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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-K
Annual Report Pursuant to Section 13 or
15(d) of The Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002 Commission file number
0-17248
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California 68-0023931
- ------------------------ ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2221 Olympic Boulevard
Walnut Creek, California 94595
- ------------------------ -----
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code (925) 935-3840
--------------
Securities to be registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Not applicable Not applicable
Securities to be registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits filed with Registrant's Registration Statement No.333-69272 are
incorporated by reference into Part IV.
Exhibit Index at page 59.
Part I
Item 1. Business
The Partnership is a California limited partnership organized on June
14, 1984, which invests in first, second, third, wraparound and construction
mortgage loans and loans on leasehold interest mortgages. In June 1985, the
Partnership became the successor-in-interest to Owens Mortgage Investment Fund
I, a California limited partnership formed in June 1983 with the same policies
and objectives as the Partnership. In October 1992, the Partnership changed its
name from Owens Mortgage Investment Partnership II to Owens Mortgage Investment
Fund, a California Limited Partnership. The address of the Partnership is P.O.
Box 2400, 2221 Olympic Blvd., Walnut Creek, CA 94595. Its telephone number is
(925) 935-3840.
Owens Financial Group, Inc. (the General Partner) makes, arranges or
purchases all of the loans invested in by the Partnership. The Partnership's
mortgage loans are secured by mortgages on unimproved, improved,
income-producing and non-income-producing real property, such as apartments,
shopping centers, office buildings, and other commercial or industrial
properties. No single Partnership loan may exceed 10% of the total Partnership
assets as of the date the loan is made.
The following table shows the total Partnership capital, mortgage
investments and net income as of and for the years ended December 31, 2002,
2001, 2000, 1999, 1998 and 1997.
Total Partners' Mortgage Net
Capital Investments Income
2002............................ $ 280,350,974 $ 260,211,121 $ 21,669,959
2001............................ $ 272,286,714 $ 213,703,469 $ 21,889,224
2000............................ $ 238,757,190 $ 223,273,464 $ 22,535,056
1999 ........................... $ 214,611,813 $ 200,356,517 $ 17,479,853
1998 ........................... $ 201,340,802 $ 182,721,465 $ 16,978,692
1997............................ $ 190,731,135 $ 174,714,607 $ 15,420,247
As of December 31, 2002, the Partnership held investments in 100
mortgage loans, secured by liens on title and leasehold interests in real
property, and one loan secured by a collateral assignment of a limited liability
company that owns and is developing commercial real property in Arizona. 43% of
the mortgage loans are located in Northern California. The remaining 57% are
located in Southern California, Arizona, Colorado, Connecticut, Hawaii, Idaho,
Missouri, Nevada, Ohio, Oregon, Texas, Virginia and Washington.
The following table sets forth the types and maturities of mortgage investments
held by the Partnership as of December 31, 2002:
TYPES AND MATURITIES OF MORTGAGE INVESTMENTS
(As of December 31, 2002)
Number of Loans Amount Percent
1st Mortgages.................................... 89 $ 241,335,259 92.75%
2nd Mortgages.................................... 11 18,875,862 7.25%
--- ------------- -------
100 $ 260,211,121 100.00%
=== ============= =======
Maturing on or before December 31, 2003 (1)...... 53 $ 160,350,025 61.62%
Maturing on or between January 1, 2004 and December
31, 2006....................................... 32 80,626,284 30.99%
Maturing on or between January 1, 2007 and September
1, 2018 15 19,234,812 7.39%
--- ------------- -------
100 $ 260,211,121 100.00%
=== ============= =======
Income Producing Properties...................... 85 $ 228,210,411 87.70%
Construction..................................... 4 12,670,310 4.87%
Unimproved Land.................................. 8 16,938,678 6.51%
Residential...................................... 3 2,391,722 0.92%
--- ------------- -------
100 $ 260,211,121 100.00%
=== ============= =======
- --------
(1) Approximately $47,129,000 was past maturity as of December 31, 2002.
The average loan balance of the mortgage loan portfolio of $2,602,000
as of December 31, 2002 is considered by the General Partner to be a reasonable
diversification of investments concentrated in mortgages secured by commercial
properties. Of such investments, 13.0% earn a variable rate of interest and
87.0% earn a fixed rate of interest. All were negotiated according to the
Partnership's investment standards.
As of December 31, 2002, the Partnership was invested in construction
loans in the amount of approximately $12,670,000 and in loans secured by
leasehold interests of $25,423,000.
The Partnership has other assets in addition to its mortgage
investments, comprised principally of the following:
o $6,684,000 in cash and cash equivalents held for investment, required
to transact the business of the Partnership and/or in conjunction with
contingency reserve requirements;
o $31,742,000 in real estate held for sale and investment; and
o $3,177,000 in interest and other receivables.
Delinquencies
The General Partner does not regularly examine the existing loan
portfolio to see if acceptable loan-to-value ratios are being maintained because
the majority of loans mature in a period of only 1-3 years. The General Partner
will perform an internal review on a loan secured by property in the following
circumstances:
o payments on the loan become delinquent;
o the loan is past maturity;
o it learns of physical changes to the property securing the loan or to
the area in which the property is located; or
o it learns of changes to the economic condition of the borrower or of
leasing activity of the property securing the loan.
A review includes a physical evaluation of the property securing the
loan and the area in which the property is located, the financial stability of
the borrower, and the property's occupancy.
As of December 31, 2002, the Partnership's portfolio included
$26,327,000 (compared with $18,604,000 as of December 31, 2001) of loans
delinquent more than 90 days, representing 10.1% of the Partnership's investment
in mortgage loans. Loans delinquent more than 90 days have historically
represented between 3% to 10% of the total loans outstanding at any given time.
The balance of delinquent loans at December 31, 2002 includes $6,503,000
(compared with $5,327,000 as of December 31, 2001) in the process of foreclosure
and $4,300,000 (compared with $6,182,000 as of December 31, 2001) involving
loans to borrowers who are in bankruptcy. The General Partner believes that
these loans may result in a loss of principal and foregone interest. However,
the General Partner believes that the $4,4,774,000 allowance for losses on loans
which is maintained in the financial statements of the Partnership as of
December 31, 2002 is sufficient to cover any potential losses of principal. With
the exception of the Sonora property on which the Partnership recorded a loss of
$712,000 in 1997, $614,000 of losses on two loans in 2001 and the $1,235,000
loss recognized at foreclosure on a motel property located in Phoenix, Arizona
during 2002, the Partnership has not suffered material losses on defaults or
foreclosures.
Of the $18,604,000 that was delinquent as of December 31, 2001,
$5,353,000 remained delinquent as of December 31, 2002, $3,364,000 was paid off,
$5,525,000 became real estate acquired through foreclosure of the Partnership,
and $4,362,000 was brought current.
In limited instances where the Partnership has participated in loans
with third parties, the General Partner has advanced certain payments on behalf
of borrowers of Partnership loans, such as property taxes, insurance and
mortgage interest pursuant to senior indebtedness. Such payments made on loans
by the General Partner during 2002 totaled approximately $67,000 of which
$51,000 had been reimbursed to OFG by the borrowers as of December 31, 2002. The
Partnership has no obligation to repay such amounts to the General Partner.
Following is a table representing the Partnership's delinquency
experience (over 90 days) as of December 31, 1999, 2000, 2001 and 2002 and
foreclosures by the Partnership during the years ended December 31, 1999, 2000,
2001 and 2002:
1999 2000 2001 2002
---- ---- ---- ----
Delinquent Loans....................... $ 7,415,000 $ 8,014,000 $ 18,604,000 $ 26,327,000
Loans Foreclosed....................... $ 2,001,000 $ 685,000 $ 3,369,000 $ 9,370,000
Total Mortgage Investments............. $ 200,357,000 $ 223,273,000 $ 213,703,000 $ 260,211,000
Percent of Delinquent Loans to Total Loans 3.70% 3.59% 8.71% 10.12%
If the delinquency rate increases on loans held by the Partnership, the
interest income of the Partnership will be reduced by a proportionate amount.
For example, if an additional 10% of the Partnership loans become delinquent,
the mortgage interest income of the Partnership would be reduced by
approximately 10%. If a mortgage loan held by the Partnership is foreclosed on,
the Partnership will acquire ownership of real property and the inherent
benefits and detriments of such ownership.
Compensation to the General Partner
The General Partner receives various forms of compensation and
reimbursement of expenses from the Partnership and compensation from borrowers
under mortgage loans held by the Partnership.
Compensation and Reimbursement from the Partnership
Management Fees
Management fees to the General Partner are paid pursuant to the
Partnership Agreement and are determined at the sole discretion of the General
Partner. The management fee is paid monthly and cannot exceed 2 3/4% annually of
the average unpaid balance of the Partnership's mortgage loans at the end of
each of the 12 months in the calendar year. Since this fee is paid monthly, it
could exceed 2 3/4% in one or more months, but the total fee in any one year is
limited to a maximum of 2 3/4%, and any amount paid above this must be repaid by
the General Partner to the Partnership. The General Partner is entitled to
receive a management fee on all loans, including those that are delinquent. The
General Partner believes this is justified by the added effort associated with
such loans. In order to maintain a competitive yield for the Partnership, the
General Partner in the past has chosen not to take the maximum allowable
compensation. A number of factors are considered in the General Partner's
monthly meeting to determine the yield to pay to partners. These factors
include:
o Interest rate environment and recent trends in interest rates on loans
and similar investment vehicles;
o Delinquencies on Partnership loans;
o Level of cash held pending investment in mortgage loans; and
o Real estate activity, including net operating income from real estate
and gains/losses from sales.
Once the yield is set and all other items of tax basis income and
expense are determined for a particular month, the management fees are also set
for that month. Large fluctuations in the management fees paid to the General
Partner are normally a result of extraordinary items of income or expense within
the Partnership (such as gains or losses from sales of real estate, etc.) or
fluctuations in the level of delinquent loans, since the majority of the
Partnership's assets are invested in mortgage loans.
If the maximum management fees had been paid to the General Partner
during the year ended December 31, 2002, the management fees would have been
$6,724,000 (increase of $3,108,000), which would have reduced net income
allocated to limited partners by approximately 14.3%, and net income allocated
to limited partners per weighted average limited partner unit by the same
percentage to $.07.
If the maximum management fees had been paid to the General Partner
during the years ended December 31, 2001 and 2000, the management fees would
have been $6,287,000 (increase of $2,849,000) and 5,845,000 (increase of
$1,931,000), respectively, which would have reduced net income allocated to
limited partners by approximately 13.0% and 8.7%, respectively, and net income
allocated to limited partners per weighted average limited partner unit by the
same percentages to $.07 and $.09, respectively.
The maximum management fee permitted under the Partnership Agreement is
2 3/4% per year of the average upaid balance of mortgage loans. For the years
2000, 2001 and 2002, the management fees were 1.85%, 1.48% and 1.46% of the
average unpaid balance of mortgage loans, respecitvely.
Servicing Fees
The General Partner has serviced all of the mortgage loans held by the
Partnership and expects to continue this policy. The Partnership Agreement
permits the General Partner to receive from the Partnership a monthly servicing
fee, which, when added to all other fees paid in connection with the servicing
of a particular loan, does not exceed the lesser of the customary, competitive
fee in the community where the loan is placed for the provision of such mortgage
services on that type of loan or up to 0.25% per annum of the unpaid balance of
mortgage loans held by the Partnership. The General Partner has historically
been paid the maximum servicing fee allowable.
Carried Interest
Based upon the Partnership's investment in mortgages of a minimum of
86.5% of capital contributions, the General Partner receives a carried interest
of 1/2 of 1% of the aggregate capital accounts of the limited partners, which is
additional compensation to the General Partner. The carried interest is
increased each month by 1/2 of 1% of the net increase in the capital accounts of
the limited partners. If there is a net decrease in the capital accounts for a
particular month, no carried interest is allocated for that month and the
allocation to carried interest is "trued-up" to the correct 0.5% amount in the
next month that there is an increase in the net change in capital accounts.
Thus, if the Partnership generates an annual yield on capital of the limited
partners of 10%, the General Partner would receive additional distributions on
its carried interest of approximately $150,000 per year if $300,000,000 of Units
were outstanding. In addition, if the Partnership were liquidated, the General
Partner could receive up to $1,500,000 in capital distributions without having
made equivalent cash contributions as a result of its carried interest. These
capital distributions, however, will be made only after the limited partners
have received capital distributions equaling 100% of their capital
contributions.
Reimbursement of Other Expenses
The General Partner is reimbursed by the Partnership for the actual
cost of goods and materials used for or by the Partnership and obtained from
unaffiliated entities and the actual cost of services of non-management and
non-supervisory personnel related to the administration of the Partnership
(subject to certain limitations contained in the Partnership Agreement).
Compensation from Borrowers
In addition to compensation from the Partnership, the General Partner
also receives compensation from borrowers under the mortgage loans placed by the
General Partner with the Partnership.
Loan Origination Fees
Loan origination fees, also called mortgage placement fees or points,
are paid to the General Partner by the borrowers of loans held by the
Partnership, with the exception of certain loans not originated by the General
Partner. These fees are compensation for the evaluation, origination, extension
and refinancing of loans for the borrowers and may be paid at the placement,
extension or refinancing of the loan or at the time of final repayment of the
loan. The amount of these fees is determined by competitive conditions and the
General Partner and may have a direct effect on the interest rate borrowers are
willing to pay the Partnership.
Late Payment Charges
All late payment charges paid by borrowers of delinquent mortgage
loans, including additional interest and late payment fees, are retained by the
General Partner. Generally, on the majority of the Partnership's loans, the late
payment fee charged to the borrower for late payments is 10% of the payment
amount. In addition, on the majority of the Partnership's loans, the additional
interest charge required to be paid by borrowers once a loan is past maturity is
in the range of 3%-5% (paid in addition to the pre-default interest rate).
Table of Compensation and Reimbursed Expenses
The following table summarizes the compensation and reimbursed expenses
paid to the General Partner or its affiliates for the years ended December 31,
2002 and 2001, showing actual amounts and the maximum allowable amounts for
management and servicing fees. No other compensation was paid to the General
Partner during these periods. The fees were established by the General Partner
and were not determined by arms'-length negotiation.
Year Ended Year Ended
---------- ----------
December 31, 2002 December 31, 2001
----------------- -----------------
Maximum Maximum
Form of Compensation Actual Allowable Actual Allowable
- -------------------- ------ --------- ------ ---------
Paid by the Partnership:
Management Fees*..................... $ 3,616,000 $ 6,724,000 $ 3,438,000 $ 6,287,000
Servicing Fees....................... 611,000 611,000 572,000 572,000
Carried Interest..................... 40,000 40,000 173,000 173,000
------------- ------------ ------------ ------------
Subtotal $ 4,267,000 $ 7,375,000 $ 4,183,000 $ 7,032,000
------------- ------------ ------------ ------------
Paid by Borrowers:
Loan Origination Fees................ $ 5,815,000 $ 5,815,000 $ 6,990,000 $ 6,990,000
Late Payment Charges................. 649,000 649,000 1,297,000 1,297,000
------------ ------------- ------------- ------------
Subtotal $ 6,464,000 $ 6,464,000 $ 8,287,000 $ 8,287,000
------------ ------------- ------------- ------------
Grand Total $ 10,731,000 $ 13,839,000 $ 12,470,000 $ 15,319,000
============ ============= ============= ============
Reimbursement by the Partnership of
Other Expenses $ 217,000 $ 217,000 $ 32,000 $ 32,000
============== =============== =============== ===============
- -------
* The management fees paid to the General Partner are determined by the General
Partner within the limits set by the Partnership Agreement. An increase or
decrease in the management fees paid directly impacts the yield paid to the
partners.
Aggregate actual compensation paid by the Partnership and by borrowers
to the General Partner during the years ended December 31, 2002 and 2001,
exclusive of expense reimbursement, was $10,731,000 and $12,470,000,
respectively, or 3.8% and 4.6%, respectively, of partners' capital. If the
maximum amounts had been paid to the General Partner during these periods, the
compensation, excluding reimbursements, would have been $13,839,000 and
$15,319,000, respectively, or 4.9% and 5.6%, respectively, of partners' capital,
which would have reduced net income allocated to limited partners by
approximately 14.3% and 13.0%, respectively.
Loan origination fees as a percentage of loans purchased by the
Partnership were 4.2%, 4.3% and 6.8% for the years ended December 31, 2002,
2001, and 2000, respectively. Of the $5,815,000 in loan origination fees accrued
during the year ended December 31, 2002, approximately $2,142,000 were back-end
fees earned as of December 31, 2002 but will not be collected until the related
loans are paid off in full. Of the $6,990,000 in loan origination fees accrued
during the year ended December 31, 2001, approximately $225,000 were back-end
fees earned as of December 31, 2001 but will not be collected until the related
loans are paid off in full. Of the $7,936,000 in loan origination fees accrued
during the year ended December 31, 2000, approximately $5,033,000 were back-end
fees earned but not collected as of December 31, 2000. In the year ended
December 31, 2000, two loans in the total amount of $45,419,000 had loan
origination fees totaling $4,542,000.
The General Partner believes that the maximum allowable compensation
payable to the General Partner is commensurate with the services provided.
However, in order to maintain a competitive yield for the Partnership, the
General Partner in the past has chosen not to take the maximum allowable
compensation. If it chooses to take the maximum allowable, the amount of net
income available for distribution to limited partners would be reduced during
each such year.
Principal Investment Objectives
The Partnership invests primarily in mortgage loans on commercial,
industrial and residential income-producing real property and land. The General
Partner arranges, makes and/or purchases all loans, which are then either made
or purchased by the Partnership, on a loan-by-loan basis. Normally, when the
Partnership has sufficient funds available to make or invest in a specific loan,
the General Partner will give the Partnership priority in making or purchasing
the loan over other persons to whom the General Partner may sell loans as a part
of its business. However, there may be limited instances when another investor
may be given priority over the Partnership to purchase a particular loan, such
as when the particular loan does not meet all of the investment criteria of the
Partnership or when the General Partner does not want to add more of a
particular loan type to the Partnership's portfolio. Factors that further
influence the General Partner in determining whether the Partnership has
priority over other investors include the following:
o All loans arranged by the General Partner which are secured by
property located outside the State of California and that satisfy
investment criteria of the Partnership will be acquired by the
Partnership; and
o All hypothecation loans (also called "wrap-around loans" or
"all-inclusive deeds of trust") will be made or acquired by the
Partnership. A hypothecation loan is one in which the security for
the loan is the assignment of another secured promissory note.
