in any such action or proceeding affecting the Mortgaged Property, pay, contest or compromise any encumbrance, charge or lien which affects the Mortgaged Property, disburse such sums and take such action as Beneficiary or Trustee deems necessary or appropriate to protect Beneficiary's interest, including, but not limited to, disbursement of reasonable attorneys' fees, entry upon the Mortgaged Property to make repairs or take other action to protect the security hereof, and payment, purchase, contest or compromise of any encumbrance, charge or lien which in the judgment of either Beneficiary or Trustee appears to be prior or superior hereto. Trustor further agrees to pay all reasonable expenses of Beneficiary (including fees and disbursements of counsel) incident to the protection of the rights of Beneficiary hereunder, or to enforcement or collection of payment of the Note or any Future Advances, whether by judicial or nonjudicial proceedings, or in connection with any bankruptcy, insolvency, arrangement, reorganization or other debtor relief proceeding of Trustor, or otherwise. Any amounts disbursed by Beneficiary or Trustee pursuant to this Section 1.12 shall be additional indebtedness of Trustor secured by this Deed of Trust and each of the Related Agreements as of the date of disbursement and shall bear interest at the rate set forth in the Note. All such amounts shall be payable by Trustor immediately without demand. Nothing contained in this Section 1.12 shall be construed to require Beneficiary or Trustee to incur any expense, make any appearance, or take any other action. 1.13 Fixture Filing. This Deed of Trust constitutes a financing statement filed as a fixture filing in the Official Records of the County Recorder of the county in which the Mortgaged Property is located with respect to any and all fixtures included within the term "Mortgaged Property" as used herein and with respect to any goods or other personal property that may now be or hereafter become such fixtures. 1.14 Notify Lender of Default. Trustor shall notify Beneficiary in writing within five (5) days of the occurrence of any Event of Default or other event which, upon the giving of notice or the passage of time or both, would constitute an Event of Default. 1.15 Management of Mortgaged Property. Trustor shall manage the Mortgaged Property through its own personnel or a third party manager approved by Beneficiary, and shall not hire, retain or contract with any other third party for property management services without the prior written approval by Beneficiary of such party and the terms of its contract for management services; provided, however, Beneficiary shall not withhold approval of a new manager if the new manager has a reputation and experience in managing properties similar to the Mortgaged Property which are greater than or equal to the present experience and reputation of the current manager. 1.16 Miscellaneous. Trustor shall: (a) make or permit no termination or material amendment of any agreement between Trustor and a third party relating to the Mortgaged Property or the loan secured hereby (including, without limitation, the leases) (the "Third Party Agreements") without the prior written approval of Beneficiary, except amendments to leases permitted by Section 1.06 hereof, (b) perform Trustor's obligations under each Third Party Agreement, and (c) comply promptly with all governmental requirements relating to Trustor, the loan secured hereby and the Mortgaged Property. ARTICLE II REPRESENTATIONS AND WARRANTIES To induce the Beneficiary to make the loan secured hereby, Trustor represents and warrants to Beneficiary, in addition to any representations and warranties in the Note or any Related Agreements, that as of the date hereof and throughout the term of the loan secured hereby until the Note is paid in full and all obligations under this Deed of Trust are performed: 2.01 Power and Authority. Trustor is duly organized and validly existing, qualified to do business and in good standing in the State of California and has full power and due authority to execute, deliver and perform this Deed of Trust, the Note, and any Related Agreements in accordance with their terms. Such execution, delivery and performance has been duly authorized by all necessary trust action and approved by each required governmental authority or other party. 2.02 No Default or Violations. No Event of Default (as defined hereafter) or event which, with notice or passage of time or both, would constitute an Event of Default ("Unmatured Event of Default") has occurred and is continuing under this Deed of Trust, the Note, or any of the Related Agreements. Trustor is not in violation of any governmental requirement (including, without limitation, any applicable securities law) or in default under any agreement to which it is bound, or which affects it or any of its property, and the execution, delivery and performance of this Deed of Trust, the Note, or any of the Related Agreements in accordance with their terms and the use and occupancy of the Mortgaged Property will not violate any governmental requirement (including, without limitation, any applicable usury law), or conflict with, be inconsistent with or result in any default under, any of the provisions of any deed of trust, easement, restriction of record, contract, document, agreement or instrument of any kind to which any of the foregoing is bound or which affects it or any of its property, except as identified in writing and approved by Beneficiary. 2.03 No Limitation or Governmental Controls. There are no proceedings of any kind pending, or, to the knowledge of Trustor, threatened against or affecting Trustor, the Mortgaged Property (including any attempt or threat by any governmental authority to condemn or rezone all or any portion of the Mortgaged Property), any party constituting Trustor or any general partner in any such party, or involving the validity, enforceability or priority of this Deed of Trust, the Note or any of the Related Agreements or enjoining or preventing or threatening to enjoin or prevent the use and occupancy of the Mortgaged Property or the performance by Beneficiary of its obligations hereunder, and there are no rent controls, governmental moratoria or environment controls presently in existence, or, to the knowledge of Trustor, threatened or affecting the Mortgaged Property, except as identified in writing to, and approved by, Beneficiary. 2.04 Liens. Title to the Mortgaged Property, or any part thereof, is not subject to any liens, encumbrances or defects of any nature whatsoever, whether or not of record, and whether or not customarily shown on title insurance policies, except as identified in writing and approved by Beneficiary. 2.05 Financial and Operating Statements. All financial and operating statements submitted to Beneficiary in connection with this loan secured hereby are true and correct in all respects, have been prepared in accordance with generally accepted accounting principles (applied, in the case of any unaudited statement, on a basis consistent with that of the preceding fiscal year) and fairly present the respective financial conditions of the subjects thereof and the results of their operations as of the respective dates shown thereon. No materially adverse changes have occurred in the financial conditions and operations reflected therein since their respective dates, and no additional borrowings have been made since the date thereof other than the borrowing made under this Deed of Trust and any other borrowing approved in writing by Beneficiary. 