In December 2001, the Partnership obtained its California Finance
Lender ("CFL") license to enable it to fund loans directly to borrowers.
Obtaining this license has not changed the business of the Partnership in any
way or changed the duties of or fees paid to the General Partner. The main
benefit of the Partnership receiving its CFL license is the quicker investment
of proceeds from capital contributions and loan payoffs into new loans, which
may increase the income earned by the Partnership.
The Partnership's two principal investment objectives are to preserve
the capital of the Partnership and provide monthly cash distributions to the
limited partners. It is not an objective of the Partnership to provide
tax-sheltered income. Under the Partnership Agreement, the General Partner would
be permitted to modify these investment objectives without the vote of limited
partners but has no authority to do anything that would make it impossible to
carry on the ordinary business as a mortgage investment limited partnership.
The General Partner locates and identifies virtually all mortgages the
Partnership invests in and makes all investment decisions on behalf of the
Partnership in its sole discretion. The limited partners are not entitled to act
on any proposed investment. In evaluating prospective investments, the General
Partner considers such factors as the following:
o the ratio of the amount of the investment to the value of the property
by which it is secured;
o the property's potential for capital appreciation;
o expected levels of rental and occupancy rates;
o current and projected cash flow generated by the property;
o potential for rental rate increases;
o the marketability of the investment;
o geographic location of the property;
o the condition and use of the property;
o the property's income-producing capacity;
o the quality, experience and creditworthiness of the borrower;
o general economic conditions in the area where the property is located;
and
o any other factors that the General Partner believes are relevant.
Substantially all investment loans of the Partnership are arranged or
originated by the General Partner, which is licensed by the State of California
as a real estate broker and California Finance Lender. During the course of its
business, the General Partner is continuously evaluating prospective
investments. The General Partner originates loans from mortgage brokers,
previous borrowers, and by personal solicitations of new borrowers. The
Partnership may purchase or participate in existing loans that were originated
by other lenders. Such a loan might be obtained by the General Partner from a
third party and sold to the Partnership at an amount equal to or less than its
face value. The General Partner evaluates all potential mortgage loan
investments to determine if the security for the loan and the loan-to-value
ratio meet the standards established for the Partnership, and if the loan can
meet the Partnership's investment criteria and objectives. An appraisal will be
ordered on the property securing the loan, and an officer, director, agent or
employee of the General Partner will inspect the property during the loan
approval process.
The Partnership requires that each borrower obtain a title insurance
policy as to the priority of the mortgage and the condition of title. The
Partnership obtains an independent appraisal from a qualified appraiser for each
property in which it invests. Appraisals will ordinarily take into account
factors such as property location, age, condition, estimated replacement cost,
community and site data, valuation of land, valuation by cost, valuation by
income, economic market analysis, and correlation of the foregoing valuation
methods. The General Partner additionally relies on its own independent analysis
in determining whether or not to make a particular mortgage loan.
The General Partner has the power to cause the Partnership to become a
joint venturer, partner or member of an entity formed to own, develop, operate
and/or dispose of properties owned or co-owned by the Partnership acquired
through foreclosure of a loan. To date, the Partnership has entered into four
such ventures for purposes of developing and disposing of properties acquired by
the Partnership through foreclosure. The General Partner may enter into such
ventures in the future.
Types of Mortgage Loans
The Partnership invests in first, second, and third mortgage loans,
wraparound mortgage loans, construction mortgage loans on real property, and
loans on leasehold interest mortgages. The Partnership does not ordinarily make
or invest in mortgage loans with a maturity of more than 15 years, and most
loans have terms of 1-3 years. Virtually all loans provide for monthly payments
of interest and some also provide for principal amortization. Most Partnership
loans provide for payments of interest only and a payment of principal in full
at the end of the loan term. The General Partner does not generally originate
loans with negative amortization provisions. The Partnership does not have any
policies directing the portion of its assets that may be invested in
construction loans, loans secured by leasehold interests and second, third and
wrap-around mortgage loans. However, the General Partner recognizes that these
types of loans are riskier than first deeds of trust on income-producing, fee
simple properties and will seek to minimize the amount of these types of loans
in the Partnership's portfolio. Additionally, the General Partner will consider
that these loans are riskier when determining the rate of interest on the loans.
First Mortgage Loans
First mortgage loans are secured by first deeds of trust on real
property. Such loans are generally for terms of 1-3 years. In addition, such
loans do not usually exceed 80% of the appraised value of improved residential
real property, 50% of the appraised value of unimproved real property, and 75%
of the appraised value of commercial property.
Second and Wraparound Mortgage Loans
Second and wraparound mortgage loans are secured by second or
wraparound deeds of trust on real property which is already subject to prior
mortgage indebtedness, in an amount which, when added to the existing
indebtedness, does not generally exceed 75% of the appraised value of the
mortgaged property. A wraparound loan is one or more junior mortgage loans
having a principal amount equal to the outstanding balance under the existing
mortgage loans, plus the amount actually to be advanced under the wraparound
mortgage loan. Under a wraparound loan, the Partnership generally makes
principal and interest payments on behalf of the borrower to the holders of the
prior mortgage loans.
Third Mortgage Loans
Third mortgage loans are secured by third deeds of trust on real
property which is already subject to prior first and second mortgage
indebtedness, in an amount which, when added to the existing indebtedness, does
not generally exceed 75% of the appraised value of the mortgaged property.
Construction Loans
Construction loans are loans made for both original development and
renovation of property. Construction loans invested in by the Partnership are
generally secured by first deeds of trust on real property for terms of six
months to two years. In addition, if the mortgaged property is being developed,
the amount of such loans generally will not exceed 75% of the post-development
appraised value.
The Partnership will not usually disburse funds on a construction loan
until work in the previous phase of the project has been completed, and an
independent inspector has verified completion of work to be paid for. In
addition, the Partnership requires the submission of signed labor and material
lien releases by the contractor in connection with each completed phase of the
project prior to making any periodic disbursements of loan proceeds.
Leasehold Interest Loans
Loans on leasehold interests are secured by an assignment of the
borrower's leasehold interest in the particular real property. Such loans are
generally for terms of from six months to 15 years. Leasehold interest loans
generally do not exceed 75% of the value of the leasehold interest. The
leasehold interest loans are either amortized over a period that is shorter than
the lease term or have a maturity date prior to the date the lease terminates.
These loans permit the General Partner to cure any default under the lease.
Variable Rate Loans
Approximately 13.0% ($33,859,000) of the Partnership's loans as of
December 31, 2002 bear interest at a variable rate. Variable rate loans
originated by the General Partner may use as indices the one and five year
Treasury Constant Maturity Index, the Prime Rate Index or the Monthly Weighted
Average Cost of Funds Index for Eleventh District Savings Institutions (Federal
Home Loan Bank Board).
The General Partner may negotiate spreads over these indices of from
2.5% to 5.5%, depending upon market conditions at the time the loan is made.
The following is a summary of the various indices described above as of
December 31, 2002 and December 31, 2001:
December 31, December 31,
2002 2001
---------------- -------------
One-year Treasury Constant Maturity Index 1.41% 2.28%
Five-year Treasury Constant Maturity Index 2.89% 4.49%
Prime Rate Index 4.25% 4.75%
Monthly Weighted Average Cost of Funds for
Eleventh District Savings Institutions 2.54% 3.37%
The majority of the Partnership's variable rate loans use the five-year
Treasury Constant Maturity Index. This index tends to be less sensitive to
fluctuations in market rates. Thus, it is possible that the rates on the
Partnership's variable rate loans will rise slower than the rates of other loan
investments available to the Partnership. However, most variable rate loans
arranged by the General Partner contain provisions whereby the interest rate
cannot fall below the starting rate (the "floor rate"). Thus, for variable rate
loans, the Partnership is generally protected against declines in general market
interest rates.
Interest Rate Caps
All of the Partnership's variable rate loans have interest rate caps.
The interest rate cap is generally a ceiling that is 2-4% above the starting
rate with a floor rate equal to the starting rate. The inherent risk in interest
rate caps occurs when general market interest rates exceed the cap rate.
Assumability
Variable rate loans of 5 to 10 year maturities are generally not
assumable without the prior consent of the General Partner. The Partnership does
not typically make or invest in other assumable loans. To minimize risk to the
Partnership, any borrower assuming a loan is subject to the same stringent
underwriting criteria as the original borrower.
Prepayment Penalties
The Partnership's loans typically do not contain prepayment penalties.
If the Partnership's loans are at a high rate of interest in a market of falling
interest rates, the failure to have a prepayment penalty provision in the loan
allows the borrower to refinance the loan at a lower rate of interest, thus
providing a lower yield to the Partnership on the reinvestment of the prepayment
proceeds.
Balloon Payment
A majority of the loans made or invested in by the Partnership require
the borrower to make a "balloon payment" on the principal amount upon maturity
of the loan. To the extent that a borrower has an obligation to pay mortgage
loan principal in a large lump sum payment, its ability to satisfy this
obligation may be dependent upon its ability to sell the property, obtain
suitable refinancing or otherwise raise a substantial cash amount. As a result,
these loans involve a higher risk of default than fully amortizing loans.
Equity Interests and Participation in Real Property
As part of investing in or making a mortgage loan the Partnership may
acquire an equity interest in the real property securing the loan in the form of
a shared appreciation interest or other equity participation.
Debt Coverage Standard for Mortgage Loans
Loans on commercial property require the net annual estimated cash flow
to equal or exceed the annual payments required on the mortgage loan.
Loan Limit Amount
The Partnership limits the amount of its investment in any single
mortgage loan, and the amount of its investment in mortgage loans to any one
borrower, to 10% of the total Partnership assets as of the date the loan is
made.
Loans to Affiliates
The Partnership will not provide loans to the General Partner,
affiliates of the General Partner, or any limited partnership or entity
affiliated with or organized by the General Partner except for cash advances
made to the General Partner, its affiliates, agents or attorneys ("Indemnified
Party") for reasonable legal expenses and other costs incurred as a result of
any legal action or proceeding if:
o such suit, action or proceeding relates to or arises out of any action
or inaction on the part of the Indemnified Party in the performance of
its duties or provision of its services on behalf of the Partnership;
o such suit, action or proceeding is initiated by a third party who is
not a Limited Partner; and
o the Indemnified Party undertakes by written agreement to repay any
funds advanced in the cases in which such Indemnified Party would not
be entitled to indemnification under Article IV. 5(a) of the
Partnership Agreement.
Purchase of Loans from Affiliates
The Partnership may purchase loans deemed suitable for acquisition from
the General Partner or its Affiliates only if the General Partner makes or
purchases such loans in its own name and temporarily holds title thereto for the
purpose of facilitating the acquisition of such loans, and provided that such
loans are purchased by the Partnership for a price no greater than the cost of
such loans to the General Partner (except compensation in accordance with
Article IX of the Partnership Agreement), there is no other benefit arising out
of such transactions to the General Partner, such loans are not in default, and
otherwise satisfy all requirements of Article VI. of the Partnership Agreement,
including:
o The Partnership shall not make or invest in mortgage loans on any one
property if at the time of acquisition of the loan the aggregate amount
of all mortgage loans outstanding on the property, including loans by
the Partnership, would exceed an amount equal to 80% of the appraised
value of the property as determined by independent appraisal, unless
substantial justification exists because of the presence of other
documented underwriting criteria.
o The Partnership will limit any single mortgage loan and limit its
mortgage loans to any one borrower to not more than 10% of the total
Partnership assets as of the date the loan is made or purchased.
o The Partnership may not invest in or make mortgage loans on unimproved
real property is an amount in excess of 25% of the total Partnership
assets.
At times when there is a decline in mortgage originations by the
General Partner and the Partnership has funds to invest in new loans, the
General Partner may purchase loans from other lending institutions such as banks
or mortgage bankers.
Borrowing
In March 2001, the Partnership amended its Limited Partnership
Agreement, with the consent of a majority of limited partners, to allow the
Partnership to incur indebtedness for the purpose of investing in mortgage
loans. Prior to that, it could only incur indebtedness in order to prevent
default under mortgage loans which are senior to the Partnership's mortgage
loans, to discharge senior mortgage loans if this becomes necessary to protect
the Partnership's investment in mortgage loans, or in order to operate or
develop a property that the Partnership acquires under a defaulted loan. The
total amount of indebtedness incurred by the Partnership cannot exceed the sum
of 50% of the aggregate fair market value of all Partnership loans. The
Partnership finalized a line of credit agreement with a bank in August 2001,
which provides interim financing on mortgage loans invested in by the
Partnership. The amount of credit available under this line of credit is
$40,000,000 (pursuant to an amendment in August 2002). The balance outstanding
on the line of credit was $6,867,000 as of December 31, 2002.
Repayment of Mortgages on Sales of Properties
The Partnership invests in mortgage loans and does not normally acquire
real estate or engage in real estate operations or development (other than when
the Partnership forecloses on a loan and takes over management of such
foreclosed property). The Partnership also does not invest in mortgage loans
primarily for sale or other disposition in the ordinary course of business.
The Partnership may require a borrower to repay a mortgage loan upon
the sale of the mortgaged property rather than allow the buyer to assume the
existing loan. This may be done if the General Partner determines that repayment
appears to be advantageous to the Partnership based upon then-current interest
rates, the length of time that the loan has been held by the Partnership, the
credit-worthiness of the buyer and the objectives of the Partnership. The net
proceeds to the Partnership from any sale or repayment are invested in new
mortgage loans, held as cash or distributed to the partners at such times and in
such intervals as the General Partner in its sole discretion determines.
No Trust or Investment Company Activities
The Partnership has not qualified as a real estate investment trust
under the Internal Revenue Code of 1986, as amended, and, therefore, is not
subject to the restrictions on its activities that are imposed on real estate
investment trusts. The Partnership conducts its business so that it is not an
"investment company" within the meaning of the Investment Company Act of 1940.
It is the intention of the Partnership to conduct its business in such manner as
not to be deemed a "dealer" in mortgage loans for federal income tax purposes.
Miscellaneous Policies and Procedures
The Partnership will not:
o issue securities senior to the Units or issue any Units or other
securities for other than cash;
o invest in the securities of other issuers for the purpose of exercising
control, except in connection with the exercise of its rights as a
secured lender;
o underwrite securities of other issuers; or
o offer securities in exchange for property.
Competition and General Economic Conditions
The Partnership's major competitors in providing mortgage loans are
banks, savings and loan associations, thrifts, conduit lenders, and other
entities both larger and smaller than the Partnership. The Partnership is
competitive in large part because the General Partner generates all of its
loans. The General Partner has been in the business of making or investing in
mortgage loans in Northern California since 1951 and has developed a quality
reputation and recognition within the field.
In general, mortgage interest rates have fallen during 2002. This has
been partially due to actions by the Federal Reserve Bank to reduce the discount
rate on borrowings charged to member banks, a slowing economy and low threat of
inflation. Although the general trend for interest rates has been down, many
lenders have tightened their credit and reduced their lending exposure in
various markets and property types. This credit tightening from competing
lenders would generally provide the Partnership with additional lending
opportunities at above-market rates. However, as a result of the slowing
economy, there are now fewer transactions in the marketplace, which could
potentially reduce the number of lending opportunities to the Partnership.
Continued rate reductions by the Federal Reserve Bank, the slowing economy and a
continued low threat of inflation could have the effect of reducing mortgage
yields in the future. Current loans with relatively high yields could be
replaced with loans with lower yields, which in turn could reduce the net yield
paid to the limited partners. In addition, if there is less demand by borrowers
for loans and, thus, fewer loans for the Partnership to invest in, it will
invest its excess cash, including proceeds from the offering of the Units, in
shorter-term alternative investments yielding considerably less than the current
investment portfolio.
Item 2. Properties
Between 1993 and 2002, the Partnership foreclosed on $29,844,000 of
delinquent mortgage loans and acquired title to 29 properties securing the
loans. As of December 31, 2002, the Partnership still holds title to 13 of these
properties (either solely or through its investments in the limited liability
companies discussed below) in the amount of $18,500,000, net of an allowance for
losses of $250,000. Three of the properties are being held for long-term
investment and the remaining ten properties are being marketed for sale or will
be marketed for sale in the foreseeable future. All of the properties
individually have a book value less than 2% of total Partnership assets as of
December 31, 2002. See also discussion of the property within the real estate
joint venture and the corporate joint venture, which were not acquired through
foreclosure, below.
o The Partnership's (or related LLC's) title to all properties is held as
fee simple.
o There are no mortgages or encumbrances to third parties on any of the
Partnership's real estate properties acquired through foreclosure.
o Of the thirteen properties held, eight of the properties are either
partially or fully leased to various tenants. Only minor renovations
and repairs to the properties are currently being made or planned,
other than the undeveloped land located in Reno, Nevada, on which a new
retail or residential building may be constructed.
o Management of the General Partner believes that all properties owned by
the Partnership are adequately covered by customary casualty insurance.
o The Partnership maintains an allowance for losses on real estate held
for sale in its financial statements of $250,000 as of December 31,
2002.
Real estate acquired through foreclosure is typically held for a number
of years before ultimate disposition primarily because the Partnership has the
intent and ability to dispose of the properties for the highest possible price
(such as when market conditions improve). During the time that the real estate
is held, the Partnership may earn less income on these properties than could be
earned on mortgage loans and may have negative cash flow on these properties.
Investment in Limited Partnership
During the year ended December 31, 2001, the Partnership entered into a
limited partnership, University Hills, L.P. (University Hills) with two other
unrelated developers for the purpose of developing, leasing and selling an
apartment complex on 5.3 acres of undeveloped land located in Reno, Nevada
(which was acquired through foreclosure by the Partnership in 1996). As of
December 31, 2001, the land had not been contributed into University Hills by
the Partnership. During the year ended December 31, 2002, University Hills was
dissolved. The Partnership intends to develop the property on its own. During
the year ended December 31, 2002, approximately $41,000 of costs previously
advanced to University Hills were written off by the Partnership. The
Partnership's total net basis in the property is $365,000 as of December 31,
2002.
Investment in Limited Liability Companies
Oregon Leisure Homes, LLC
During 2001, a new entity named Oregon Leisure Homes, LLC (OLH) was
formed between the Partnership and an unrelated developer for the purpose of
developing and selling eight condominium units located in Lincoln City, Oregon,
which were acquired by the Partnership via a deed in lieu of foreclosure. OLH
also purchased a house located on the ocean in Lincoln City for renovation and
sale. OLH will sell eleven interests in each condominium and seven interests in
the ocean house. The Partnership is co-manager of OLH and is to receive 70% of
the profits. The assets, liabilities, income and expenses of OLH have been
consolidated into the accompanying consolidated balance sheet and income
statement of the Partnership. During the year ended December 31, 2002, the
Partnership advanced an additional $936,000 to OLH (for a total of $1,537,000)
for continued development and marketing of the condominium units and house that
are currently for sale. OLH sold three interests in the condominiums during the
year ended December 31, 2002 for total proceeds of $74,000 and a note in the
amount of $27,000. No gain or loss was recognized as a result of these sales.
OLH sold six interests in the ocean house during the year ended December 31,
2002 for proceeds of $383,000 and three notes in the total amount of $296,000,
and recognized gain in the amount of $198,000. The net loss to the Partnership
(including gains on sales) was approximately $182,000 for the year ended
December 31, 2002. The Partnership's investment in the OLH real property was
approximately $1,558,000 as of December 31, 2002.
Dation, LLC
In July 2001, a mobile home park located in Lake Charles, Louisiana
that secured a Partnership loan in the amount of $2,113,600 was transferred by
the borrower to a new entity named Dation, LLC (Dation), which was formed
between the Partnership and an unrelated developer. The Partnership is advancing
funds to Dation to finish the remaining lots under the existing loan terms and
may provide additional financing to Dation. The Partnership is co-manager of
Dation and is to receive 50% of the profits and losses. The net loss to the
Partnership was approximately $184,000 and $79,000 for the years ended December
31, 2002 and 2001, respectively. The Partnership also recognized $64,000 and
$128,000 in interest income from its loan to Dation. As of December 31, 2002,
the Partnership had advanced an additional $140,000 to Dation and had received
repayments from sales of lots in the amount of $60,000, under the existing loan.
The Partnership's total investment in Dation was approximately $1,931,000 as of
December 31, 2002. Investment in Real Estate Joint Venture
The Partnership has a construction loan on a housing development
located in Hayward, California. The loan is reported in the financial statements
as an investment in a real estate joint venture to account for the investment
pursuant to accounting guidelines for acquisition, development and construction
arrangements. The Partnership is to receive interest on its advances to the
joint venture at the rate of 10.25% per annum and is to receive 30% of the net
profits from the sale of each house after payment of a 10% loan fee is made to
OFG. As of December 31, 2002, the Partnership has received all interest payments
due on the loan but has not received any payments of residual profits. The
Partnership advanced an additional $8,847,000 to the joint venture and received
payment of advances in the amount of $14,028,000 during the year ended December
31, 2002. The Partnership's investment in the joint venture was approximately
$1,330,000 and $6,511,000 as of December 31, 2002 and 2001, respectively.
Investment in Corporate Joint Venture
In 1995, the Partnership foreclosed on a $571,853 loan and obtained
title to a commercial lot in Los Gatos, California that secured the loan. In
1997, the Partnership contributed the lot to a limited liability company (the
Company) formed with an unaffiliated developer to develop and sell a commercial
office building on the lot. The Partnership provided construction financing to
the Company at the rate of prime plus two percent.
Construction of the building was substantially completed in June 2000.
Prior to the sale of the building in July 2000, the Company entered into a
reverse, like-kind exchange, whereby the proceeds attributable to the
Partnership's interest in the Company from the sale of the building
(approximately $3,338,000), net of repayment of the outstanding advances to the
Partnership in the amount of $3,858,000, were reinvested into the purchase of a
retail commercial development in Greeley, Colorado. The purpose of this exchange
was to defer the recognition of gain for tax purposes to the Company and, hence,
the Partnership. The sale resulted in a book gain to the Partnership of
approximately $2,691,000. The Company also incurred a note payable in the amount
of $6,023,000 as part of the purchase of the new property. A new member that
will act as the property manager of the Greeley property was admitted to the
Company in August, 2000.
The Partnership receives 65% of the profits and losses in 720
University after priority return on partner contributions is allocated at the
rate of 10% per annum. The assets, liabilities, income and expenses of 720
University have been consolidated into the accompanying consolidated balance
sheet and income statement of the Partnership. The net income to the Partnership
was approximately $291,000 during the year ended December 31, 2002. The minority
interest of the joint venture partner of approximately $132,000 and $108,000 as
of December 31, 2002 and 2001, respectively, is reported in the accompanying
consolidated balance sheet.
Item 3. Legal Proceedings
The Partnership is not presently involved in any material pending legal
proceedings other than ordinary routine litigation incidental to the business.
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
a. There is no established public trading market for the trading of Units.
b. Holders: As of December 31, 2002, 2,940 Limited Partners held
277,791,148 Units of limited partnership interest in the Partnership.
c. The Partnership generally distributes all net income of the Partnership
to Unit holders on a monthly basis. The Partnership made distributions
of net income to the Limited Partners of approximately $21,675,000 and
$21,456,000 (prior to reinvested distributions) during 2001 and 2002,
respectively. It is the intention of the General Partner to continue to
distribute all net income earned by the Partnership to the Unit
holders.
Item 6. Selected Financial Data
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
As of and for the year ended
December 31
----------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Loans secured by trust deeds $ 260,211,121 $ 213,703,469 $ 223,273,464 $ 200,356,517 $ 182,721,465
Less: Allowance for loan losses (4,774,000) (4,425,000) (4,000,000) (4,000,000) (3,500,000)
Real estate held for investment 16,200,449 14,064,664 13,078,189 -- --
Real estate held for sale.. 15,791,632 14,768,961 6,683,419 13,733,722 11,155,202
Less: Allowance for losses on
real estate.............. (250,000) (634,000) (1,136,000) (1,336,000) (1,184,000)
Cash, cash equivalents and other
assets................... 10,053,851 43,812,645 8,300,109 7,617,278 13,218,253
------------- ------------- ------------ ------------- -------------
Total assets............... $ 297,233,053 $ 281,290,739 $ 246,199,181 $ 216,371,517 $ 202,410,920
============= ============= ============= ============= =============
Liabilities................ $ 16,750,541 $ 8,896,345 $ 7,339,888 $ 1,759,704 $ 1,070,118
Minority interest.......... 131,538 107,680 102,103 -- --
Partners' capital
General partner.......... 2,755,846 2,677,867 2,334,845 2,104,936 1,967,069
Limited partners......... 277,595,128 269,608,847 236,422,345 212,506,877 199,373,733
----------- ----------- ----------- ----------- -----------
Total partners' capital 280,350,974 272,286,714 238,757,190 214,611,813 201,340,802
----------- ----------- ----------- ----------- -----------
Total liabilities /
Partners' capital.... $ 297,233,053 $ 281,290,739 $ 246,199,181 $ 216,371,517 $ 202,410,920
============= ============= ============= ============= =============
Revenues................... $ 31,078,295 $ 29,479,565 $ 28,268,431 $ 22,184,072 $ 21,685,398
Expenses:
Carried interest......... 40,075 173,292 102,212 67,907 49,545
Management fees.......... 3,616,102 3,437,684 3,914,488 2,652,882 3,249,824
Servicing fees........... 611,243 571,538 531,337 479,592 472,390
Rental expenses.......... 3,090,324 1,546,678 763,754 581,537 697,839
Interest expense......... 426,778 429,032 235,311 -- --
Minority interest........ 35,848 5,577 2,103 -- --
Provision for losses on loans 1,584,000 1,039,645 -- 500,000 --
Provision for (recovery of)
losses on real estate, net (313,577) -- -- 152,000 --
Other.................... 317,543 386,895 184,170 270,301 237,108
------- ------- ------- ------- -------
Total Expenses 9,408,336 7,590,341 5,733,375 4,704,219 4,706,706
--------- --------- --------- --------- ---------
Net Income $ 21,669,959 $ 21,889,224 $ 22,535,056 $ 17,479,853 $ 16,978,692
============ ============ ============ ============ ============
Net income allocated to general
partner.................. $ 214,125 $ 214,147 $ 221,684 $ 172,335 $ 168,106
========== ========== ========== ========== ==========
Net income allocated to limited
partners................. $ 21,455,834 $ 21,675,077 $ 22,313,372 $ 17,307,518 $ 16,810,586
============ ============ ============ ============ ============
Net income allocated to limited
partners per limited
partnership unit......... $ .08 $ .08 $ .10 $ .08 $ .09
=== === === === ===
The information in this table should be read in conjunction with the
accompanying audited financial statements and notes to financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Some of the information in this Form 10-K may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
words such as "may," "will," "expect," "anticipate," "estimate," "continue" or
other similar words. These statements discuss future expectations, contain
projections of results of operations or of financial conditions or state other
forward-looking information. When considering such forward-looking statements
you should keep in mind the risk factors and other cautionary statements in the
Partnership's Prospectus. Although management of the Partnership believes that
the expectations reflected in such forward-looking statements are based on
reasonable assumptions, there are certain factors, in addition to these risk
factors and cautioning statements, such as general economic conditions, local
real estate conditions, adequacy of reserves, or weather and other natural
occurrences that might cause a difference between actual results and those
forward-looking statements.
Results of Operations
2002 Compared to 2001
The net income decrease of $219,000 (1.0%) for 2002 compared to 2001, was due
to:
o a decrease in other income of $345,000;
o an increase in management fees to the general partner of $178,000;
o an increase in rental and other expenses of $1,544,000; and
o an increase in provision for loan losses of $544,000.
The net income decrease in 2002 as compared to 2001, was offset by:
o an increase in interest income on loans secured by trust deeds of
$1,382,000;
o an increase in rental and other income on real estate properties of
$637,000;
o a decrease in carried interest to the general partner of $133,000;
o a decrease in other expenses of $113,000; and
o the net recovery of losses on real estate held for sale of $314,000.
Interest income on investments (other income) decreased by $345,000
(50.8%) for the year ended December 31, 2002, as compared to the same period in
2001 due primarily to a decrease in the average yield on the Partnership's
investments from 4.0% to 2.1% due to a decrease in general market interest
rates.
Management fees to the General Partner are paid pursuant to the
Partnership Agreement and are determined at the sole discretion of the General
Partner. The increase in management fees of $178,000 (5.2%) during the year
ended December 31, 2002 as compared to 2001 was primarily a result of an
increase in the average loan portfolio of 7.0% during the year.
The maximum management fee permitted under the Partnership Agreement is
2 3/4% per year of the average upaid balance of mortgage loans. For the years
2000, 2001 and 2002, the management fees were 1.85%, 1.48% and 1.46% of the
average unpaid balance of mortgage loans, respecitvely.
In determining the management fees and hence the yield to the partners,
the General Partner may consider a number of factors, including current market
yields, delinquency experience, uninvested cash and real estate activities. The
General Partner expects that the management fees that it receives from the
Partnership will vary in amount and percentage from period to period, and it is
highly likely that the General Partner will again receive less than the maximum
management fees in the future. However, if the General Partner chooses to take
the maximum allowable management fees in the future, the yield paid to limited
partners may be reduced.
If the maximum management fees had been paid to the General Partner
during the year ended December 31, 2002, the management fees would have been
$6,724,000 (increase of $3,108,000), which would have reduced net income
allocated to limited partners by approximately 14.3%, and net income allocated
to limited partners per weighted average limited partner unit by the same
percentage to $.07.
The increase in rental and other expenses on real estate properties of
$1,544,000 (99.8%) and the increase in rental and other income on real estate
properties of $637,000 (24.5%) was primarily the result of the foreclosure on a
hotel located in Phoenix, Arizona during the year ended December 31, 2002 and
its subsequent operation, the acquisition of a commercial building through
foreclosure in the last half of 2001, the losses incurred from the Partnership's
investments in OLH and Dation of $366,000 during the year ended December 31,
2002, and delinquent property taxes and other expenses incurred in the total
amount of $410,000 on three non-operating properties that were obtained via
foreclosure during 2002. See further discussion under "Real Estate Properties
Held for Sale and Investment" below.
The provision for loan losses of $1,584,000 for the year ended December
31, 2002 was based on an analysis performed on the loan portfolio as of December
31, 2002. See "Financial Condition - Loan Portfolio" below.
Interest income on loans secured by trust deeds increased $1,382,000
(5.6%) for the year ended December 31, 2002, as compared to the same period in
2001. This increase was a result of an increase in the average loan portfolio of
7.0% during the year ended December 31, 2002 as compared to 2001 and an increase
in the weighted average yield of the loan portfolio from 11.75% for the year
ended December 31, 2001 to 11.86% for the year ended December 31, 2002. The
increase was partially offset by the increase in loans delinquent greater than
ninety days during the year ended December 31, 2002. See "Financial Condition -
Loan Portfolio" below.
The decrease in carried interest to the general partner of $133,000
(76.9%) is a result of decreased limited partner contributions to the
Partnership during the year ended December 31, 2002 as the Partnership has been
closed to most new investments since September 1, 2001. On a monthly basis, the
General Partner receives an additional carried interest in the Partnership equal
to 1/2 of 1% of the net increase in the capital accounts of the limited partners
pursuant to the Partnership Agreement.
The decrease in other expenses of $113,000 (60.5%) was due primarily to
registration fees paid to the Securities and Exchange Commission, National
Association of Securities Dealers and various states related to a new
Partnership registration statement originally filed in September 2001. No
filings requiring the payment of fees occurred in 2002.
The net recovery of losses on real estate held for sale of $314,000 was
the result of the reversal of an allowance in the amount of $384,000 previously
established on the manufactured home subdivision development located in Ione,
California, due to management's evaluation of the property's fair market value
based on recent sales. This recovery was offset by an allowance in the amount of
$70,000 established on the commercial building located in Gresham, Oregon in
June 2002, which was sold by the Partnership in July 2002.
Results of Operations
2001 Compared to 2000
The net income decrease of $646,000 (2.9%) for 2001 as compared to 2000, was due
to:
o a decrease in gain on sale of real estate of $1,530,000;
o an increase in rental expenses of $783,000;
o an increase in interest expense of $194,000;
o an increase in other expenses of $165,000; and
o an increase in the provision for loan losses of $1,040,000.
The net income decrease in 2001 as compared to 2000, was offset by:
o an increase in interest income on loans secured by trust deeds of
$1,394,000;
o an increase in rental income of $907,000;
o an increase in other income of $440,000; and
o a decrease in management fees to the general partner of $477,000;
Gain on sale of real estate decreased by $1,530,000 (51.5%) for the
year ended December 31, 2001, as compared to 2000 due to the sale of the Los
Gatos office building within the corporate joint venture in July 2000, which
resulted in a gain of $2,691,000 for financial statement purposes in 2000. Four
properties were sold during the year ended December 31, 2001, resulting in a net
gain of $1,442,000.
The increase in rental expenses of $783,000 (102.5%) during the year
ended December 31, 2001 as compared to 2000 was a result of the purchase of the
retail development in Greeley, Colorado in July 2000. Thus, the Partnership had
only approximately five months of rental expenses from this property in 2000 as
compared to a full twelve months of rental expenses in 2001.
The increase in interest expense of $194,000 (82.3%) during the year
ended December 31, 2001 as compared to 2000 was a result of the purchase of the
retail development in Greeley, Colorado in July 2000. Thus, the Partnership had
only approximately five months of interest expense from this property in 2000 as
compared to a full twelve months of interest expense in 2001.
The increase in other expenses of $165,000 (732.9%) was due primarily
to registration fees paid to the Securities and Exchange Commission, National
Association of Securities Dealers and various states related to a new
Partnership registration statement filed in September 2001.
The increase in the provision for loan losses of $1,040,000 (100%) was
made as a result of increased delinquencies in the loan portfolio as a whole and
specific reserves required based on the General Partner's calculation of the
fair value of the collateral on certain Partnership loans. See "Financial
Condition - Loan Portfolio" below.
Interest income on loans secured by trust deeds increased $1,394,000
(6.0%) for the year ended December 31, 2001, as compared to 2000. This increase
was a result of an increase in the weighted average yield of the loan portfolio
from 11.33% for the year ended December 31, 2000 to 11.75% for the year ended
December 31, 2001. In addition, the average loan portfolio grew by 7.6% for the
year ended December 31, 2001 as compared to 2000. The increased income resulting
from the growth in the weighted average yield and the average loan portfolio
were offset by an increase in loans greater than 90 days delinquent in payments
as of December 31, 2001 as compared to December 31, 2000. See "Financial
Condition - Loan Portfolio" below.
The increase in rental income of $907,000 (53.7%) during the year ended
December 31, 2001 as compared to 2000 was primarily a result of the purchase of
the retail development in Greeley, Colorado in July 2000. Thus, the Partnership
had only approximately five months of rental income from this property in 2000
as compared to a full twelve months of rental income in 2001.
The increase in other income of $440,000 (184.7%) for the year ended
December 31, 2001 as compared to 2000 was primarily the result of interest
income from increased cash pending investment in mortgage loans during the year.
These funds were invested in money market accounts and commercial paper. The
increase in funds pending investment was primarily a result of increased sales
of Partnership units (including sales under the Partnership's Distribution
Reinvestment Plan) without the investment in new loans of the same amount.
Management fees to the General Partner are paid pursuant to the
Partnership Agreement and are determined at the sole discretion of the General
Partner. In determining the yield to the partners and hence the management fees,
the General Partner may consider a number of factors, including current market
yields, delinquency experience, uninvested cash and real estate activities. The
General Partner expects that the management fees that it receives from the
Partnership will vary in amount and percentage from period to period, and it is
highly likely that the General Partner will again receive less than the maximum
management fees in the future. However, if the General Partner chooses to take
the maximum allowable management fees in the future, the yield paid to limited
partners may be reduced. The decrease in management fees of $477,000 (12.2%)
during the year ended December 31, 2001 as compared to 2000 was primarily a
result of increased delinquencies in the Partnership's loan portfolio.