2.06 Other Statements to Beneficiary. Neither this Deed of Trust, the Note, any Related Agreement, nor any document, agreement, report, schedule, notice or other writing furnished to the Beneficiary by or on behalf of any party constituting Trustor, or any general partner of any such party, contains any omission or misleading or untrue statement of any fact material to any of the foregoing. 2.07 Third Party Agreements. Each Third Party Agreement is unmodified and in full force and effect and free from default on the part of each party thereto, and all conditions required to be (or which by their nature can be) satisfied by any party to date have been satisfied. Trustor has not done or said or omitted to do or say anything which would give to any obligor on any Third Party Agreement any basis for any claims against Beneficiary or any counterclaim to any claim which might be made by Beneficiary against such obligor on the basis of any Third Party Agreement. ARTICLE III EVENTS OF DEFAULT Each of the following shall constitute an event of default ("Event of Default") hereunder: 3.01 Failure to make any payment of principal or interest on the Note or any Future Advance, when and as the same shall become due and payable, whether at maturity or by acceleration or as part of any prepayment or otherwise, or default in the performance of any of the covenants or agreements of Trustor contained herein, or default in the performance of any of the covenants or agreements of Trustor contained in the Note, or in any note evidencing a Future Advance, or in any of the Related Agreements, after the expiration of the period of time, if any, permitted for cure of such default thereunder. 3.02 The appointment, pursuant to an order of a court of competent jurisdiction, of a trustee, receiver or liquidator of the Mortgaged Property or any part thereof, or of Trustor, or any termination or voluntary suspension of the transaction of business of Trustor, or any attachment, execution or other judicial seizure of all or any substantial portion of Trustor's assets which attachment, execution or seizure is not discharged within thirty (30) days. 3.03 Trustor, any trustee of Trustor, any general partner of Trustor, or any trustee of a general partner of Trustor (each of which shall constitute "Trustor" for purposes of this Section 3.03 and Sections 3.04 and 3.05 below) shall file a voluntary case under any applicable bankruptcy, insolvency, debtor relief, or other similar law now or hereafter in effect, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or similar official) of the Trustor or for any part of the Mortgaged Property or any substantial part of Trustor's property, or shall make any general assignment for the benefit of Trustor's creditors, or shall fail generally to pay Trustor's debts as they become due or shall take any action in furtherance of any of the foregoing. 3.04 A court having jurisdiction shall enter a decree or order for relief in respect of the Trustor, in any involuntary case brought under any bankruptcy, insolvency, debtor relief, or similar law now or hereafter in effect, or Trustor shall consent to or shall fail to oppose any such proceeding, or any such court shall enter a decree or order appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Trustor or for any part of the Mortgaged Property or any substantial part of the Trustor's property, or ordering the winding up or liquidation of the affairs of the Trustor, and such decree or order shall not be dismissed within sixty (60) days after the entry thereof. 3.05 Default under the terms of any agreement of guaranty relating to the indebtedness evidenced by the Note or relating to any Future Advance, or the occurrence of any of the events enumerated in Sections 3.02, 3.03 or 3.04 with regard to any guarantor of the Note or any Future Advance, or the revocation, limitation or termination of the obligations of any guarantor of the Note or any Future Advance, except in accordance with the express written terms of the instrument of guaranty. 3.06 The occurrence of any event or transaction described in subsection 1.08(a) above without the prior written consent of Beneficiary. 3.07 Without the prior written consent of Beneficiary in each case, (a) the dissolution or termination of existence of Trustor, voluntarily or involuntarily; (b) the amendment or modification in any respect of Trustor's agreement of partnership or its partnership resolutions relating to this transaction; or (c) the distribution of any of the Trustor's capital, except for distribution of the proceeds of the loan secured hereby and cash from operations; as used herein, cash from operations shall mean any cash of the Trustor earned from operation of the Mortgaged Property, but not from a sale or refinancing of the Mortgaged Property or from borrowing, available after paying all ordinary and necessary current expenses of the Trustor, including expenses incurred in the maintenance of the Mortgaged Property, and after establishing reserves to meet current or reasonably expected obligations of the Trustor. 3.08 The imposition of a tax, other than a state or federal income tax, on or payable by Trustee or Beneficiary by reason of its ownership of the Note, or its ownership of any note evidencing a Future Advance, or this Deed of Trust, and Trustor not promptly paying said tax, or it being illegal for Trustor to pay said tax. 3.09 Any representation, warranty, or disclosure made to Beneficiary by Trustor or any guarantor of any indebtedness secured hereby in connection with or as an inducement to the making of the loan evidenced by the Note or in connection with or as an inducement to the making of any Future Advance, or this Deed of Trust (including, without limitation, the representations and warranties contained in Article II of this Deed of Trust), or any of the Related Agreements, proving to be false or misleading in any material respect as of the time the same was made, whether or not any such representation or disclosure appears as part of this Deed of Trust. 3.10 Any other event occurring which, under this Deed of Trust, or under the Note or any note evidencing a Future Advance, or under any of the Related Agreements constitutes a default by Trustor hereunder or thereunder or gives Beneficiary the right to accelerate the maturity of the indebtedness, or any part thereof, secured hereby. ARTICLE IV REMEDIES Upon the occurrence of any Event of Default, Trustee and Beneficiary shall have the following rights and remedies: 4.01 Acceleration. Beneficiary may declare the entire principal amount of the Note and/or any Future Advances then outstanding (if not then due and payable), and accrued and unpaid interest thereon, and all other sums or payments required thereunder, to be due and payable immediately, and notwithstanding the stated maturity in the Note, or any note evidencing any Future Advance, the principal amount of the Note and/or any Future Advance and the accrued and unpaid interest thereon and all other sums or payments required thereunder shall thereupon become and be immediately due and payable. 4.02 Entry. Irrespective of whether Beneficiary exercises the option provided in Section 4.01 above, Beneficiary in person or by agent or by court-appointed receiver may enter upon, take possession of, manage and operate the Mortgaged Property or any part thereof and do all things necessary or appropriate in Beneficiary's sole discretion in connection therewith, including, without limitation, making and enforcing, and if the same be subject to modification or cancellation, modifying or canceling leases upon such terms or conditions as Beneficiary deems proper, obtaining and evicting tenants, and fixing or modifying rents, contracting for and making repairs and alterations, and doing any and all other acts which Beneficiary deems proper to protect the security hereof; and either with or without so taking possession, in its own name or in the name of Trustor, sue for or otherwise collect and receive the Rents and Profits, including those past due and unpaid, and apply the same less costs and expenses of operation and collection, including reasonable attorneys' fees, upon any indebtedness secured hereby, and in such order as Beneficiary may determine. Upon request of Beneficiary, Trustor shall assemble and make available to Beneficiary at the site of the real property covered hereby any of the Mortgaged Property which has been removed therefrom. The entering upon and taking possession of the Mortgaged Property, or any part thereof, and the collection of any Rents and Profits and the application thereof as aforesaid shall not cure or waive any default theretofore or thereafter occurring or affect any notice or default hereunder or invalidate any act done pursuant to any such default or notice, and, notwithstanding continuance in possession of the Mortgaged Property or any part thereof by Beneficiary, Trustor or a receiver, and the collection, receipt and application of the Rents and Profits, Beneficiary shall be entitled to exercise every right provided for in this Deed of Trust or by law or in equity upon or after the occurrence of a default, including, without limitation, the right to exercise the power of sale. Any of the actions referred to in this Section 4.02 may be taken by Beneficiary irrespective of whether any notice of default or election to sell has been given hereunder and without regard to the adequacy of the security for the indebtedness hereby secured. 4.03 Judicial Action. Beneficiary may bring an action in any court of competent jurisdiction to foreclose this instrument or to enforce any of the covenants and agreements hereof. 4.04 Power of Sale. Beneficiary may elect to cause the Mortgaged Property or any part thereof to be sold under the power of sale herein granted in any manner permitted by applicable law. In connection with any sale or sales hereunder, Beneficiary may elect to treat any of the Mortgaged Property which consists of a right in action or which is property that can be severed from the real property covered hereby or any improvements thereon without causing structural damage thereto as if the same were personal property, and dispose of the same in accordance with applicable law, separate and apart from the sale of real property. Sales hereunder of any personal property only shall be conducted in any manner permitted by the California Uniform Commercial Code. Where the Mortgaged Property consists of real property and personal property located on or within the real property, Beneficiary may elect in its discretion to dispose of both the real and personal property together in one sale pursuant to real property law as permitted by Section 9-501(4) of the California Uniform Commercial Code. Should Beneficiary elect to sell the Mortgaged Property, or any part thereof, which is real property or which Beneficiary has elected to treat as real property as provided above, Beneficiary or Trustee shall give such notice of default and election to sell as may then be required by law. Thereafter, upon the expiration of such time and the giving of such notice of sale as may then be required by law, and without the necessity of any demand on Trustor, Trustee, at the time and place specified in the notice of sale, shall sell said real property or part thereof at public auction to the highest bidder for cash in lawful money of the United States. Trustee may, and upon request of Beneficiary shall, from time to time, postpone any sale hereunder by public announcement thereof at the time and place noticed therefor. If the Mortgaged Property consists of several lots, parcels or items of property, Beneficiary may: (a) designate the order in which such lots, parcels or items shall be offered for sale or sold, or (b) elect to sell such lots, parcels or items through a single sale, or through two or more successive sales, or in any other manner Beneficiary deems in its best interest. Any person, including Trustor, Trustee or Beneficiary, may purchase at any sale hereunder, and Beneficiary shall have the right to purchase at any sale hereunder by crediting upon the bid price the amount of all or any part of the indebtedness hereby secured. Should Beneficiary desire that more than one sale or other disposition of the Mortgaged Property be conducted, Beneficiary may, at its option, cause the same to be conducted simultaneously, or successively, on the same day, or at such different days or times and in such order as Beneficiary may deem to be in its best interests, and no such sale shall terminate or otherwise affect the lien of this Deed of Trust on any part of the Mortgaged Property not sold until all indebtedness secured hereby has been fully paid. In the event Beneficiary elects to dispose of the Mortgaged Property through more than one sale, Trustor agrees to pay the costs and expenses of each such sale and of any judicial proceedings wherein the same may be made, including reasonable compensation to Trustee and Beneficiary, their agents and counsel, and to pay all expenses, liabilities and advances made or incurred by Trustee in connection with such sale or sales, together with interest on all such advances made by Trustee at the lower of the rate set forth in the Note, or the maximum rate permitted by law to be charged by Trustee. Upon any sale hereunder, Trustee shall execute and deliver to the purchaser or purchasers a deed or deeds conveying the property so sold, but without any covenant or warranty whatsoever, express or implied, whereupon such purchaser or purchasers shall be let into immediate possession; and the recitals in any such deed or deeds of facts, such as default, the giving of notice of default and notice of sale, and other facts affecting the regularity or validity of such sale or disposition, shall be conclusive proof of the truth of such facts and any such deed or deeds shall be conclusive against all persons as to such facts recited therein. 