If the maximum management fees had been paid to the General Partner
during the year ended December 31, 2001, the management fees would have been
$6,287,000 (increase of $2,849,000), which would have reduced net income
allocated to limited partners by approximately 13.0%, and net income allocated
to limited partners per weighted average limited partner unit by the same
percentage to $.07.
Financial Condition
December 31, 2002, 2001 and 2000
Loan Portfolio
At the end of 2000 and 2001 the number of Partnership mortgage
investments was 116 and 97, respectively, and increased to 100 by December 31,
2002. The average loan balance was $1,925,000 and $2,203,000 at the end of 2000
and 2001 respectively, and increased to $2,602,000 as of December 31, 2002. The
average loan balance in the Partnership's portfolio has been steadily increasing
for several years. This is due to the fact that there are more lenders competing
for short-term bridge financing at loan levels of $1,000,000 and less, and many
of these lenders have the financial capability of funding these loans at more
competitive rates. The current opportunities for maximizing the return to the
Partnership are greater for larger loan amounts.
Approximately $26,327,000 (10.1%) and $18,604,000 (8.7%) of the loans
invested in by the Partnership were more than 90 days delinquent in monthly
payments as of December 31, 2002 and 2001, respectively. Of these amounts,
approximately $6,503,000 (2.5%) and $5,327,000 (2.5%) were in the process of
non-judicial foreclosure and approximately $4,300,000 (1.7%) and $6,182,000
(2.9%), respectively, involved loans to borrowers who were in bankruptcy. In
addition, the Partnership's investment in loans that were past maturity
(delinquent in principal) but current in monthly payments was approximately
$41,569,000 as of December 31, 2002. Of the total past maturity loans as of
December 31, 2002, $8,161,000 was paid off and $14,000,000 had the maturity date
extended subsequent to year end.
Loans more than 90 days delinquent in monthly payments increased by
$7,723,000 (41.5%) from December 31, 2001 to December 31, 2002, primarily due to
one large loan with a principal amount of $11,222,000 that became delinquent
during the year ended December 31, 2002. This loan is secured by leasehold
interests in nine commercial properties located in Washington, Idaho and Nevada.
The largest tenant in one of the properties recently vacated which significantly
reduced the cash flow to the borrower. A modification agreement was signed in
August 2002 whereby the borrower is to make reduced minimum monthly payments of
$100,000 until the borrower's cash situation improves. In August 2002, the
borrower sold one of the properties securing the loan and paid down loan
principal by $828,000. The Partnership has been applying all payments received
since June 2002 to reduction in principal and has not accrued any past due
interest on the loan. The Partnership has also established a specific loan loss
allowance on this loan in the amount of $621,000 as of December 31, 2002. The
General Partner does not expect the delinquency rate on the Partnership's loan
portfolio to continue to increase in the forseeable future. However, there is no
precise method used by the General Partner to predict delinquency rates or
losses on specific loans.
Loans in the process of foreclosure as of December 31, 2001 consisted
of three loans, of which one was foreclosed on by the Partnership in January
2002 (see "Real Estate Properties Held for Sale and Investment" below), one paid
off in full resulting in no loss to the Partnership, and one is still delinquent
and in foreclosure. In addition, four other delinquent loans with a total
principal balance of approximately $4,903,000 entered into foreclosure during
the year ended December 31, 2002. The Partnership has established a specific
loan loss allowance in the amount of $353,000 on one of these loans as of
December 31, 2002.
Loans to borrowers who were in bankruptcy decreased by $1,882,000
(30.4%) due to one loan that became real estate held for sale due to foreclosure
and one loan that became current pursuant to the bankruptcy plan during the year
ended December 31, 2002. The resulting increase in loans to borrowers who were
in bankruptcy was due to two delinquent loans with a total principal balance of
approximately $4,300,000, the borrowers of which entered into bankruptcy
proceedings during the year ended December 31, 2002. The Partnership has
established a specific loan loss allowance in the amount of $1,000,000 on one of
these loans as of December 31, 2002.
As of December 31, 2002, 2001 and 2000, the Partnership held the
following types of mortgages:
December 31, December 31, December 31,
2002 2001 2000
---- ---- ----
1st Mortgages $ 241,335,259 205,139,594 212,831,212
2nd Mortgages 18,875,862 8,563,875 10,377,607
3rd Mortgages -- -- 64,645
----------- ----------- -----------
Total $ 260,211,121 $ 213,703,469 $ 223,273,464
=========== =========== ===========
Income Producing Properties $ 228,210,411 $ 180,506,295 $ 169,840,446
Construction 12,670,310 14,773,984 41,417,905
Unimproved Land 16,938,678 15,360,822 11,870,113
Residential 2,391,722 3,062,368 145,000
----------- ----------- -----------
Total $ 260,211,121 $ 213,703,469 $ 223,273,464
=========== =========== ===========
As of December 31, 2002, 2001, and 2000, approximately 43%, 54% and 54%
of the Partnership's mortgage loans were secured by real property in Northern
California.
The Partnership's investment in residential loans decreased by $671,000
(21.9%) since December 31, 2001 due to partial repayments received on one
residential loan during the year ended December 31, 2002, net of three new
residential loans originated during the year. All of the residential loans are
first trust deeds.
The Partnership's investment in construction loans decreased by
$2,104,000 (14.2%) since December 31, 2001. This decrease was primarily due to
the payoff on one large construction loan in the amount of $7,350,000 and the
completion of construction on properties secured by several other loans that
resulted in a change in classification to income-producing or residential.
Changes in the allowance for loan losses for the years ended December
31, 2002, 2001and 2000 were as follows:
2002 2001 2000
---- ---- ----
Balance, beginning of period $ 4,425,000 $ 4,000,000 $ 4,000,000
Provision 1,584,000 1,040,000 --
Charge-offs (1,235,000) (615,000) --
--------- --------- ---------
Balance, end of period $ 4,774,000 $ 4,425,000 $ 4,000,000
========= ========= =========
Real Estate Properties Acquired Through Foreclosure and Held for Sale and
Investment
The Partnership currently holds title to 15 properties that were
foreclosed on or purchased from January 1, 1993 through December 31, 2002 in the
amount of $31,742,000, net of allowance for losses of $250,000. As of December
31, 2002, properties held for sale total $15,542,000 (including the properties
held in the limited liability companies and the real estate joint venture, which
was not acquired through foreclosure - see below) and properties held for
investment total $16,200,000 (excluding the property held in the corporate joint
venture - see below). When the Partnership acquires property by foreclosure, it
typically earns less income on those properties than could be earned on mortgage
loans and may not be able to sell the properties in a timely manner.
During the year ended December 31, 2002, a commercial parcel located in
Vallejo, California that was acquired by the Partnership through foreclosure in
1994 was sold for $1,095,000, resulting in a gain to the Partnership of
approximately $734,000. In addition, a commercial building located in
Sacramento, California that was acquired by the Partnership through foreclosure
in 1998 was sold for $147,000, resulting in a gain to the Partnership of
approximately $117,000.
During the year ended December 31, 2002, the Partnership sold a
commercial building located in Gresham, Oregon for proceeds in the amount of
$340,000 resulting in no gain or loss. An allowance in the amount of $70,000 was
previously established in 2002 on this property and, thus, the loss was reported
net of the recovery of losses on real estate held for sale in the accompanying
consolidated income statement for the year ended December 31, 2002.
During the year ended December 31, 2002, 22 lots (11 including houses)
located in a manufactured home subdivision development located in Ione,
California (that were acquired by the Partnership through foreclosure in 1997)
were sold for $1,811,000, resulting in a gain to the Partnership of
approximately $317,000. An allowance in the amount of $384,000 that was
previously established on this property was reversed during the year ended
December 31, 2002 as a result of management's evaluation of the property's fair
market value based on recent sales. There are 61 lots remaining to be sold on
this property as of December 31, 2002.
During the year ended December 31, 2002, the Partnership foreclosed on
a 1st mortgage loan secured by a commercial building located in Albany, Oregon
in the amount of $1,800,000 and foreclosed on a 1st mortgage loan secured by
commercial land located in Gresham, Oregon in the amount of $1,620,000 and
obtained the properties via the trustee's sale.
During the year ended December 31, 2002, the Partnership foreclosed on
a first mortgage loan secured by a hotel located in Phoenix, Arizona in the
amount of $2,925,000 (which had an allowance established in the amount of
$1,235,000) and obtained the property via the trustee's sale. The Partnership
paid $335,000 in delinquent property taxes at the time of foreclosure which were
capitalized to the basis of the property. The Partnership transferred the net
basis of the loan to real estate held for sale at the time of foreclosure.
During the year ended December 31, 2002, the Partnership foreclosed on
a first mortgage loan secured by undeveloped land located in San Jose,
California in the amount of $3,025,000 and obtained the property via the
trustee's sale.
During the year ended December 31, 2001, the Partnership entered into a
limited partnership, University Hills, L.P. (University Hills) with two other
unrelated developers for the purpose of developing, leasing and selling an
apartment complex on 5.3 acres of undeveloped land located in Reno, Nevada
(which was acquired through foreclosure by the Partnership in 1996). As of
December 31, 2001, the land had not yet been contributed into University Hills
by the Partnership. During the year ended December 31, 2002, University Hills
was dissolved. The Partnership intends to develop the property on its own.
During the year ended December 31, 2002, approximately $41,000 of costs
previously advanced to University Hills were written off by the Partnership. The
Partnership's total net basis in the property is $365,000 as of December 31,
2002.
In January 2003, the Partnership foreclosed on a first mortgage loan
secured by an industrial building located in Santa Clara, California in the
amount of $2,000,000 and obtained the property via the trustee's sale.
During the year ended December 31, 2001, an industrial building located
in Merced, California that was acquired by the Partnership through foreclosure
in 1993 was sold for $1,000,000, resulting in a gain to the Partnership of
approximately $478,000 (net of the allowance for real estate losses established
on this property in the amount of $350,000).
During the year ended December 31, 2001, a light industrial building
located in Oakland, California that was acquired by the Partnership through
foreclosure in 1997 was sold for cash of $1,328,000, resulting in a gain to the
Partnership of approximately $875,000. A commercial building located in San
Ramon, California that was acquired by the Partnership through foreclosure in
1999 was sold for cash of $1,390,000, resulting in a gain to the Partnership of
approximately $151,000 during 2001. In addition, one house and one improved lot
located in Lake Don Pedro, California that were acquired by the Partnership
through foreclosure in 1999 were sold for cash of $174,000, resulting in a loss
to the Partnership of approximately $62,000 during 2001.
During the year ended December 31, 2001, the Partnership foreclosed on
a 2nd mortgage loan secured by an office building located in Roseville,
California in the amount of $210,000 and obtained the property via the trustee's
sale. The Partnership subsequently paid off the 1st mortgage loan in the amount
of approximately $527,000.
During the year ended December 31, 2000, an industrial building located
in Lathrop, California that was acquired by the Partnership through foreclosure
in April 2000 was sold for cash of $90,000 and a note of $814,000, resulting in
a gain to the Partnership of approximately $142,000. The note was repaid in full
by the borrower in 2001. 87 residential lots located in Lake Don Pedro,
California that were acquired by the Partnership through foreclosure in 1999
were sold for cash resulting in a gain to the Partnership of approximately
$46,000 during 2000. In addition, a residential/retail building located in
Oakland, California that was acquired by the Partnership through foreclosure in
1999 was sold for cash resulting in a gain to the Partnership of approximately
$92,000 during 2000.
Changes in the allowance for real estate losses for the years ended
December 31, 2002, 2001and 2000 were as follows:
2002 2001 2000
---- ---- ----
Balance, beginning of period $ 634,000 $ 1,136,000 $ 1,336,000
Provision -- -- --
Deductions (384,000) (502,000) (200,000)
-------- --------- ----------
Balance, end of period $ 250,000 $ 634,000 $ 1,136,000
======== ========= =========
Five of the Partnership's fifteen properties do not currently generate
revenue. Expenses from rental properties (including expenses from the Corporate
Joint Venture - see below) have increased from approximately $1,547,000 to
$3,090,000 (99.8%) for the years ended December 31, 2001 and 2002, respectively,
and revenues associated with these properties (including revenues from the
Corporate Joint Venture - see below) have increased from $2,596,000 to
$3,233,000 (24.5%), thus generating a net income from real estate of $143,000
during the year ended December 31, 2002 (compared to $1,049,000 during 2001).
The increases in income and expenses (and decrease in net income from real
estate operations) are primarily a result of the foreclosure and subsequent
operation of a hotel located in Phoenix, Arizona during 2002, the acquisition of
a commercial building through foreclosure in the last half of 2001, the losses
incurred from the Partnership's investments in OLH and Dation in the total
amount of $366,000 during the year ended December 31, 2002, and delinquent
property taxes and other expenses incurred in the total amount of $410,000 on
three non-operating properties that were obtained via foreclosure during 2002.
As of December 31, 2001 and 2000, the Partnership owned eleven and
twelve properties, respectively. Prior to foreclosure, these properties secured
Partnership loans aggregating $10,509,000 and $10,567,000 in 2001 and 2000,
respectively. During the years ended December 31, 2001 and 2000, the Partnership
acquired certain properties through foreclosure on which it had trust deed
investments totaling $3,369,000 and $685,000, respectively.
Investment in Limited Liability Companies
Oregon Leisure Homes, LLC
During 2001, a new entity named Oregon Leisure Homes, LLC (OLH) was
formed between the Partnership and an unrelated developer for the purpose of
developing and selling eight condominium units located in Lincoln City, Oregon,
which were acquired by the Partnership via a deed in lieu of foreclosure. OLH
also purchased a house located on the ocean in Lincoln City for renovation and
sale. OLH will sell eleven interests in each condominium and seven interests in
the ocean house. The Partnership is co-manager of OLH and is to receive 70% of
the profits. The assets, liabilities, income and expenses of OLH have been
consolidated into the accompanying consolidated balance sheet and income
statement of the Partnership. During the year ended December 31, 2002, the
Partnership advanced an additional $936,000 to OLH (for a total of $1,537,000)
for continued development and marketing of the condominium units and house that
are currently for sale. OLH sold three interests in the condominiums during the
year ended December 31, 2002 for total proceeds of $74,000 and a note in the
amount of $27,000. No gain or loss was recognized as a result of these sales.
OLH sold six interests in the ocean house during the year ended December 31,
2002 for proceeds of $383,000 and three notes in the total amount of $296,000,
and recognized gain in the amount of $198,000. The net loss to the Partnership
(including gains on sales) was approximately $182,000 for the year ended
December 31, 2002. The Partnership's investment in the OLH real property was
approximately $1,558,000 as of December 31, 2002.
Dation, LLC
In July 2001, a mobile home park located in Lake Charles, Louisiana
that secured a Partnership loan in the amount of $2,113,600 was transferred by
the borrower to a new entity named Dation, LLC (Dation), which was formed
between the Partnership and an unrelated developer. The Partnership is advancing
funds to Dation to finish the remaining lots under the existing loan terms and
may provide additional financing to Dation. The Partnership is co-manager of
Dation and is to receive 50% of the profits and losses. The net loss to the
Partnership was approximately $184,000 and $79,000 for the years ended December
31, 2002 and 2001, respectively. The Partnership also recognized $64,000 and
$128,000 in interest income from its loan to Dation during the years ended
December 31, 2002 and 2001, respectively. As of December 31, 2002, the
Partnership had advanced an additional $140,000 to Dation and had received
repayments from sales of lots in the amount of $60,000, under the existing loan.
The Partnership's total investment in Dation was approximately $1,931,000 as of
December 31, 2002.
Investment in Real Estate Joint Venture
The Partnership has a construction loan on a housing development
located in Hayward, California. The loan is reported in the financial statements
as an investment in a real estate joint venture to account for the investment
pursuant to accounting guidelines for acquisition, development and construction
arrangements. The Partnership is to receive interest on its advances to the
joint venture at the rate of 10.25% per annum and is to receive 30% of the net
profits from the sale of each house after payment of a 10% loan fee is made to
OFG. As of December 31, 2002, the Partnership has received all interest payments
due on the loan but has not received any payments of residual profits. The
Partnership advanced an additional $8,847,000 to the joint venture and received
payment of advances in the amount of $14,028,000 during the year ended December
31, 2002. The Partnership's investment in the joint venture was approximately
$1,330,000 and $6,511,000 as of December 31, 2002 and 2001, respectively.
Investment in Corporate Joint Venture
In 1995, the Partnership foreclosed on a $571,853 loan and obtained
title to a commercial lot in Los Gatos, California that secured the loan. In
1997, the Partnership contributed the lot to a limited liability company (the
Company) formed with an unaffiliated developer to develop and sell a commercial
office building on the lot. The Partnership provided construction financing to
the Company at the rate of prime plus two percent.
Construction of the building was substantially completed in June 2000.
Prior to the sale of the building in July 2000, the Company entered into a
reverse, like-kind exchange, whereby the proceeds attributable to the
Partnership's interest in the Company from the sale of the building
(approximately $3,338,000), net of repayment of the outstanding advances to the
Partnership in the amount of $3,858,000, were reinvested into the purchase of a
retail commercial development in Greeley, Colorado. The purpose of this exchange
was to defer the recognition of gain for tax purposes to the Company and, hence,
the Partnership. The sale resulted in a book gain to the Partnership of
approximately $2,691,000. The Company also incurred a note payable in the amount
of $6,023,000 as part of the purchase of the new property. A new member that
will act as the property manager of the Greeley property was admitted to the
Company in August, 2000.
The Partnership receives 65% of the profits and losses in the Company
after priority return on partner contributions is allocated at the rate of 10%
per annum. The assets, liabilities, income and expenses of the Company have been
consolidated into the accompanying consolidated balance sheet and income
statement of the Partnership. The net income to the Partnership was
approximately $291,000 during the year ended December 31, 2002. The minority
interest of the joint venture partner of approximately $132,000 and $108,000 as
of December 31, 2002 and 2001, respectively, is reported in the accompanying
consolidated balance sheet.