4.05 Environmental Default and Remedies. In the event that any portion of the Mortgaged Property is determined to be "environmentally impaired" (as "environmentally impaired" is defined in California Code of Civil Procedure Section 726.5(e)(3)) or to be an "affected parcel" (as "affected parcel" is defined in California Code of Civil Procedure Section 726.5(e)(1)), then, without otherwise limiting or in any way affecting Beneficiary's or Trustee's rights and remedies under this Deed of Trust, Beneficiary may elect to exercise its right under California Code of Civil Procedure Section 726.5(a) to (1) waive its lien on such environmentally impaired or affected portion of the Mortgaged Property and (2) exercise (i) the rights and remedies of an unsecured creditor, including reduction of its claim against Trustor to judgment, and (ii) any other rights and remedies permitted by law. For purposes of determining Beneficiary's right to proceed as an unsecured creditor under California Code of Civil Procedure Section 726.5(a), Trustor shall be deemed to have willfully permitted or acquiesced in a release or threatened release of hazardous materials, within the meaning of California Code of Civil Procedure Section 726.5(d)(1), if the release or threatened release of hazardous materials was knowingly or negligently caused or contributed to by any lessee, occupant or user of any portion of the Mortgaged Property and Trustor knew or should have known of the activity by such lessee, occupant or user which caused or contributed to the release or threatened release. All costs and expenses, including, but not limited to, attorneys' fees, incurred by Beneficiary in connection with any action commenced under this Section 4.05, including any action required by California Code of Civil Procedure Section 726.5(b) to determine the degree to which the Mortgaged Property is environmentally impaired, plus interest thereon at the rate specified in Paragraph 2(b) of the Note, shall be added to the indebtedness secured by this Deed of Trust and shall be due and payable to Beneficiary upon its demand made at any time following the conclusion of such action. 4.06 Proceeds of Sale. The proceeds of any sale made under or by virtue of this Article IV, together with all other sums which then may be held by Trustee or Beneficiary under this Deed of Trust, whether under the provisions of this Article IV or otherwise, shall be applied as follows: FIRST: To the payment of costs and expenses of sale and of any judicial proceedings wherein the same may be made, including reasonable compensation to Trustee and Beneficiary, their agents and counsel, and to the payment of all expenses, liabilities and advances made or incurred by Trustee under this Deed of Trust, together with interest on all advances made by Trustee at the lower of the interest rate set forth in the Note or the maximum rate permitted by law to be charged by Trustee. SECOND: To the payment of any and all sums expended by Beneficiary under the terms of this Deed of Trust, not then repaid, with accrued interest at the rate set forth in the Note, and all other sums (except advances of principal and interest thereon) required to be paid by Trustor pursuant to any provisions of this Deed of Trust, or the Note, or any note evidencing any Future Advance, or any of the Related Agreements, including but not limited to all expenses, liabilities and advances made or incurred by Beneficiary under this Deed of Trust or in connection with the enforcement thereof, together with interest thereon as herein provided except for any amounts incurred under or as a result of the Environmental Agreement. THIRD: To the payment of the entire amount then due, owing or unpaid for principal and interest upon the Note and any notes evidencing any Future Advances, with interest on the unpaid principal at the rate set forth therein from the date of advancement thereof until the same is paid in full. FOURTH: To the payment of any and all expenses, liabilities and advances made or incurred by Beneficiary under this Deed of Trust or otherwise in connection with the Environmental Agreement or in connection with the enforcement thereof, together with interest thereon as herein provided. FIFTH: The remainder, if any, to the person or persons legally entitled thereto. 4.07 Waiver of Marshalling. Trustor, for itself and for all persons hereafter claiming through or under it or who may at any time hereafter become holders of liens junior to the lien of this Deed of Trust, hereby expressly waives and releases all rights to direct the order in which any of the Mortgaged Property shall be sold in the event of any sale or sales pursuant hereto and to have any of the Mortgaged Property and/or any other property now or hereafter constituting security for any of the indebtedness secured by this Deed of Trust marshalled upon any foreclosure of this Deed of Trust or of any other security for any of said indebtedness. 4.08 Remedies Cumulative. No remedy herein conferred upon or reserved to Trustee or Beneficiary is intended to be exclusive of any other remedy herein or by law provided, but each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. No delay or omission of Trustee or Beneficiary to exercise any right or power accruing upon any Event of Default shall impair any right or power or shall be construed to be a waiver of any Event of Default or any acquiescence therein; and every power and remedy given by this Deed of Trust to Trustee or Beneficiary may be exercised from time to time as often as may be deemed expedient by Trustee or Beneficiary. If there exists additional security for the performance of the obligations secured hereby, the holder of the Note, at its sole option, and without limiting or affecting any of its rights or remedies hereunder, may exercise any of the rights and remedies to which it may be entitled hereunder either concurrently with whatever rights and remedies it may have in connection with such other security or in such order as it may determine. Any application of any amounts or any portion thereof held by Beneficiary at any time as additional security hereunder, whether pursuant to Section 1.03 or Section 1.05 hereof or otherwise, to any indebtedness secured hereby shall not extend or postpone the due dates of any payments due from Trustor to Beneficiary hereunder or under the Note, any Future Advances or any of the Related Agreements, or change the amounts of any such payments or otherwise be construed to cure or waive any default or notice of default hereunder or invalidate any act done pursuant to any such default or notice. ARTICLE V MISCELLANEOUS 5.01 Severability. In the event any one or more of the provisions contained in this Deed of Trust shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Deed of Trust, but this Deed of Trust shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 5.02 Certain Charges. Trustor agrees to pay Beneficiary for each statement of Beneficiary as to the obligations secured hereby, furnished at Trustor's request, the maximum fee allowed by law, or if there be no maximum fee, then such reasonable fee as is charged by Beneficiary as of the time said statement is furnished. Trustor further agrees to pay the charges of Beneficiary for any other service rendered Trustor, or on its behalf, connected with this Deed of Trust or the indebtedness secured hereby, including, without limitation, the delivery to an escrow holder of a request for full or partial reconveyance of this Deed of Trust, transmitting to an escrow holder moneys secured hereby, changing its records pertaining to this Deed of Trust and indebtedness secured hereby to show a new owner of the Mortgaged Property, and replacing an existing policy of insurance held hereunder with another such policy. 5.03 Notices. All notices expressly provided hereunder to be given by Beneficiary to Trustor and all notices and demands of any kind or nature whatsoever which Trustor may be required or may desire to give to or serve on Beneficiary shall be in writing and shall be served in person or by first class or certified mail. Any such notice or demand so served by first class or certified mail shall be deposited in the United States mail, with postage thereon fully prepaid and addressed to the party so to be served at its address above stated or at such other address of which said party shall have theretofore notified in writing, as provided above, the party giving such notice. Service of any such notice or demand so made shall be deemed effective on the day of actual delivery as shown by the addressee's return receipt or the expiration of three business days after the date of mailing, whichever is the earlier in time, except that service of any notice of default or notice of sale provided or required by law shall, if mailed, be deemed effective on the date of mailing. 5.04 Trustor Not Released. Extension of the time for payment or modification of the terms of payment of any sums secured by this Deed of Trust granted by Beneficiary to any successor in interest of Trustor shall not operate to release, in any manner, the liability of the original Trustor. Beneficiary shall not be required to commence proceedings against such successor or refuse to extend time for payment or otherwise modify the terms of payment of the sums secured by the Deed of Trust by reason of any demand made by the original Trustor. Without affecting the liability of any person, including Trustor, for the payment of any indebtedness secured hereby, or the lien of this Deed of Trust on the remainder of the Mortgaged Property for the full amount of any such indebtedness and liability unpaid, Beneficiary and Trustee are respectively empowered as follows: Beneficiary may from time to time and without notice (a) release any person liable for the payment of any of the indebtedness, (b) extend the time or otherwise alter the terms of payment of any of the indebtedness, (c) accept additional real or personal property of any kind as security therefor, whether evidenced by deeds of trust, mortgages, security agreement or any other instruments of security, or (d) alter, substitute or release any property securing the indebtedness; Trustee may, at any time, and from time to time, upon the written request of Beneficiary, which Beneficiary may withhold in its sole discretion (1) consent to the making of any map or plat of the Mortgaged Property or any part thereof, (2) join in granting any easement or creating any restriction thereon, (3) join in any subordination or other agreement affecting this Deed of Trust or the lien or charge hereof, or (4) reconvey, without any warranty, all or part of the Mortgaged Property. 5.05 Inspection. Beneficiary may at any reasonable time or times make or cause to be made entry upon and inspection of the Mortgaged Property or any part thereof in person or by agent. 5.06 Reconveyance. Upon the payment in full of all sums secured by this Deed of Trust, Beneficiary shall request Trustee to reconvey the Mortgaged Property and shall surrender this Deed of Trust and all notes evidencing indebtedness secured by this Deed of Trust to Trustee. Upon payment of its fees and any other sums owing to it under this Deed of Trust, Trustee shall reconvey the Mortgaged Property without warranty to the person or persons legally entitled thereto. Trustor shall pay all costs of recordation, if any. The recitals in such conveyance of any matters of facts shall be conclusive proof of the truthfulness thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto." Five years after issuance of such full reconveyance, Trustee may destroy said notes and this Deed of Trust unless otherwise directed by Beneficiary. 5.07 Statute of Limitations. The pleading of any statute of limitations as a defense to any and all obligations secured by this Deed of Trust is hereby waived to the fullest extent permitted by law. 5.08 Interpretation. Wherever used in this Deed of Trust, unless the context otherwise indicates a contrary intent, or unless otherwise specifically provided herein, the word "Trustor" shall mean and include both Trustor and any subsequent owner or owners of the Mortgaged Property, and the word "Beneficiary" shall mean and include not only the original Beneficiary hereunder but also any future owner and holder, including pledgees, of the Note secured hereby. In this Deed of Trust whenever the context so requires, the masculine gender includes the feminine and/or neuter, and the neuter includes the feminine and/or masculine, and the singular number includes the plural and conversely. In this Deed of Trust, the use of the word "including" shall not be deemed to limit the generality of the term or clause to which it has reference, whether or not nonlimiting language (such as "without limitation," or "but not limited to," or words of similar import) is used with reference thereto, but rather shall be deemed to include any word which could reasonably fall within the broadest possible scope of such general statement, term or matter. The captions and headings of the Articles and Sections of this Deed of Trust are for convenience only and are not to be used to interpret, define or limit the provisions of this Deed of Trust. 5.09 Consent; Delegation to Sub-Agents. The granting or withholding of consent by Beneficiary to any transaction as required by the terms hereof shall not be deemed a waiver of the right to require consent to future or successive transactions. Wherever a power of attorney is conferred upon Beneficiary hereunder, it is understood and agreed that such power is conferred with full power of substitution, and Beneficiary may elect in its sole discretion to exercise such power itself or to delegate such power, or any part thereof, to one or more sub-agents. 5.10 Successors and Assigns. All of the grants, obligations, covenants, agreements, terms, provisions and conditions herein shall run with the land and shall apply to, bind and inure to the benefit of, the heirs, administrators, executors, legal representatives, successors and assigns of Trustor and the successors in trust of Trustee and the endorsees, transferees, successors and assigns of Beneficiary. In the event Trustor is composed of more than one party, the obligations, covenants, agreements, and warranties contained herein as well as the obligations arising therefrom are and shall be joint and several as to each such party. 5.11 Governing Law. The loan secured by this Deed of Trust is made pursuant to, and shall be construed and governed by, the laws of the United States of America and the rules and regulations promulgated thereunder, including the federal laws, rules and regulations for federal savings and loan associations. 