Cash and Cash Equivalents
Cash and cash equivalents decreased from approximately $41,431,000 as
of December 31, 2001 to $6,684,000 as of December 31, 2002, respectively
($34,747,000 or 83.9%). This decrease is primarily due to a greater amount of
loans funded or purchased than repayments on loans received during the year
ended December 31, 2002.
Interest and Other Receivables
Interest and other receivables increased from approximately $2,253,000
as of December 31, 2001 to $3,177,000 as of December 31, 2002 ($924,000 or
41.0%), due primarily to additional deferred interest accrued on three loans
pursuant to the loan agreements in the amount of approximately $110,000, amounts
due from borrowers of certain loans in the amount of $167,000 for legal fees,
insurance and property tax payments made by the Partnership, and an increase in
interest receivable on loans secured by trust deeds as of December 31, 2002. The
increase in interest receivable is a result of an increase in the average loan
portfolio of 7.0% and an increase in the weighted average yield of the loan
portfolio from 11.75% for the year ended December 31, 2001 to 11.86% for the
year ended December 31, 2002.
Due from Affiliate
Due from affiliate decreased by approximately $64,000 (50.2%) during
the year ended December 31, 2002 due to additional interest accrued on the loan
to Dation, LLC (see above).
Due to General Partner
Due to General Partner decreased from approximately $1,272,000 as of
December 31, 2001 to $957,000 as of December 31, 2002 ($315,000 or 24.8%), due
primarily to lower accrued management fees for the months of November and
December 2002 as compared to November and December 2001. These fees are paid
pursuant to the Partnership Agreement (see "Results of Operations" above).
Note Payable
Note payable increased from approximately $6,920,000 as of December 31,
2001 to $8,190,000 as of December 31, 2002 ($1,270,000 or 18.4%), due to
advances made on the loan held within the Corporate Joint Venture for the
commercial development in Greeley, Colorado (see above) to pay for building and
tenant improvements during 2002.
Line of Credit Payable
Line of credit payable increased $6,867,000 (100%) from December 31,
2001 to December 31, 2002 as a result of the Partnership's decision to advance
from the line of credit to fund investments in certain loans during the year
ended December 31, 2002. There is an additional $33,133,000 available to be
advanced from the line of credit as of December 31, 2002.
Asset Quality
Some losses are normal when lending money and the amounts of losses
vary as the loan portfolio is affected by changing economic conditions and
financial experiences of borrowers. There is no precise method of predicting
specific losses or amounts that ultimately may be charged off on particular
segments of the loan portfolio.
The conclusion that a Partnership loan may become uncollectible, in
whole or in part, is a matter of judgment. Although lenders such as banks and
savings and loans are subject to regulations that require them to perform
ongoing analyses of their loan portfolios (including analyses of loan to value
ratios, reserves, etc.), and to obtain current information regarding its
borrowers and the securing properties, the Partnership is not subject to these
regulations and has not adopted these practices. Rather, management of the
General Partner, in connection with the quarterly closing of the accounting
records of the Partnership and the preparation of the financial statements,
evaluates the Partnership's mortgage loan portfolio. The allowance for loan
losses is established through a provision for loan losses based on the General
Partner's evaluation of the risk inherent in the Partnership's loan portfolio
and current economic conditions. Such evaluation, which includes a review of all
loans on which full collectibility may not be reasonably assured, considers
among other matters:
o prevailing economic conditions;
o historical experience;
o the types and dollar amounts of the loans in the portfolio;
o borrowers' financial condition and adverse situations that may affect
the borrowers' ability to pay;
o evaluation of industry trends;
o review and evaluation of loans identified as having loss potential; and
o estimated net realizable value or fair value of the underlying
collateral.
Based upon this evaluation, a determination is made as to whether the
allowance for loan losses is adequate to cover potential losses of the
Partnership. Additions to the allowance for loan losses are made by charges to
the provision for loan losses. Loan losses deemed to be uncollectible are
charged against the allowance for loan losses. Recoveries of previously charged
off amounts are credited to the allowance for loan losses. There was a
$1,235,000 loss recognized on a motel property located in Phoenix, Arizona at
the time of foreclosure in 2002 (see discussion under "Financial Condition"
above). There was a total loss of $614,000 realized on two Partnership loans
during the year ended December 31, 2001 There were no actual losses incurred on
loans by the Partnership during the years ended December 31, 2000, 1999 and
1998. However, the Partnership realized a loss on real estate in the amount of
$712,000 from the sale of a foreclosed property to the General Partner at its
fair market value during 1998. As of December 31, 2002, management believes that
the allowance for loan losses of $4,774,000 is adequate.
Liquidity and Capital Resources
Sales of Units to investors and portfolio loan payoffs provide the
capital for new mortgage investments. If general market interest rates were to
rise substantially, investors might turn to interest-yielding investments other
than Partnership Units, which would reduce the liquidity of the Partnership and
its ability to make additional mortgage investments to take advantage of the
generally higher interest rates. In contrast, a significant increase in the
dollar amount of loan payoffs and additional limited partner investments without
the origination of new loans of the same amount would increase the liquidity of
the Partnership. This increase in liquidity could result in a decrease in the
yield paid to limited partners as the Partnership would be required to invest
the additional funds in lower yielding, short term investments.
There was little variation in the percentage of capital withdrawals to
total capital invested by the limited partners between 1994 and 2001, excluding
regular distributions of net income to limited partners. There has been a
significant decrease in withdrawals during the year ended December 31, 2002.
Withdrawal percentages have been 7.33%, 7.99%, 6.64%, 5.45%, and 3.32% for the
years ended December 31, 1998, 1999, 2000, 2001 and 2002, respectively. These
percentages are the annual average of the limited partners' capital withdrawals
in each calendar quarter divided by the total limited partner capital as of the
end of each quarter.
The limited partners may withdraw, or partially withdraw, from the
Partnership and obtain the return of their outstanding capital accounts at $1.00
per Unit within 61 to 91 days after written notices are delivered to the General
Partner, subject to the following limitations, among others:
o No withdrawal of Units can be requested or made until at least one year
from the date of purchase of those Units, other than Units received
under the Partnership's Reinvested Distribution Plan.
o Any such payments are required to be made only from net proceeds and
capital contributions (as defined) during said 91-day period.
o A maximum of $100,000 per partner may be withdrawn during any calendar
quarter.
o The General Partner is not required to establish a reserve fund for the
purpose of funding such payments.
o No more than 10% of the total outstanding limited partnership interests
may be withdrawn during any calendar year except upon a plan of
dissolution of the Partnership.
In March 2001, the Partnership amended its Limited Partnership
Agreement, with the consent of a majority of limited partners, to allow the
Partnership to incur indebtedness for the purpose of investing in mortgage
loans. The total amount of indebtedness incurred by the Partnership cannot
exceed the sum of 50% of the aggregate fair market value of all Partnership
loans. The Partnership finalized a line of credit agreement with a bank in
August 2001, which provides interim financing on mortgage loans invested in by
the Partnership. The amount of credit available under this line of credit is
$40,000,000 (pursuant to an amendment in August 2002). The balance outstanding
on the line of credit was $6,867,000 as of December 31, 2002.
Contingency Reserves
The Partnership maintains cash, cash equivalents and marketable
securities as contingency reserves in an aggregate amount of 2% of the limited
partners' capital accounts to cover expenses in excess of revenues or other
unforeseen obligations of the Partnership. Although the General Partner believes
that contingency reserves are adequate, it could become necessary for the
Partnership to sell or otherwise liquidate certain of its investments to cover
such contingencies on terms which might not be favorable to the Partnership.
Current Economic Conditions
The current economic climate in Northern California and the Western
United States has shown increasing signs of a slowdown. Interest rates have
continued to decline and several key indices are at the lowest levels in
decades. Despite the Partnership's historical ability to purchase mortgage loans
with relatively strong yields, increased competition by other mortgage lenders
or changes in the economy could have the effect of reducing mortgage yields in
the future. Present loans with relatively high yields could be replaced with
loans with lower yields, which in turn could reduce the net yield paid to the
limited partners. In addition, if there is less demand by borrowers for loans
and, thus, fewer loans for the Partnership to invest in, the Partnership may be
required to invest its excess cash in short-term alternative investments
yielding considerably less than investments in mortgage loans.
The Partnership Agreement permits the General Partner to purchase
delinquent loans from the Partnership as long as certain criteria are met.
Although the General Partner has purchased some delinquent loans from the
Partnership in the past, it is not required to do so; therefore, the Partnership
could sustain losses with respect to loans secured by properties located in
areas of declining real estate values. This could result in a reduction of the
net income of the Partnership for a year in which those losses occur.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, loans held in the Partnership's portfolio and a note payable
securing a real estate property owned by the Partnership as of December 31,
2002. The presentation, for each category of information, aggregates the assets
and liabilities by their maturity dates for maturities occurring in each of the
years 2003 through 2007 and separately aggregates the information for all
maturities arising after 2007. The carrying values of these assets and
liabilities approximate their fair values as of December 31, 2002.
Interest Earning Assets and Interest Bearing Liabilities,
Aggregated by Maturity Date
Twelve Months Ended December 31,
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Interest earning
assets:
Money market
accounts $ 6,021,109 $ 6,021,109
- - - - -
Average interest 1.3% 1.3%
rate - - - - -
Loans secured by
trust deeds $160,350,025 $43,469,490 $ 37,156,795 $ - $ 3,093,783 $ 16,141,028 $260,211,121
Average interest 12.3% 10.9% 11.0% - 8.91% 11.4% 11.7%
rate
Interest bearing
liabilities:
Note payable to bank $ 8,190,111 $ 8,190,111
- - - - -
Average interest
rate 4.0% - - - - - 4.0%
Line of credit
payable $ 6,867,371 $ 6,867,371
Average interest
rate 4.3% - - - - - 4.3%
Market Risk
Market risk is the exposure to loss resulting from changes in interest
rates, equity prices and real estate values. The Partnership's note payable
bears interest at a variable rate, tied to the LIBOR rate of interest. As a
result, the Partnership's primary market risk exposure is to changes in interest
rates, which will affect the interest cost of outstanding amounts on the note
payable.
The majority of the Partnership's mortgage loans (87.0% as of December
31, 2002) earn interest at fixed rates. Changes in interest rates may also
affect the value of the Partnership's investment in mortgage loans and the rates
at which the Partnership reinvests funds obtained from loan repayments and new
capital contributions from limited partners. As interest rates increase,
although the interest rates the Partnership obtains from reinvested funds will
generally increase, the value of the Partnership's existing loans at fixed rates
will generally tend to decrease. As interest rates decrease, the amounts
becoming available to the Partnership for investment due to repayment of
Partnership loans may be invested at lower rates than the Partnership had been
able to obtain in prior investments, or than the rates on the repaid loans.
The Partnership does not hedge or otherwise seek to manage interest
rate risk. The Partnership does not enter into risk sensitive instruments for
trading purposes.
Item 8. Financial Statements and Supplementary Data
See pages 34-54 and pages 60-62 of this Form 10-K.
Report of Independent Certified Public Accountants
The Partners
Owens Mortgage Investment Fund
We have audited the accompanying consolidated balance sheets of Owens Mortgage
Investment Fund, a California Limited Partnership, as of December 31, 2002 and
2001, and the related consolidated statements of income, partners' capital and
cash flows for the three year period ended December 31, 2002. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the auditing standards generally
accepted in the United States of America. 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 presentation. 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 consolidated financial position of Owens Mortgage
Investment Fund as of December 31, 2002 and 2001, and the results of their
consolidated operations and their consolidated cash flows for the three years
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedules II and IV are presented for
purposes of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ Grant Thornton LLP
Reno, Nevada
February 8, 2003
OWENS MORTGAGE INVESTMENT FUND,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Balance Sheets
December 31, 2002 and 2001
Assets 2002 2001
------------------- -------------------
Cash and cash equivalents $ 6,684,418 41,431,108
Loans secured by trust deeds, net of allowance for
losses of $4,774,000 in 2002 and $4,425,000 in 2001 255,437,121 209,278,469
Interest and other receivables 3,176,786 2,253,322
Due from affiliate 192,647 128,215
Real estate held for sale, net of allowance for
losses of $250,000 in 2002 and $634,000 in 2001 15,541,632 14,134,961
Real estate held for investment, net of accumulated depreciation
and amortization of $628,000 in 2002 and $339,000 in 2001 16,200,449 14,064,664
-------------- --------------
$ 297,233,053 281,290,739
============== ==============
Liabilities and Partners' Capital
Liabilities:
Accrued distributions payable $ 619,234 625,645
Due to general partner 956,800 1,272,042
Accounts payable and accrued liabilities 117,025 78,829
Note payable 8,190,111 6,919,829
Line of credit payable 6,867,371 --
-------------- --------------
Total liabilities 16,750,541 8,896,345
-------------- --------------
Minority interest 131,538 107,680
-------------- --------------
Partners' capital (units subject to redemption):
General partner 2,755,846 2,677,867
Limited partners
Authorized 500,000,000 units outstanding in 2002 and 2001;
442,167,000 and 424,788,000 units issued and 277,791,000 and
269,805,000 units outstanding in 2002 and 2001, respectively 277,595,128 269,608,847
-------------- --------------
Total partners' capital 280,350,974 272,286,714
-------------- --------------
$ 297,233,053 281,290,739
============== ==============
The accompanying notes are an integral part of these financial statements.
OWENS MORTGAGE INVESTMENT FUND,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Income
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------------ ------------------ ------------------
Revenues:
Interest income on loans secured by trust deeds $ 26,145,598 24,763,875 23,369,474
Gain on sale of real estate, net 1,366,048 1,441,649 2,971,454
Rental and other income from real estate properties 3,233,067 2,595,848 1,689,256
Other income 333,582 678,193 238,247
------------------ ------------------ ------------------
Total revenues 31,078,295 29,479,565 28,268,431
------------------ ------------------ ------------------
Expenses:
Management fees to general partner 3,616,102 3,437,684 3,914,488
Servicing fees to general partner 611,243 571,538 531,337
Carried interest to general partner 40,075 173,292 102,212
Administrative 39,600 31,500 31,500
Legal and accounting 204,091 168,255 130,201
Rental and other expenses on real estate properties 3,090,324 1,546,678 763,754
Interest expense 426,778 429,032 235,311
Minority interest 35,848 5,577 2,103
Other 73,852 187,140 22,469
Provision for loan losses 1,584,000 1,039,645 --
Recovery of losses on real estate held for sale, net (313,577) -- --
------------------ ------------------ ------------------
Total expenses 9,408,336 7,590,341 5,733,375
------------------ ------------------ ------------------
Net income $ 21,669,959 21,889,224 22,535,056
================== ================== ==================
Net income allocated to general partner $ 214,125 214,147 221,684
================== ================== ==================
Net income allocated to limited partners $ 21,455,834 21,675,077 22,313,372
================== ================== ==================
Net income allocated to limited partners per
weighted average limited partnership unit $ 0.08 0.08 0.10
================== ================== ==================
The accompanying notes are an integral part of these financial statements.
OWENS MORTGAGE INVESTMENT FUND,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Partners' Capital
Years Ended December 31, 2002, 2001 and 2000
Limited partners Total
General --------------------------------------- Partners'
partner Units Amount capital
------------------- ------------------ ----------------- ------------------
Balances, December 31, 1999 $ 2,104,936 212,702,897 $ 212,506,877 214,611,813
Net income 221,684 22,313,372 22,313,372 22,535,056
Sale of partnership units 204,424 23,801,227 23,801,227 24,005,651
Partners' withdrawals -- (15,121,766) (15,121,766) (15,121,766)
Partners' distributions (196,199) (7,077,365) (7,077,365) (7,273,564)
------------------- ------------------ ----------------- ------------------
Balances, December 31, 2000 2,334,845 236,618,365 236,422,345 238,757,190
Net income 214,147 21,675,077 21,675,077 21,889,224
Sale of partnership units 346,584 33,105,753 33,105,753 33,452,337
Partners' withdrawals -- (14,099,001) (14,099,001) (14,099,001)
Partners' distributions (217,709) (7,495,327) (7,495,327) (7,713,036)
------------------- ------------------ ----------------- ------------------
Balances, December 31, 2001 2,677,867 269,804,867 $ 269,608,847 272,286,714
Net income 214,125 21,455,834 21,455,834 21,669,959
Sale of partnership units 80,150 3,042,450 3,042,450 3,122,600
Partners' withdrawals -- (9,125,830) (9,125,830) (9,125,830)
Partners' distributions (216,296) (7,386,173) (7,386,173) (7,602,469)
------------------- ------------------ ----------------- ------------------
Balances, December 31, 2002 $ 2,755,846 277,791,148 $ 277,595,128 280,350,974
=================== ================== ================= ==================
The accompanying notes are an integral part of these financial statements.