5.12 Substitution of Trustee. Beneficiary may remove Trustee at any time or from time to time and appoint a successor trustee, and upon such appointment, all powers, rights, duties and authority of Trustee, as aforesaid, shall thereupon become vested in such successor. Such substitute trustee shall be appointed by written instrument duly recorded in the county or counties where the real property covered hereby is located, which appointment may be executed by any authorized agent of Beneficiary or in any other manner permitted by applicable law. 5.13 No Waiver. No failure or delay by Beneficiary in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No waiver, consent or approval of any kind by Beneficiary shall be effective unless contained in writing signed and delivered by Beneficiary. No notice to or demand on Trustor in any case shall entitle Trustor to any other notice or demand in similar or other circumstances, nor shall such notice or demand constitute a waiver of the rights of Beneficiary to any other or further actions. 5.14 Beneficiary Not Partner of Trustor; Trustor to Indemnify Beneficiary. The exercise by Beneficiary of any of its rights, privileges or remedies conferred hereunder or under the Note or any other Related Agreements or under applicable law, shall not be deemed to render Beneficiary a partner or a coventurer with the Trustor or with any other person. Any and all of such actions will be exercised by Beneficiary solely in furtherance of its role as a secured lender advancing funds for use by the Trustor as provided in this Deed of Trust. Trustor shall indemnify Beneficiary against any claim by any third party for any injury, damage or liability of any kind arising out of any failure of Trustor to perform its obligations in this transaction, shall notify Beneficiary of any lawsuit based on such claim, and at Beneficiary's election, shall defend Beneficiary therein at Trustor's own expense by counsel satisfactory to Beneficiary or shall pay the Beneficiary's cost and attorneys' fees if Beneficiary chooses to defend itself on any such claim. 5.15 Time of Essence. Time is declared to be of the essence in this Deed of Trust, the Note and any Related Agreements and of every part hereof and thereof. 5.16 Entire Agreement. Once the Note, this Deed of Trust, and all of the other Related Agreements, if any, have been executed, all of the foregoing constitutes the entire agreement between the parties hereto and none of the foregoing may be modified or amended in any manner other than by supplemental written agreement executed by the parties hereto; provided, however, that all written and oral representations of Trustor, and of any partner, principal or agent of Trustor, previously made to Beneficiary shall be deemed to have been made to induce Beneficiary to make the loan secured hereby and to enter into the transaction evidenced hereby and by the Note and the Related Agreements, and shall survive the execution hereof and the closing pursuant hereto. This Deed of Trust cannot be changed or modified except by written agreement signed by both Trustor and Beneficiary. 5.17 No Third Party Benefits. This Deed of Trust, the Note and the other Related Agreements, if any, are made for the sole benefit of Trustor and Beneficiary and their successors and assigns, and convey no other legal interest to any party under or by reason of any of the foregoing. Whether or not Beneficiary elects to employ any or all of the rights, powers or remedies available to it under any of the foregoing, Beneficiary shall have no obligation or liability of any kind to any third party by reason of any of the foregoing or any of Beneficiary's actions or omissions pursuant thereto or otherwise in connection with this transaction. REQUEST FOR NOTICES Trustor hereby requests that a copy of any Notice of Default and Notice of Sale as may be required by law be mailed to Trustor at its address above stated. IN WITNESS WHEREOF, Trustor has executed this Deed of Trust as of the day and year first hereinabove written. TRUSTOR: _________________________________ _________________________________ EXHIBIT A DESCRIPTION OF THE PROPERTY STATE OF CALIFORNIA ) ) COUNTY OF ______________________) On __________________, 19___ before me, ___________________________, a Notary Public in and for said State, personally appeared______________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ___________________________________ (Signature) (SEAL) STATE OF CALIFORNIA ) ) COUNTY OF ___________________________) On __________________, 19___ before me, ___________________________, a Notary Public in and for said State, personally appeared __________ _______________________________________________personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ___________________________________ (Signature) (SEAL)~ EX-10.4(C) 17 DEED OF TRUST TO ACCOMPANY EX 10.3(D) Exhibit 10.4(c) RECORDING REQUESTED BY AND WHEN RECORDED, MAIL TO Name Address Title Order No. _________________ Escrow No. __________________ - -------------------------------------- SPACE ABOVE THIS LINE FOR RECORDERS USE Loan No. ____________________________________________________ DEED OF TRUST AND ASSIGNMENT OF RENTS BY THIS DEED OF TRUST, made this day of , 19 between herein called Trustor, whose address is and , a California corporation, herein called Trustee, and , herein called Beneficiary, Trustor grants, transfers, and assigns to Trustee, in trust, with power of sale, that property in_______________________ County, California, described as: Trustor also assigns to Beneficiary all rents, issues and profits of said realty reserving the right to collect and use the same except during continuance of default hereunder and during continuance of such default authorizing Beneficiary to collect and enforce the same by any lawful means in the name of any party hereto. For the purpose of securing: (1) Payment of the indebtedness by one promissory note in the principal sum of $ of even date herewith, payable to Beneficiary, and any extensions or renewals thereof; (2) the payment of any money that may be advanced by the Beneficiary to Trustor, or his successors, with interest thereon, evidenced by additional notes (indicating they are so secured) or by endorsement on the original note, executed by Trustor or his successor; (3) performance of each agreement of Trustor incorporated by reference or contained herein. On October 25, 1973, identical fictitious Deeds of Trust were recorded in the offices of the County Recorders of the Counties of the State of California, the first page thereof appearing in the book and at the page of the records of the respective County Recorder as follows: COUNTY BOOK PAGE COUNTY BOOK PAGE Alameda 3540 89 Marin 2736 463 Alpine 18 753 Mariposa 143 717 Amador 250 243 Mendocino 942 242 Butte 1870 678 Merced 1940 361 Calaveras 368 92 Modoc 225 668 Colusa 409 347 Mono 160 215 Contra Costa 7077 178 Monterey 877 243 Del Norte 174 526 Napa 922 96 El Dorado 1229 594 Nevada 665 303 Fresno 6227 411 Orange 10961 398 Glenn 565 290 Placer 1528 440 Humboldt 1213 31 Plumas 227 443 Imperial 1355 801 Riverside 1973 139405 Inyo 205 660 Sacramento 731025 59 Kern 4809 2351 San Benito 386 94 Kings 1018 394 San Bernadino 8294 877 Lake 743 552 San Francisco B820 585 Lassen 271 367 San Joaquin 3813 6 Los Angeles T8512 751 San Luis Obispo 1750 491 Madera 1176 234 San Mateo 6491 600 Santa Barbara 2486 1244 Santa Clara 0623 713 Santa Cruz 2358 744 Shasta 1195 293 Sierra 59 439 Siskiyou 697 407 Solano 1860 581 Sonoma 2810 975 Stanislaus 2587 332 Sutter 817 182 Tehema 630 522 Trinity 161 393 Tulare 3137 567 Tuolumne 396 309 Ventura 4182 662 Yolo 1081 335 Yuba 564 163 San Diego File No. 73- 299568 The provisions contained in Section A, including paragraphs 1 through 5, and the provisions contained in Section B, including paragraphs 1 through 9 of said fictitious Deeds of Trust are incorporated herein as fully as though set forth at length and in full herein, except certain amendments to the fictitious Deed of Trust are set forth on an amendment attached hereto and incorporated herein. The undersigned Trustor requests that a copy of any notice of default and any notice of sale hereunder be mailed to Trustor at the address hereinabove set forth, being the address designed for the purpose of receiving such notice. The Note securing this Deed of Trust provides as follows: Borrowers required repayment in full before scheduled date A. In the event of any sale or conveyance of any part of the real property described in the Deed of Trust securing this Note, then the Note Holder may demand payment in full of all amounts that I owe under this Note, as allowed by law. - ---------------------------------- --------------------------------- - ---------------------------------- ---------------------------------- - ----------------------------------------------------------------------------- DO NOT RECORD - Provisions incorporated from Recorded Fictitious Deed of Trust A. TO PROTECT THE SECURITY HEREOF, TRUSTOR AGREES: (1) To keep said property in good condition and repair, preserve thereon the buildings, complete construction begun, restore damage or destruction, and pay the cost thereof; to commit or permit no waste, no violation of laws or covenants or conditions relating to use, alterations or improvements; to cultivate, irrigate, fertilize, fumigate, prune, and do all other acts which the character and use of said property and the estate or interest in said property secured by this Deed of Trust may require to preserve this security. (2) To provide, maintain and deliver to Beneficiary fire insurance satisfactory to and with loss payable to Beneficiary. The amount collected under any fire or other insurance policy may be applied by Beneficiary upon any indebtedness secured hereby and in such order as Beneficiary may determine, or Beneficiary may release all or any part thereof to Trustor. Such application or release shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. (3) To appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; and to pay all costs and expenses, including cost of evidence of title and attorneys fees in a reasonable sum, in any such action or proceeding in which Beneficiary or Trustee may appear. B. IT IS MUTUALLY AGREED THAT: (1) Any award of damages in connection with any condemnation for public use of or injury to said property or any part thereof is hereby assigned to Beneficiary, who may apply or release such moneys received by him in the same manner and with the same effect as provided for disposition of proceeds of fire or other insurance. (2) By accepting payment of any sum secured hereby after its due date, Beneficiary does not waive his right either to require payment when due of all other sums so secured or to declare default for failure so to pay. (3) At any time or from time to time, without liability therefor and without notice, upon written request of Beneficiary and presentation of this Deed and said note for endorsement, and without affecting the personal liability of any person for payment of the indebtedness secured hereby, Trustee may: reconvey any part of said property; consent to the making of any map thereof; join in granting any easement thereon; or join in any agreement extending or subordinating the lien or charge hereof. (4) Upon written request of Beneficiary stating that all sums secured hereby have been paid, and upon surrender of this Deed and said note to Trustee for cancellation and retention and upon payment of its fees, Trustee shall reconvey, without warranty, the property then held hereunder. The recitals in such reconveyance of any matters or facts shall be conclusive proof of the truthfulness thereof. The grantee in such reconveyance may be described as the person or persons legally entitled thereto. (5) Upon default by Trustor in payment of any indebtedness secured hereby or in performance of any agreement hereunder, Beneficiary may declare all sums secured hereby immediately due and payable by delivery to Trustee of written declaration of default and demand for sale and of written notice of default and of election to cause said property to be sold, which notice Trustee shall cause to be duly filed for record. Beneficiary also shall deposit with Trustee this Deed, said note and all documents evidencing expenditures secured hereby. Trustee shall give notice of sale as then required by law, and without demand on Trustor, at least three months having elapsed after recordation of such notice of default, shall sell said property at the time and place of sale fixed by it in said notice of sale, either as a whole or in separate parcels and in such order as it may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. (4) To pay: at least ten days before delinquency all taxes and assessments affecting said property, including assessments on appurtenant water stock; when due, all encumbrances, charges and liens, with interest, on said property or any part thereof, which appear to be prior or superior hereto; all costs, fees and expenses of this Trust. Should Trustor fail to make any payment or to do any act as herein provided, then Beneficiary or Trustee, but without obligation so to do and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereof, may: make or do the same in such manner and to such extent as either may deem necessary to protect the security hereof, Beneficiary or Trustee being authorized to enter upon said property for such purposes; appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; pay, purchase, contest or compromise any encumbrance, charge or lien, which in the judgment of either appears to be prior or superior hereto; and, in exercising any such powers, pay necessary expenses, employ counsel and pay his reasonable fees. (5) To pay immediately and without demand all sums so expended by Beneficiary or Trustee, with interest from date of expenditure at seven per cent per annum, and to pay for any statement provided for by law regarding the obligations secured hereby in the amount demanded by Beneficiary, not exceeding the maximum amount permitted by law at the time of the request therefore. Trustee may postpone sale of all or any portion of said property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement. Trustee shall deliver to such purchaser its deed conveying the property so sold, but without any covenant or warranty, expressed or implied. The recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Trustor, Trustee, or Beneficiary as hereinafter defined, may purchase at such sale. After deducting all costs, fees and expenses of Trustee and of this Trust, including cost of evidence of title in connection with sale, Trustee shall apply the proceeds of sale to payment of: all sums expended under the terms hereof, not then repaid, with accrued interest at seven per cent per annum; all other sums then secured hereby; and the remainder, if any, to the person or persons legally entitled thereto. (6) This Deed