OWENS MORTGAGE INVESTMENT FUND,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---------------- ----------------- ---------------
Cash flows from operating activities:
Net income $ 21,669,959 21,889,224 22,535,056
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of real estate properties (1,366,048) (1,441,649) (2,971,454)
Provision for loan losses 1,584,000 1,039,645 --
Recovery of losses on real estate properties
held for sale, net (313,577) -- --
Depreciation and amortization 288,672 231,872 100,797
Changes in operating assets and liabilities:
Interest and other receivables (600,344) (365,907) 135,322
Accounts payable and accrued liabilities 38,196 (26,811) (325,024)
Due from affiliate (64,432) -- --
Due to general partner (315,242) 702,775 (182,492)
---------------- ----------------- ---------------
Net cash provided by operating activities 20,921,184 22,029,149 19,292,205
---------------- ----------------- ---------------
Cash flows from investing activities:
Purchases of loans secured by trust deeds (148,595,993) (148,046,907) (117,409,372)
Principal collected on loans 781,258 1,293,665 1,124,071
Loan payoffs 91,937,090 150,359,545 86,831,041
Sales of loans to third and related parties at face value -- -- 6,665,913
Investment in real estate properties (12,217,682) (8,108,796) (384,513)
Net proceeds from disposition of real estate properties 3,850,052 5,093,603 1,346,769
Proceeds received from real estate joint venture 14,028,000 -- --
Investment in corporate joint venture -- -- (2,863,870)
Repayment received from corporate joint venture -- -- 581,250
Proceeds from sale of real estate in corporate
joint venture -- -- 7,195,640
Purchase of real estate in corporate joint venture -- -- (3,337,888)
Minority interest in corporate joint venture 23,858 5,577 102,103
Maturity of commercial paper, net -- -- 200,000
Maturities of certificates of deposit, net -- 50,000 --
---------------- ----------------- ---------------
Net cash (used in) provided by investing activities (50,193,417) 646,687 (19,948,856)
---------------- ----------------- ---------------
Cash flows from financing activities:
Proceeds from sale of partnership units 3,122,600 33,452,337 24,005,651
Accrued distributions payable (6,411) (16,119) 64,483
Advances on notes payable 1,270,282 896,612 --
Advances on line of credit payable, net 6,867,371 -- --
Partners' cash distributions (7,602,469) (7,713,036) (7,273,564)
Partners' capital withdrawals (9,125,830) (14,099,001) (15,121,766)
---------------- ----------------- ---------------
Net cash (used in) provided by financing activities (5,474,457) 12,520,793 1,674,804
---------------- ----------------- ---------------
Net (decrease) increase in cash and cash equivalents (34,746,690) 35,196,629 1,018,153
Cash and cash equivalents at beginning of year 41,431,108 6,234,479 5,216,326
---------------- ----------------- ---------------
Cash and cash equivalents at end of year $ 6,684,418 41,431,108 6,234,479
================ ================= ===============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest 411,903 445,906 187,732
See notes 3 and 4 for supplemental disclosure of noncash investing and financing
activities. The accompanying notes are an integral part of these financial
statements.
OWENS MORTGAGE INVESTMENT FUND,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(1) Organization
Owens Mortgage Investment Fund, a California Limited Partnership, (the
Partnership) was formed on June 14, 1984 to invest in loans secured by
first, second and third trust deeds, wraparound, participating and
construction mortgage loans and leasehold interest mortgages. The
Partnership commenced operations on the date of formation and will
continue until December 31, 2034 unless dissolved prior thereto under the
provisions of the Partnership Agreement.
The general partner of the Partnership is Owens Financial Group, Inc.
(OFG), a California corporation engaged in the origination of real estate
mortgage loans for eventual sale and the subsequent servicing of those
mortgages for the Partnership and other third-party investors.
OFG is authorized to offer and sell units in the Partnership up to an
aggregate of 500,000,000 units outstanding at $1.00 per unit,
representing $500,000,000 of limited partnership interests in the
Partnership. Limited partnership units outstanding were 277,791,148,
269,804,867 and 236,618,365 as of December 31, 2002, 2001 and 2000,
respectively.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of the
Partnership, its majority-owned limited liability company located
in Oregon (see Note 4), and its majority-owned limited liability
company located in Colorado (see Note 5). All significant
inter-company transactions and balances have been eliminated in
consolidation.
Certain reclassifications not affecting net income have been made
to the 2001 and 2000 consolidated financial statements to conform
to the 2002 presentation.
(b) Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(c) New Accounting Pronouncements
SFAS 141 and 142
On July 20, 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) 141,
Business Combinations, and SFAS 142, Goodwill and Intangible
Assets. SFAS 141 is effective for all business combinations
completed after June 30, 2001. SFAS 142 is effective for fiscal
years beginning after December 15, 2001; however, certain
provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective
date of SFAS 142. Major provisions of these Statements and their
effective dates for the Partnership are as follows:
* all business combinations initiated after June 30, 2001 must
use the purchase method of accounting. The pooling of interest
method of accounting is prohibited except for transactions
initiated before July 1, 2001.
* intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from
contractual or other legal rights or are separable from the
acquired entity and can be sold, transferred, licensed, rented
or exchanged, either individually or as part of a related
contract, asset or liability.
* goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective
January 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be
subject to amortization.
* effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and
whenever there is an impairment indicator.
* all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.
These Statements have not had a material impact on the
Partnership's financial position or results of operations.
SFAS 143
In June 2001, the Financial Accounting Standards Board issued SFAS
No. 143, Accounting for Asset Retirement Obligations, which
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
associated asset retirement costs. The new rules apply to legal
obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and
(or) normal operation of a long-lived asset. SFAS 143 is effective
at the beginning January 1, 2003. The adoption of SFAS 143 will
not, at this time, have a material impact on the Partnership's
consolidated financial position or results of operations.
SFAS 144
In August 2001, the Financial Accounting Standards Board issued
SFAS 144, Accounting for the Impairment or Disposition of Long
Lived Assets. This Statement supersedes SFAS 121, Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of, and Accounting Principles Board Opinion No. 30,
Reporting Results of Operations - Reporting the Effect of
Disposals on a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions. This Statement
retains the fundamental provisions of SFAS 121 for recognition and
measurement of impairment, but amends the accounting and reporting
standards for segments of business to be disposed of. The
provisions of this Statement are required to be adopted no later
than fiscal years beginning after December 31, 2001, with early
adoption encouraged. The adoption of SFAS 144 did not result in a
material impact to the Partnership's consolidated financial
position or results of operations.
Interpretation No. 46
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities." Interpretation No.
46 clarifies the application of Accounting Research Bulletin No.
51 and applies immediately to any variable interest entities
created after January 31, 2003 and to variable interest entities
in which an interest is obtained after that date. This
Interpretation is applicable for the Partnership in the third
quarter of fiscal year 2003, for interests acquired in variable
interest entities prior to February 1, 2003. The Partnership does
not expect the adoption of Interpretation No. 46 to have a
material effect on its financial position or results of
operations.
(d) Loans Secured by Trust Deeds
Loans secured by trust deeds are recorded at cost. Interest income
on loans is accrued by the simple interest method. The Partnership
does not recognize interest income on loans once they are
determined to be impaired until the interest is collected in cash.
A loan is impaired when, based on current information and events,
it is probable that the Partnership will be unable to collect all
amounts due according to the contractual terms of the loan
agreement, when the loan is past maturity, or when monthly
payments are delinquent greater than 90 days. Cash receipts are
allocated to interest income, except when such payments are
specifically designated as principal reduction or when management
does not believe the Partnership's investment in the loan is fully
recoverable.
(e) Allowance for Loan Losses
The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance
when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
types and dollar amounts of loans in the portfolio, adverse
situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as
it requires estimates that are susceptible to significant revision
as more information becomes available. Impairment is measured on a
loan by loan basis by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the
underlying collateral.
In limited instances, OFG advances certain payments on behalf of
borrowers of Partnership loans, such as property taxes, insurance
and mortgage interest pursuant to senior indebtedness. Such
payments made on loans by OFG during 2002, 2001 and 2000 totaled
approximately $67,000, $136,000 and $191,000, respectively. Of the
amounts advanced, $51,000, $52,000 and $96,000 had been reimbursed
to OFG by the borrowers as of December 31, 2002, 2001 and 2000,
respectively. The loans on which OFG has made such advances are
considered impaired and are evaluated with all other impaired
loans for purposes of the loan loss allowance.
(f) Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash
equivalents include interest-bearing and noninterest-bearing bank
deposits, money market accounts and short-term certificates of
deposit with original maturities of three months or less.
The Partnership maintains its cash in bank deposit accounts that,
at times, may exceed Federally insured limits. The Partnership has
not experienced any losses in such accounts. The Partnership
believes it is not exposed to any significant credit risk on cash
and cash equivalents.
(g) Marketable Securities
At various times during the year, the Partnership may purchase
marketable securities with various financial institutions with
original maturities of up to one year. The Partnership classifies
its debt securities as held-to-maturity, as the Partnership has
the ability and intent to hold the securities until maturity.
These securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. A decline in
the market value of any held-to-maturity security below cost that
is deemed to be other than temporary results in a reduction in
carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established.
Premiums and discounts are amortized or accreted over the life of
the related security as an adjustment to yield using the effective
interest method. Interest income is recognized when earned.
(h) Real Estate Held for Sale and Investment
Real estate held for sale includes real estate acquired through
foreclosure and an investment in a real estate joint venture and
is carried at the lower of the recorded investment in the loan or
the joint venture, inclusive of any senior indebtedness, or the
property's estimated fair value, less estimated costs to sell.
Real estate held for investment includes real estate purchased or
acquired through foreclosure and is initially stated at the lower
of cost or the recorded investment in the loan, or the property's
estimated fair value. Depreciation is provided on the
straight-line method over the estimated useful lives of buildings
and improvements of 39 years. Amortization of lease commissions is
provided on the straight-line method over the lives of the related
leases.
In accordance with Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposition of Long-lived
Assets, the Partnership periodically compares the carrying value
of real estate to expected future cash flows for the purpose of
assessing the recoverability of the recorded amounts. If the
carrying value exceeds future cash flows, the assets are reduced
to fair value. During the year ended December 31, 2002, the
Partnership reduced the carrying value of a property located in
Gresham, Oregon by approximately $70,000 to its fair market value
and reversed a previously established reserve on a property
located in Ione, California in the amount of $384,000. There were
no required reductions to the carrying value of real estate held
for sale or investment made for the years ended December 31, 2001
and 2000.
(i) Income Taxes
No provision is made for income taxes since the Partnership is not
a taxable entity. Accordingly, any income or loss is included in
the tax returns of the partners.
(3) Loans Secured by Trust Deeds
Loans secured by trust deeds as of December 31, 2002 and 2001 are as
follows:
2002 2001
--------------- ----------------
Income-producing properties $ 228,210,411 180,506,295
Construction 12,670,310 14,773,984
Unimproved land 16,938,678 15,360,822
Residential 2,391,722 3,062,368
--------------- ----------------
$ 260,211,121 213,703,469
=============== ================
First mortgages $ 241,335,259 205,139,594
Second mortgages 18,875,862 8,563,875
--------------- ----------------
$ 260,211,121 213,703,469
=============== ================
Scheduled maturities of loans secured by trust deeds as of December 31,
2002 and the interest rate sensitivity of such loans is as follows:
Fixed Variable Total
interest interest
rate rate
-------------------- ----------------- ------------------
Year ending December 31:
2002 (past maturity) $ 47,129,257 -- 47,129,257
2003 109,661,651 3,559,117 113,220,768
2004 28,648,442 14,821,048 43,469,490
2005 36,828,382 328,413 37,156,795
2006 -- -- --
2007 2,800,000 293,783 3,093,783
Thereafter (through 2018) 1,284,394 14,856,634 16,141,028
-------------------- ----------------- ------------------
$ 226,352,126 33,858,995 260,211,121
==================== ================= ==================
Variable rate loans use as indices the one- and five-year Treasury
Constant Maturity Index (1.41% and 2.89%, respectively, as of December
31, 2002), the prime rate (4.25% as of December 31, 2002) or the weighted
average cost of funds index for Eleventh District savings institutions
(2.54% as of December 31, 2002) or include terms whereby the interest
rate is increased at a later date. Premiums over these indices have
varied from 250-550 basis points depending upon market conditions at the
time the loan is made.
The scheduled maturities for 2002 include approximately $47,129,000 of
loans which are past maturity as of December 31, 2002, of which
$5,003,000 represents loans for which interest payments are delinquent
over 90 days. During the years ended December 31, 2002 and 2001, the
Partnership refinanced loans totaling $21,985,000 and $13,677,000,
respectively, thereby extending the maturity dates of such loans.
A majority of the loans made or invested in by the Partnership require
the borrower to make a "balloon payment" on the principal amount upon
maturity of the loan. To the extent that a borrower has an obligation to
pay mortgage loan principal in a large lump sum payment, its ability to
satisfy this obligation may be dependent upon its ability to sell the
property, obtain suitable refinancing or otherwise raise a substantial
cash amount. As a result, these loans involve a higher risk of default
than fully amortizing loans.
As of December 31, 2002, the Partnership participated in 14 separate
loans with a total principal balance of $76,050,000 with an unrelated
mortgage entity that originated the loans with the borrowers. The General
Partner receives the payments on these participated loans from the
unrelated entity. Pursuant to inter-creditor agreements between the
Partnership and the unrelated entity on 11 of the loans with a total
principal balance of $60,550,000, the Partnership is guaranteed its share
of interest and principal prior to any other investors participated in
such loans.
The Partnership's investment in impaired loans that were delinquent in
payments greater than 90 days was approximately $26,327,000 as of
December 31, 2002. In addition, the Partnership's investment in impaired
loans that were past maturity (delinquent in principal) but current in
monthly payments was approximately $42,126,000 as of December 31, 2002.
The Partnership had an allowance for loan losses equal to $4,774,000 and
$4,425,000 as of December 31, 2002 and 2001, respectively. Of the total
impaired loans as of December 31, 2002, $13,876,000 has a specific
related allowance for credit losses totaling approximately $1,974,000.
There is a non-specific allowance for credit losses of $2,800,000 for the
remaining impaired loans. Of the impaired loans, approximately $6,503,000
and $5,327,000 were in the process of foreclosure as of December 31, 2002
and 2001. Of the total past maturity loans as of December 31, 2002,
$8,161,000 was paid off and $14,000,000 had the maturity date extended
subsequent to year end.
Changes in the allowance for loan losses for the years ended December 31,
2002, 2001 and 2000 were as follows:
2002 2001 2000
--------------- ------------------ -----------------
Balance, beginning of year $ 4,425,000 4,000,000 4,000,000
Provision 1,584,000 1,039,645 --
Charge-offs (1,235,000) (614,645) --
--------------- ------------------ -----------------
Balance, end of year $ 4,774,000 4,425,000 4,000,000
=============== ================== =================
The average recorded investment in impaired loans with an allowance
established was $12,360,000 and $11,234,000 during the years ended
December 31, 2002 and 2001, respectively. Interest income received on
impaired loans during the years ended December 31, 2002, 2001 and 2000
totaled approximately $630,000, $461,000 and $559,000, respectively.
As of December 31, 2002 and 2001, the Partnership's loans secured by
deeds of trust on real property collateral located in Northern California
totaled approximately 43% ($112,218,000) and 54% ($115,358,000),
respectively, of the loan portfolio. The Northern California region
(which includes the following counties and all counties north: Monterey,
Fresno, Kings, Tulare and Inyo) is a large geographic area which has a
diversified economic base. The ability of borrowers to repay loans is
influenced by the economic strength of the region and the impact of
prevailing market conditions on the value of real estate.
During the year ended December 31, 2000, the Partnership sold for cash
full interests in five loans to third parties and to related parties in
the amounts of $6,366,000 and $300,000, respectively. The sale of all the
loans resulted in no gain or loss in the accompanying financial
statements.
(4) Real Estate Held for Sale
Real estate held for sale includes the following components as of
December 31, 2002 and 2001:
2002 2001
-------------------- --------------------
Real estate held for sale $ 10,722,133 3,778,675
Investment in limited liability companies 3,489,146 3,668,644
Investment in limited partnership -- 176,743
Investment in real estate joint venture 1,330,353 6,510,899
-------------------- --------------------
$ 15,541,632 14,134,961
==================== ====================
Real estate properties held for sale as of December 31, 2002 and 2001
consists of the following properties acquired through foreclosure in 1993
through 2002:
2002 2001
--------------- ---------------
Commercial lot/residential development, Vallejo,
California $ -- 361,432
Commercial lot, Sacramento, California, net of
valuation allowance of $250,000 as of December 31,
2002 and 2001 299,828 299,828
Manufactured home subdivision development, Ione,
California, net of valuation allowance of $384,000
as of December 31, 2001 1,572,785 1,699,931
Undeveloped land, Reno, Nevada 364,948 219,553
Commercial building, Sacramento, California -- 30,000
Commercial building, Gresham, Oregon -- 410,423
Commercial building, Roseville, California -- 757,508
Hotel, Phoenix, Arizona 2,024,532 --
Undeveloped land, Gresham, Oregon 1,624,048 --
Commercial building, Albany, Oregon 1,800,000 --
Undeveloped land, San Jose, California 3,025,992 --
Undeveloped land, Reno, Nevada 10,000 --
--------------- ---------------
$ 10,722,133 3,778,675
=============== ===============
The acquisition of certain of these properties (including the property
within the limited liability companies discussed below) resulted in
non-cash increases in real estate held for sale and non-cash decreases in
loans secured by trust deeds of approximately $9,370,000, $3,369,000 and
$685,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
During the year ended December 31, 2002, the Partnership transferred the
commercial building located in Roseville, California in the amount of
$758,000 from real estate held for sale to real estate held for
investment.
During the year ended December 31, 2002, a commercial parcel located in
Vallejo, California that was acquired by the Partnership through
foreclosure in 1994 was sold for $1,095,000, resulting in a gain to the
Partnership of approximately $734,000. In addition, a commercial building
located in Sacramento, California that was acquired by the Partnership
through foreclosure in 1998 was sold for $147,000, resulting in a gain to
the Partnership of approximately $117,000.
During the year ended December 31, 2002, the Partnership sold a
commercial building located in Gresham, Oregon for proceeds in the amount
of $340,000 resulting in no gain or loss. An allowance in the amount of
$70,000 was previously established in 2002 on this property and, thus,
the loss was reported net of the recovery of losses on real estate held
for sale in the accompanying consolidated income statement for the year
ended December 31, 2002.
During the year ended December 31, 2002, 22 lots (11 including houses)
located in a manufactured home subdivision development located in Ione,
California (that were acquired by the Partnership through foreclosure in
1997) were sold for $1,811,000, resulting in a gain to the Partnership of
approximately $317,000. An allowance in the amount of $384,000 that was
previously established on this property was reversed during the year
ended December 31, 2002 as a result of management's evaluation of the
property's fair market value based on recent sales. There are 61 lots
remaining to be sold on this property as of December 31, 2002.
During the year ended December 31, 2002, the Partnership foreclosed on a
1st mortgage loan secured by a commercial building located in Albany,
Oregon in the amount of $1,800,000 and foreclosed on a 1st mortgage loan
secured by commercial land located in Gresham, Oregon in the amount of
$1,620,000 and obtained the properties via the trustee's sale.
During the year ended December 31, 2002, the Partnership foreclosed on a
first mortgage loan secured by a hotel located in Phoenix, Arizona in the
amount of $2,925,000 (which had an allowance established in the amount of
$1,235,000) and obtained the property via the trustee's sale. The
Partnership paid $335,000 in delinquent property taxes at the time of
foreclosure which were capitalized to the basis of the property. The
Partnership transferred the net basis of the loan to real estate held for
sale at the time of foreclosure.
During the year ended December 31, 2002, the Partnership foreclosed on a
first mortgage loan secured by undeveloped land located in San Jose,
California in the amount of $3,025,000 and obtained the property via the
trustee's sale.
During the year ended December 31, 2001, the Partnership entered into a
limited partnership, University Hills, L.P. (University Hills) with two
other unrelated developers for the purpose of developing, leasing and
selling an apartment complex on 5.3 acres of undeveloped land located in
Reno, Nevada (which was acquired through foreclosure by the Partnership
in 1996). As of December 31, 2001, the land had not been contributed into
University Hills by the Partnership. During the year ended December 31,
2002, University Hills was dissolved. The Partnership intends to either
sell the property or develop the property on its own. During the year
ended December 31, 2002, approximately $41,000 of costs previously
advanced to University Hills were written off by the Partnership. The
Partnership's total net basis in the property is $365,000 as of December
31, 2002.
In January 2003, the Partnership foreclosed on a first mortgage loan
secured by an industrial building located in Santa Clara, California in
the amount of $2,000,000 and obtained the property via the trustee's
sale.
During the year ended December 31, 2001, an industrial building located
in Merced, California that was acquired by the Partnership through
foreclosure in 1993 was sold for $1,000,000, resulting in a gain to the
Partnership of approximately $478,000 (net of the allowance for real
estate losses established on this property in the amount of $350,000).
During the year ended December 31, 2001, a light industrial building
located in Oakland, California that was acquired by the Partnership
through foreclosure in 1997 was sold for cash of $1,328,000, resulting in
a gain to the Partnership of approximately $875,000. A commercial
building located in San Ramon, California that was acquired by the
Partnership through foreclosure in 1999 was sold for cash of $1,390,000,
resulting in a gain to the Partnership of approximately $151,000 during
2001. In addition, a house and improved lot located in Lake Don Pedro,
California that were acquired by the Partnership through foreclosure in
1999 were sold for cash of $174,000, resulting in a loss to the
Partnership of approximately $62,000 during 2001.
During the year ended December 31, 2001, the Partnership foreclosed on a
2nd mortgage loan secured by an office building located in Roseville,
California in the amount of $210,000 and obtained the property via the
trustee's sale. The Partnership subsequently paid off the 1st mortgage
loan in the amount of approximately $527,000.
During 2000, an industrial building located in Lathrop, California that
was acquired by the Partnership through foreclosure in April 2000 was
sold for cash of $90,000 and a note of $814,000, resulting in a gain to
the Partnership of approximately $142,000. The note was repaid in full by
the borrower in 2001. 87 residential lots located in Lake Don Pedro,
California that were acquired by the Partnership through foreclosure in
1999 were sold for cash resulting in a gain to the Partnership of
approximately $46,000 during 2000. In addition, a residential/retail
building located in Oakland, California that was acquired by the
Partnership through foreclosure in 1999 was sold for cash resulting in a
gain to the Partnership of approximately $92,000 during 2000.
Changes in the allowance for real estate losses for the years ended
December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000
--------------- ------------------ -----------------
Balance, beginning of year $ 634,000 1,136,000 1,336,000
Provision -- -- --
Deductions (384,000) (502,000) (200,000)
--------------- ------------------ -----------------
Balance, end of year $ 250,000 634,000 1,136,000
=============== ================== =================
(b) Investment in Limited Liability Companies
Oregon Leisure Homes, LLC
During 2001, a new entity named Oregon Leisure Homes, LLC (OLH)
was formed between the Partnership and an unrelated developer for
the purpose of developing and selling eight condominium units
located in Lincoln City, Oregon, which were acquired by the
Partnership via a deed in lieu of foreclosure. OLH also purchased
a house located on the ocean in Lincoln City for renovation and
ultimate sale. OLH will sell eleven interests in each condominium
and seven interests in the ocean house. The Partnership is
co-manager of OLH and is to receive 70% of the profits. The
assets, liabilities, income and expenses of OLH have been
consolidated into the accompanying consolidated balance sheet and
income statement of the Partnership. During the year ended
December 31, 2002, the Partnership advanced an additional $936,000
to OLH (for a total of $1,537,000) for continued development and
marketing of the condominium units and house that are currently
for sale. OLH sold three interests in the condominiums during the
year ended December 31, 2002 for total cash proceeds of $74,000
and a note in the amount of $27,000. No gain or loss was
recognized as a result of these sales. OLH sold six interests in
the ocean house during the year ended December 31, 2002 for cash
proceeds of $383,000 and three notes in the total amount of
$296,000, and recognized gain in the amount of $198,000. The net
loss to the Partnership (including gains on sales) was
approximately $182,000 for the year ended December 31, 2002. The
Partnership's investment in the OLH real property was
approximately $1,558,000 as of December 31, 2002.
Dation, LLC
In July 2001, a mobile home park located in Lake Charles,
Louisiana that secured a Partnership loan in the amount of
$2,113,600 was transferred by the borrower to a new entity named
Dation, LLC (Dation), which was formed between the Partnership and
an unrelated developer. The Partnership is advancing funds to
Dation to finish the remaining lots under the existing loan terms
and may provide additional financing to Dation. The Partnership is
co-manager of Dation and is to receive 50% of the profits and
losses. The net loss to the Partnership was approximately $184,000
and $79,000 for the years ended December 31, 2002 and 2001,
respectively. The Partnership also recognized $64,000 and $128,000
in interest income from its loan to Dation during the years ended
December 31, 2002 and 2001, respectively. As of December 31, 2002,
the Partnership had advanced an additional $140,000 to Dation and
had received repayments from sales of lots in the amount of
$60,000, under the existing loan. The Partnership's total
investment in Dation was approximately $1,931,000 as of December
31, 2002.
(c) Investment in Real Estate Joint Venture
The Partnership has a construction loan made on a housing
development located in Hayward, California. The loan is reported
in the financial statements as an investment in a real estate
joint venture to account for the investment pursuant to accounting
guidelines for acquisition, development and construction
arrangements. The Partnership is to receive interest on its
advances to the joint venture at the rate of 10.25% per annum and
is to receive 30% of the net profits from the sale of each house
after payment of a 10% loan fee is made to OFG. As of December 31,
2002, the Partnership has received all interest payments due on
the loan but has not received any payments of residual profits.
The Partnership advanced an additional $8,847,000 to the joint
venture and received payment of advances in the amount of
$14,028,000 during the year ended December 31, 2002. The
Partnership's investment in the joint venture was approximately
$1,330,000 and $6,511,000 as of December 31, 2002 and 2001,
respectively.
(5) Real Estate Held for Investment
Real estate held for investment is comprised of a retail property located
in Greeley, Colorado held within the corporate joint venture (see below),
an office building and undeveloped land located in Monterey, California,
a light industrial building located in Paso Robles, California, and a
commercial building located in Roseville, California and is comprised of
the following as of December 31, 2002 and 2001:
2002 2001
---- ----
Land $ 5,198,125 4,924,291
Buildings 9,123,717 8,273,043
Improvements 2,321,153 1,095,212
Other 185,215 111,206
------------- --------------
16,828,210 14,403,752
Less: Accumulated depreciation
and amortization (627,761) (339,088)
------------- -------------
$ 16,200,449 14,064,664
============= =============
During the year ended December 31, 2002, the Partnership transferred the
commercial building located in Roseville, California in the amount of
$758,000 from real estate held for sale to real estate held for
investment.
Depreciation and amortization expense was $289,000 and $232,000 for the
years ended December 31, 2002 and 2001, respectively.
Investment in Corporate Joint Venture
The Partnership has an investment in a limited liability company, 720
University, LLC (720 University), which owns a commercial retail property
located in Greeley, Colorado. The Partnership receives 65% of the profits
and losses in 720 University after priority return on partner
contributions is allocated at the rate of 10% per annum. The assets,
liabilities, income and expenses of 720 University have been consolidated
into the accompanying consolidated balance sheet and income statement of
the Partnership. The net income to the Partnership was approximately
$291,000, $186,000, and $110,000 during the years ended December 31,
2002, 2001 and 2000, respectively. The minority interest of the joint
venture partner of approximately $132,000 and $108,000 as of December 31,
2002 and 2001, respectively, is reported in the accompanying consolidated
balance sheet.
(6) Note Payable
The Partnership has a note payable with a bank through its investment in
the limited liability company (see note 5), which is secured by the
retail development in Greeley, Colorado. The note requires monthly
interest payments with the balance of unpaid principal and interest due
on May 22, 2003. The interest rate on the note is variable based on the
LIBOR rate plus 2.75% (4.0% at December 31, 2002). Interest expense for
the years ended December 31, 2002, 2001 and 2000 was approximately
$350,000, $429,000 and $235,000, respectively. The principal balance on
the note as of December 31, 2002 and 2001 was approximately $8,190,000
and $6,920,000, respectively. The Company also has the option to draw an
additional $710,000 on the note for capital expenditures, tenant
improvements or leasing commissions. The note contains certain covenants,
which the Company has complied with as of December 31, 2002.
(7) Line of Credit Payable
The Partnership finalized a line of credit agreement with a group of
banks in August 2001, which provides interim financing on mortgage loans
invested in by the Partnership. The amount of credit available under this
line of credit is $40,000,000 (pursuant to an amendment in August 2002).
The balance outstanding on the line of credit was $6,867,000 and $0 as of
December 31, 2002 and 2001, respectively. Borrowings under this line of
credit bear interest at the bank's prime rate, which was 4.25% as of
December 31, 2002. Interest expense was approximately $77,000 for the
year ended December 31, 2002. The line of credit expires on July 31,
2003. The Partnership is required to maintain non-interest bearing
accounts in the total amount of $500,000 with two of the banks. The
agreement requires the Partnership to meet certain financial covenants
including minimum tangible net worth and total liabilities to tangible
net worth. The Partnership has complied with these covenants as of
December 31, 2002.
(8) Partners' Capital
In December 1998, the limited partners voted to amend the Partnership
Agreement and there were further amendments by OFG in February 1999,
April 2000 and March 2001. All such changes have been incorporated into
this note and elsewhere in the consolidated financial statements where
applicable.
(a) Allocations, Distributions and Withdrawals
In accordance with the Partnership Agreement, the Partnership's
profits, gains and losses are allocated to each limited partner
and OFG in proportion to their respective capital accounts.
Distributions of net income are made monthly to the partners in
proportion to their weighted-average capital accounts as of the
last day of the preceding calendar month. Accrued distributions
payable represent amounts to be distributed to partners in January
of the subsequent year based on their capital accounts as of
December 31.
The Partnership makes monthly net income distributions to those
limited partners who elect to receive such distributions. Those
limited partners who elect not to receive cash distributions have
their distributions reinvested in additional limited partnership
units. Such reinvested distributions totaled $14,270,000,
$14,533,000 and $12,689,000 for the years ended December 31, 2002,
2001, and 2000, respectively. Reinvested distributions are not
shown as partners' cash distributions or proceeds from sale of
partnership units in the accompanying consolidated statements of
partners' capital and cash flows.
The limited partners may withdraw, or partially withdraw, from the
Partnership and obtain the return of their outstanding capital
accounts at $1.00 per unit (book value) within 61 to 91 days after
written notices are delivered to OFG, subject to the following
limitations, among others:
o No withdrawal of units can be requested or made until at
least one year from the date of purchase of those units,
other than units received under the Partnership's Reinvested
Distribution Plan.
o Any such payments are required to be made only from net
proceeds and capital contributions (as defined) during said
91-day period.
o A maximum of $100,000 per partner may be withdrawn during
any calendar quarter.
o The general partner is not required to establish a reserve
fund for the purpose of funding such payments.
o No more than 10% of the outstanding limited partnership
interest may be withdrawn during any calendar year except
upon dissolution of the Partnership.
(b) Carried Interest of General Partner
OFG has contributed capital to the Partnership in the amount of
0.5% of the limited partners' aggregate capital accounts and,
together with its carried interest (formerly "promotional
interest"), OFG has an interest equal to 1% of the limited
partners' capital accounts. This carried interest of OFG of up to
1/2 of 1% is recorded as an expense of the Partnership and
credited as a contribution to OFG's capital account as additional
compensation. As of December 31, 2002, OFG had made cash capital
contributions of $1,390,000 to the Partnership. OFG is required to
continue cash capital contributions to the Partnership in order to
maintain its required capital balance.
The carried interest expense charged to the Partnership was
$40,000, $173,000 and $102,000 for the years ended December 31,
2002, 2001 and 2000, respectively.
(9) Contingency Reserves
In accordance with the Partnership Agreement and to satisfy the
Partnership's liquidity requirements, the Partnership is required to
maintain contingency reserves in an aggregate amount of at least 1-1/2%
of the capital accounts of the limited partners. The cash capital
contribution of OFG (amounting to $1,390,000 as of December 31, 2002), up
to a maximum of 1/2 of 1% of the limited partners' capital accounts will
be available as an additional contingency reserve, if necessary.
The contingency reserves required as of December 31, 2002 and 2001 were
approximately $5,578,000 and $5,413,000, respectively. Cash and cash
equivalents as of the same dates were accordingly maintained as reserves.
(10) Income Taxes
The net difference between partners' capital per the Partnership's
federal income tax return and these financial statements is comprised of
the following components:
2002 2001
------------------- --------------------
Partners' capital per financial statements $ 280,350,974 272,286,714
Accrued interest income (2,485,484) (2,358,962)
Allowance for loan losses 4,774,000 4,425,000
Allowance for real estate held for sale/investment 625,468 834,000
Accrued distributions 619,234 625,645
Accrued fees due to general partner 297,824 230,357
Tax-deferred gains on sales of real estate (2,690,850) (2,690,850)
Other 170,100 (24,541)
----------------- ----------------
Partners' capital per federal income tax return $ 281,661,266 273,327,363
================= ================
(11) Transactions with Affiliates
OFG is entitled to receive from the Partnership a management fee of up to
2.75% per annum of the average unpaid balance of the Partnership's
mortgage loans at the end of the twelve months in the calendar year for
services rendered as manager of the Partnership.
All of the Partnership's loans are serviced by OFG, in consideration for
which OFG receives up to .25% per annum of the unpaid principal balance
of the loans.
OFG, at its sole discretion may, on a monthly basis, adjust the
management and servicing fees as long as they do not exceed the allowable
limits calculated on an annual basis. Even though the fees for a month
may exceed 1/12 of the maximum limits, at the end of the calendar year
the sum of the fees collected for each of the 12 months must be equal to
or less than the stated limits. Management fees amounted to approximately
$3,616,000, $3,438,000 and $3,914,000 for the years ended December 31,
2002, 2001 and 2000, respectively, and are included in the accompanying
consolidated statements of income. Service fees amounted to approximately
$611,000, $572,000 and $531,000 for the years ended December 31, 2002,
2001 and 2000, respectively, and are included in the accompanying
consolidated statements of income. As of December 31, 2002 and 2001, the
Partnership owed management and servicing fees to OFG in the amounts of
$956,000 and $1,272,000, respectively.
The maximum servicing fees were paid to OFG during the years ended
December 31, 2002, 2001 and 2000. If the maximum management fees had been
paid to OFG during the years ended December 31, 2002, 2001 and 2000, the
management fees would have been $6,724,000 (increase of $3,108,000),
$6,287,000 (increase of $2,849,000) and $5,845,000 (increase of
$1,931,000), respectively, which would have reduced net income allocated
to limited partners by approximately 14.3%, 13.0% and 8.7%, respectively,
and net income allocated to limited partners per weighted average limited
partner unit by the same percentages to $.07, $.07 and $.09,
respectively. In determining the yield to the partners and hence the
management fees, OFG may consider a number of factors, including current
market yields, delinquency experience, uninvested cash and real estate
activities. Large fluctuations in the management fees paid to the General
Partner are normally a result of extraordinary items of income or expense
within the Partnership (such as gains or losses from sales of real
estate, large increases or decreases in delinquent loans, etc.). Thus,
OFG expects that the management fees that it receives from the
Partnership will vary in amount and percentage from period to period, and
OFG may again receive less than the maximum management fees in the
future. However, if OFG chooses to take the maximum allowable management
fees in the future, the yield paid to limited partners may be reduced.
OFG receives all late payment charges from borrowers on loans owned by
the Partnership, with the exception of those loans participated with an
outside mortgage entity (see note 3), pursuant to the terms of the
Partnership Agreement. Such charges are in addition to the normal monthly
loan payments and totaled approximately $649,000, $1,297,000, and
$1,118,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
OFG originates all loans the Partnership invests in and receives a loan
origination fee from borrowers, with the exception of those loans
participated with an outside mortgage entity (see note 3). Such fees
earned by OFG amounted to approximately $5,815,000, $6,990,000 and
$7,936,000 on loans originated of $138,278,000, $166,264,000 and
$117,409,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. Such fees as a percentage of loans purchased by the
Partnership were 4.2%, 4.2% and 6.8% for the years ended December 31,
2002, 2001 and 2000, respectively. In the year ended December 31, 2000,
two loans in the total amount of $45,419,000 had loan origination fees
totaling $4,542,000.
During 2002, property securing a Partnership loan in the amount of
$13,389,000 was sold by the borrower which resulted in the Partnership
receiving a partial repayment in the amount of $10,189,000 through the
close of escrow. The remaining principal balance of $3,200,000 was then
transferred to a new loan, secured by the same property, with the buyer
as the new borrower. The Partnership is participating in the new loan
with the General Partner and with the former borrower. They each have
interests in the loan in the amount of $1,427,000 ($6,054,000 total loan
amount). Although the terms of the new loan include interest at the rate
of 3% per annum, which is deferred until maturity (one year), per the
terms of an agreement between the three lenders in the new loan, the
General Partner and former borrower are paying 11.5% interest per month
to the Partnership on its $3,200,000 portion of the loan until it is
repaid in full in exchange for its portion of the 3% deferred interest.