applies to, inures to the benefit of, and binds all parties hereto, their legal representatives and successors in interest. The term Beneficiary shall include any future owner and holder, including pledgees, of the note secured hereby. In this Deed, whenever the context so requires, the masculine gender includes the feminine and/or neuter, and the singular number includes the plural. (7) Trustee accepts this Trust when this Deed, duly executed and acknowledged, is made a public record as provided by law. Trustee is not obligated to notify any party hereto of pending sale under any other Deed of Trust or of any action or proceeding in which Trustor, Beneficiary or Trustee shall be a party unless brought by Trustee. (8) The Trusts created hereby are irrevocable by Trustor. (9) Beneficiary may substitute a successor Trustee from time to time by recording in the Office of the Recorder or Recorders of the county where the property is located an instrument stating the election by the Beneficiary to make such substitution, which instrument shall identify the Deed of Trust by recording reference, and by the name of the original Trustor, Trustee and Beneficiary, and shall set forth the name and address of the new Trustee, and which instrument shall be signed by the Beneficiary and duly acknowledged. EX-10.6 18 AGREEMENT TO SEEK A LENDER Exhibit 10.6 AGREEMENT TO SEEK A LENDER (Agency Agreement) Date: _________________________ I engage REDWOOD MORTGAGE (the Broker) to act as my exclusive agent to find a lender or lenders willing to loan money to me in the principal amount of $_______________, bearing interest at ______ percent (__________%) per annum according to the terms of the Mortgage Loan Disclosure Statement/Good Faith Estimate (the Disclosure Statement) I have executed with Broker, a copy of which is attached to this Agreement, or upon other terms and conditions as I approve. The loan is to be secured by a Deed of Trust on real property owned entirely or in part by me at _________________________. I agree to pay a brokerage commission, processing charges and fees for arranging the loan in accordance with the Disclosure Statement. If my loan application is approved by Broker in its sole discretion, Broker shall use its best efforts to obtain a lender or lenders willing to loan the requested funds to me. The Broker shall have the exclusive right to act as my agent in this regard for a period of sixty (60) days from the date the loan application is approved, except that if this loan application is for a loan which is subject to California Business and Professions Code 10243, then the period of agency shall be forty five (45) days from the date the loan application is approved. I recognize that in addition to acting as my agent, Broker may also be acting as agent for lenders seeking borrowers such as private parties, institutional lenders or government agencies, including the lender which ultimately lends me money. I agree that Broker may act as dual agent for me and for any lender to me. In addition, I recognize that Broker may, if it so chooses, lend me its own funds or funds which it controls. Broker shall incur no liability to me if it is unable to obtain a lender interested in loaning money to me, and Broker has no obligation to loan me its own funds. If loan funds are not disbursed because of any information I fail to disclose accurately, for instance the existence and terms of any lien affecting the property which will be security for this loan, or actual title to such property, I understand that Broker has performed its duties and may incur expenses and liabilities to other parties. Therefore, I agree to pay Broker the commission and all other expenses incurred in arranging the loan as listed in the Disclosure Statement as may be provided by law. I hereby authorize Broker to deliver to a prospective lender credit information available to Broker, including reports received from Credit Reporting Agencies. If applicable, Broker shall retain possession of original Note and original Deed of Trust, and forward them in accordance with the instructions of the lender. I recognize and agree that this agreement may be terminated by Broker at any time before funding of the loan to me. I further recognize and agree that this agreement shall automatically terminate when the loan funds are disbursed to me and that Broker has no further obligations to me at that time and that Broker may continue to act as agent for lender during the time the loan to me is outstanding. I agree that all claims or disputes between me and Broker arising out of or relating to the loan, including Brokers arranging of the loan and my disclosure of information to Broker shall be determined by binding arbitration in accordance with the rules of the American Arbitration Association and that the judgment of the arbitrators may be entered in a court of law. I UNDERSTAND THAT BY SIGNING THIS AGREEMENT I AM GIVING UP THE RIGHT TO A JURY OR COURT TRIAL AND AGREEING TO HAVE DISPUTES DECIDED BY NEUTRAL ARBITRATORS. I have read the above Agreement and I do agree. ____________________________________ ___________________________ (Name) (Date) ____________________________________ ___________________________ (Name) (Date) THE REAL PROPERTY WHICH WILL SECURE THE REQUESTED LOAN IS OWNER-OCCUPIED Yes ______ No _______ EX-24.1 19 CONSENT OF PARODI & CROPPER Exhibit 24.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO REDWOOD MORTGAGE INVESTORS VIII: we hereby consent to the use of our reports accompanying the balance sheets of the General Partner, Gymno Corporation, and the Partnership, REDWOOD MORTGAGE INVESTORS VIII, in the prospectus, and any supplements thereto, and Registration Statement filed on Form S-11 for REDWOOD MORTGAGE INVESTORS VIII. We also consent to the reference to our firm under the reference EXPERTS in the Prospectus. ----------------------------------- PARODI & CROPPER Lafayette, California _______________,1996 EX-24.2 20 CONSENT OF WILSON, RYAN & CAMPILONGO Exhibit 24.2 CONSENT OF COUNSEL TO REDWOOD MORTGAGE INVESTORS VIII We hereby consent to the use in this Registration Statement on Form S-11 and any amendments or supplements of our form of opinions in respect to certain tax and ERISA matters and legality as to the issuance of securities, and to any reference to our firm included in or made a part of the Registration Statement. In giving this consent, we do not thereby admit that we come within the category of persons whose consent is required under the Securities Act of 1933, as amended, or the Rules and Regulations promulgated thereunder. ----------------------------------------- WILSON, RYAN & CAMPILONGO San Francisco, California ______________,1996 EX-27 21 FDS -- WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE FINANCIAL STATEMENTS OF GYMNO CORPORATION, INC., FOR THE FISCAL YEAR ENDED JUNE 30, 1996 (AUDITED), AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. GYMNO CORPORATION, INC. 1 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 398 0 120 0 0 518 0 0 47809 5793 0 0 0 5000 37016 47809 0 14709 0 0 11619 0 320 2770 1217 1553 0 0 0 1553 3.11 3.11 AMOUNTS LISTED UNDER COMMON STOCK AND PREFERRED STOCK REPRESENT CLASS A AND CLASS B BENEFICIAL INTERESTS, RESPECTIVELY, IN THE BUSINESS TRUST.
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