The total amount of interest paid by the General Partner to the
Partnership was $167,000 during the year ended December 31, 2002.
During the year ended December 31, 2000, OFG purchased two delinquent
loans from the Partnership at face value in the total amount of
$1,178,000 for a note with interest at 9% per annum. The notes were
repaid in full during 2000. The Partnership earned interest income of
approximately $56,000 during the year ended December 31, 2000 from OFG
and affiliates under loans secured by trust deeds.
(12) Net Income per Limited Partner Unit
Net income per limited partnership unit is computed using the weighted
average number of limited partnership units outstanding during the year.
These amounts were 274,891,723, 256,208,924 and 225,427,296 for the years
ended December 31, 2002, 2001 and 2000, respectively.
(13) Rental Income
The Partnership's real estate properties held for investment are leased
to tenants under noncancellable leases with remaining terms ranging from
one to twenty eight years. Certain of the leases require the tenant to
pay all or some operating expenses of the properties. The future minimum
rental income from noncancellable operating leases due within the five
years subsequent to December 31, 2002, and thereafter are as follows:
Year ending December 31:
2003 $ 1,595,348
2004 1,308,573
2005 985,422
2006 677,151
2007 345,604
Thereafter (through 2026) 4,117,040
---------------
$ 9,029,138
===============
(14) Fair Value of Financial Instruments
The Financial Accounting Standards Board's Statement No. 107, Disclosures
about Fair Value of Financial Instruments, requires the disclosure of
fair value for certain of the Partnership's assets. The following methods
and assumptions were used to estimate the value of the financial
instruments included in the following categories:
(a) Cash and Cash Equivalents and Commercial Paper
The carrying amount approximates fair value because of the
relatively short maturity of these instruments.
(b) Loans Secured by Trust Deeds
The carrying value of these instruments of $260,211,000
approximates the fair value as of December 31, 2002. The fair
value is estimated based upon projected cash flows discounted at
the estimated current interest rates at which similar loans would
be made. The allowance for loan losses of $4,774,000 as of
December 31, 2002 is also considered in evaluating the fair value
of loans secured by trust deeds.
(c) Note Payable and Line of Credit Payable
The carrying value of the Partnership's note payable in the amount
of $8,190,000 and line of credit payable in the amount of
$6,867,000 approximates the fair value as of December 31, 2002.
The fair value is estimated based upon the quoted market prices
for the same or similar issues or on the current rates offered to
the Partnership for debt of the same remaining maturities.
(15) Selected Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------------- ------------ ------------ ----------- -------------
Revenues:
2002 $ 7,947,735 $ 7,170,656 $ 7,975,467 $ 7,984,437 $ 31,078,295
2001 7,768,681 7,037,933 7,562,520 7,110,431 29,479,565
Expenses:
2002 2,155,095 1,900,068 2,734,869 2,618,304 9,408,336
2001 1,296,163 1,868,839 2,120,416 2,304,923 7,590,341
Net Income Allocated to
General Partner
2002 57,306 52,111 51,848 52,860 214,125
2001 63,558 50,588 52,570 47,431 214,147
Net Income Allocated to
Limited Partners
2002 5,735,334 5,218,477 5,188,750 5,313,273 21,455,834
2001 6,408,960 5,118,506 5,389,534 4,758,077 21,675,077
Net Income Allocated to
Limited Partners per
Weighted Average Limited
Partnership Unit
2002 0.02 0.02 0.02 0.02 0.08
2001 0.03 0.02 0.02 0.02 0.08
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None during 2002.
Part III
Item 10. Directors and Executive Officers of the Registrant
The General Partner is Owens Financial Group, Inc., a California
corporation, 2221 Olympic Blvd., Walnut Creek, CA 94595. Its telephone number is
(925) 935-3840.
The General Partner manages and controls the affairs of the Partnership
and has general responsibility and final authority in all matters affecting the
Partnership's business. These duties include dealings with limited partners,
accounting, tax and legal matters, communications and filings with regulatory
agencies and all other needed management duties. The General Partner may also,
at its sole discretion and subject to change at any time,
o purchase from the Partnership the interest receivable or principal
on delinquent mortgage loans held by the Partnership;
o purchase from a senior lienholder the interest receivable or
principal on mortgage loans senior to mortgage loans held by the
Partnership; and
o use its own funds to cover any other costs associated with mortgage
loans held by the Partnership such as property taxes, insurance and
legal expenses.
In order to assure that the limited partners will not have personal
liability as a General Partner, limited partners have no right to participate in
the management or control of the Partnership's business or affairs other than to
exercise the limited voting rights provided for in the Partnership Agreement.
The General Partner has primary responsibility for the initial selection,
evaluation and negotiation of mortgage investments for the Partnership. The
General Partner provides all executive, supervisory and certain administrative
services for the Partnership's operations, including servicing the mortgage
loans held by the Partnership. The Partnership's books and records are
maintained by the General Partner, subject to audit by independent certified
public accountants.
The General Partner had a net worth of approximately $34,000,000 on
December 31, 2002. The following persons comprise the board of directors and
management employees of the General Partner actively involved in the
administration and investment activity of the Partnership.
o William C. Owens - Mr. Owens, age 52, has been President of the
General Partner since April 1996 and is also a member of the Board
of Directors and the Loan Committee of the General Partner. From
1989 until April 1996, he served as a Senior Vice President of the
General Partner. Mr. Owens has been active in real estate
construction, development, and mortgage financing since 1973. Prior
to joining Owens Mortgage Company in 1979, Mr. Owens was involved in
mortgage banking, property management and real estate development.
As President of the General Partner, Mr. Owens is responsible for
the overall activities and operations of the General Partner,
including corporate investment, operating policy and planning. In
addition, he is responsible for loan production, including the
underwriting and review of potential loan investments. Mr. Owens is
also the President of Owens Securities Corporation, a subsidiary of
the General Partner. Mr. Owens is a licensed real estate broker.
o Bryan H. Draper - Mr. Draper, age 45, has been Chief Financial
Officer and corporate secretary of the General Partner since
December 1987 and is also a member of the board of directors of the
General Partner. Mr. Draper is a Certified Public Accountant and is
responsible for all accounting, finance, and tax matters for the
General Partner and Owens Securities Corporation. Mr. Draper
received a Masters of Business Administration degree from the
University of Southern California in 1981.
o William E. Dutra - Mr. Dutra, age 40, is a Senior Vice President and
member of the Board of Directors and the Loan Committee of the
General Partner and has been its employee since February 1986. In
charge of loan production, Mr. Dutra has responsibility for loan
committee review, loan underwriting and loan production.
o Andrew J. Navone - Mr. Navone, age 46, is a Vice President and
member of the Board of Directors and the Loan Committee of the
General Partner and has been its employee since August 1985. Mr.
Navone has responsibilities for loan committee review, loan
underwriting and loan production.
o Melina A. Platt - Ms. Platt, age 36, has been Controller of the
General Partner since May 1998. Ms. Platt is a Certified Public
Accountant and is responsible for all accounting, finance, and
regulatory agency filings of the Partnership. Ms. Platt was
previously a Senior Manager with KPMG LLP.
Research and Acquisition
The General Partner considers prospective investments for the
Partnership. In that regard, the General Partner evaluates the credit of
prospective borrowers, analyzes the return to the Partnership of potential
mortgage loan transactions, reviews property appraisals, and determines which
types of transactions appear to be most favorable to the Partnership. For these
services, the General Partner generally receives mortgage placement fees
(points) paid by borrowers when loans are originally funded or when the
Partnership extends or refinances mortgage loans. These fees may reduce the
yield obtained by the Partnership from its mortgage loans.
Partnership Management
The General Partner is responsible for the Partnership's investment portfolio.
Its services include:
o the creation and implementation of Partnership investment policies;
o preparation and review of budgets, economic surveys, cash flow and
taxable income or loss projections and working capital requirements;
o preparation and review of Partnership reports;
o communications with limited partners;
o supervision and review of Partnership bookkeeping, accounting and
audits;
o supervision and review of Partnership state and federal tax returns;
and
o supervision of professionals employed by the Partnership in
connection with any of the foregoing, including attorneys,
accountants and appraisers.
For these and certain other services the General Partner is entitled to
receive a management fee of up to 2-3/4% per annum of the unpaid balance of the
Partnership's mortgage loans. The management fee is payable on all loans,
including nonperforming or delinquent loans. The General Partner believes that a
fee payable on delinquent loans is justified because of the expense involved in
the administration of such loans. See "Compensation to the General
Partner--Management Fees," at page 6.
Item 11. Executive Compensation
The Partnership does not pay any compensation to any persons other than
the General Partner. The Partnership has not issued, awarded or otherwise paid
to any General Partner, any options, SAR's, securities, or any other direct or
indirect form of compensation other than the management and service fees and
carried interest permitted under the Partnership Agreement.
The following table summarizes the forms and amounts of compensation
paid to the General Partner for the year ended December 31, 2002. Such fees were
established by the General Partner and were not determined by arms-length
negotiation.
Year Ended
December 31, 2002
Maximum
Form of Compensation Actual Allowable
Paid by the Partnership:
Management Fees*..................... $ 3,616,000 $ 6,724,000
Servicing Fees....................... 611,000 611,000
Carried Interest..................... 40,000 40,000
-------------- -------------
Subtotal $ 4,267,000 $ 7,375,000
-------------- -------------
Paid by Borrowers:
Loan Origination Fees................ $ 5,815,000 $ 5,815,000
Late Payment Charges................. 649,000 649,000
------------- -------------
Subtotal $ 6,464,000 $ 6,464,000
------------- -------------
Grand Total $ 10,731,000 $ 13,839,000
============= =============
Reimbursement by the Partnership of
Other Expenses $ 217,000 $ 217,000
============= =============
Item 12. Security Ownership of Certain Beneficial Owners and Management
No person or entity owns beneficially more than 5% of the ownership
interests in the Partnership. The General Partner owns approximately 3,505,000
units (1.2%) of the Partnership as of December 31, 2002. The voting common stock
of the General Partner is owned as follows: 56.098% by William C. Owens, and
14.634% each by Bryan H. Draper, William E. Dutra and Andrew J. Navone.
Item 13. Certain Relationships and Related Transactions
Transactions with Management and Others
Management Fee
The General Partner is entitled to receive from the Partnership a
management fee of up to 2.75% per annum of the average unpaid balance of the
Partnership's mortgage loans at the end of each of the preceding twelve months
for services rendered as manager of the Partnership. The amount of management
fees to the General Partner for the year ended December 31, 2002 was
approximately $3,616,000.
Servicing Fee
All of the Partnership's loans are serviced by the General Partner, in
consideration for which the General Partner receives up to .25% per annum of the
unpaid principal balance of the loans on a monthly basis. The amount of
servicing fees to the General Partner for the year ended December 31, 2002 was
approximately $611,000.
Carried Interest
The General Partner is required to continue cash capital contributions
to the Partnership in order to maintain its required capital balance equal to 1%
of the limited partners' capital accounts. The General Partner has contributed
capital to the Partnership in the amount of 0.5% of the limited partners'
aggregate capital accounts and, together with its carried interest, the General
Partner has an interest equal to 1% of the limited partners' capital accounts.
This carried interest of up to 1/2 of 1% is recorded as an expense of the
Partnership and credited as a contribution to the General Partner's capital
account as additional compensation. As of December 31, 2002, the General Partner
had made total cash capital contributions of $1,390,000 to the Partnership.
During 2002, the Partnership incurred carried interest expense of $40,000.
Reimbursement of Other Expenses
The General Partner is reimbursed by the Partnership for the actual
cost of goods and materials used for or by the Partnership and obtained from
unaffiliated entities and the actual cost of services of non-management and
non-supervisory personnel related to the administration of the Partnership
(subject to certain limitations contained in the Partnership Agreement). During
2002, the Partnership reimbursed the General Partner for expenses in the amount
of $217,000.
Compensation from Others
In addition to compensation from the Partnership, the General Partner
also receives compensation from borrowers under the mortgage loans placed by the
General Partner with the Partnership.
Loan Origination Fees
Loan origination fees, also called mortgage placement fees or points,
are paid to the General Partner from the borrowers under loans held by the
Partnership. These fees are compensation for the evaluation, origination,
extension and refinancing of loans for the borrowers and may be paid at the
placement, extension or refinancing of the loan or at the time of final
repayment of the loan. The amount of these fees is determined by competitive
conditions and the General Partner and may have a direct effect on the interest
rate borrowers are willing to pay the Partnership. During 2002, the General
Partner earned investment evaluation fees on Partnership loans in the amount of
$5,815,000.
Late Payment Charges
All late payment charges paid by borrowers of delinquent mortgage
loans, including additional interest and late payment fees, are retained by the
General Partner. During 2002, the General Partner received late payment charges
from borrowers in the amount of $649,000.
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
Form 10-K Pg.
(a)(1) List of Financial Statements:
Report of Independent Certified Public Accountants p. 34
Consolidated Balance Sheets - December 31, 2002 and
2001 p. 35
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000 p. 36
Consolidated Statements of Partners' Capital for the
years ended December 31, 2002, 2001 and 2000 p. 37
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 p. 38
Notes to Consolidated Financial Statements pp. 39-54
(2) Schedule II- Valuation and Qualifying Accounts p. 60
(3) Schedule IV- Mortgage Loans on Real Estate pp. 61-62
(4) Exhibits:
3. Sixth Amended and Restated Limited Partnership Agreement,
incorporated by reference to Exhibit A to Post-Effective Amendment No. 1 to the
Form S-11 Registration Statement No. 333-69272 filed April 18, 2002 and declared
effective on April 26, 2002.
10(a). Subscription Agreement and Power of Attorney, incorporated by
reference to Exhibit B to Post-Effective Amendment No. 1 to the Form S-11
Registration Statement No. 333-69272 filed April 18, 2002 and declared effective
on April 26, 2002.
(c) Exhibits:
3. Sixth Amended and Restated Limited Partnership Agreement,
incorporated by reference to Exhibit A to Post-Effective Amendment No. 1 to the
Form S-11 Registration Statement No. 333-69272 filed April 18, 2002 and declared
effective on April 26, 2002.
10(a). Subscription Agreement and Power of Attorney, incorporated by
reference to Exhibit B to Post-Effective Amendment No. 1 to the Form S-11
Registration Statement No. 333-69272 filed April 18, 2002 and declared effective
on April 26, 2002.
(d) Schedules:
Schedule II - Valuation and Qualifying Accounts
Schedule IV - Mortgage Loans on Real Estate
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
PROVISION FOR LOAN LOSSES ROLLFORWARD
Balance at January 1, 2000 $ 4,000,000
Provision --
Charge-offs --
--------------
Balance at December 31, 2000 4,000,000
Provision 1,039,645
Charge-offs (614,645)
--------------
Balance at December 31, 2001 4,425,000
Provision 1,584,000
Charge-offs (1,235,000)
--------------
Balance at December 31, 2002 $ 4,774,000
==============
PROVISION FOR LOSSES ON REAL ESTATE ROLLFORWARD
Balance at January 1, 2000 $ 1,336,000
Charges to costs and expenses --
Deductions (200,000)
--------------
Balance at December 31, 2000 1,136,000
Charges to costs and expenses --
Deductions (502,000)
--------------
Balance at December 31, 2001 634,000
Charges to costs and expenses --
Deductions (384,000)
--------------
Balance at December 31, 2002 $ 250,000
==============
SCHEDULE IV
OWENS MORTGAGE INVESTMENT FUND
MORTGAGE LOANS ON REAL ESTATE -- DECEMBER 31, 2002
Principal Amount Principal Amount
of Loans Subject of Loans Subject
Final Carrying Amount to Delinquent to Delinquent
Description Interest Rate Maturity date of Mortgages Principal Payments
TYPE OF LOAN
Income Producing.......... 4.25-15.00% Current to Sept. 2018 $228,210,411 $ 43,372,535 $ 24,726,789
Construction.............. 10.00-12.00% Oct. 2003 to Oct. 2005 12,670,310 -- --
Land .................... 11.50-15.00% Current to Dec. 2003 16,938,678 2,200,000 1,600,000
Residential............... 11.00-12.00% Current to Mar. 2005 2,391,722 1,556,722 --
------------ ------------ ------------
TOTAL $260,211,121 $ 47,129,257 $ 26,326,789
============ ============ ============
AMOUNT OF LOAN
$0-250,000................ 8.50-14.50% Current to Sept. 2014 $ 1,927,167 $ 556,999 $ --
$250,001-500,000.......... 10.00-12.50% Current to Sept. 2018 3,870,249 721,870 353,370
$500,001-1,000,000........ 4.25-14.00% Apr. 2003 to Jan. 2014 7,037,031 -- --
Over $1,000,000........... 8.50-15.00% Current to May, 2015 247,376,674 45,850,388 25,973,419
------------ ------------ ------------
TOTAL $260,211,121 $ 47,129,257 $ 26,326,789
============ ============ ============
POSITION OF LOAN
First .................... 8.50-15.00% Current to Sept. 2018 $241,335,259 $ 38,620,757 $ 25,226,789
Second ................... 4.25-15.00% Current to Aug. 2010 18,875,862 8,508,500 1,100,000
------------ ------------ ------------
TOTAL $260,211,121 $ 47,129,257 $ 26,326,789
============ ============ ============
- ---------------
NOTE 1: All loans are arranged by or acquired from an affiliate of the
Partnership, namely Owens Financial Group, Inc., the General Partner.
NOTE 2:
Balance at beginning of period (1/1/00)............................$200,356,517
Additions during period:
New mortgage loans............................................117,409,372
Loan carried back on sale of real estate..........................813,600
--------------
Subtotal......................................................318,579,489
Deductions during period:
Collection of principal........................................87,955,112
Sales of loans secured by trust deeds at face value.............6,665,913
Foreclosures......................................................685,000
--------------
Balance at end of period (12/31/00)..........................$223,273,464
==============
Balance at beginning of period (1/1/01)............................$223,273,464
Additions during period:
New mortgage loans............................................148,046,907
--------------
Subtotal......................................................371,320,371
Deductions during period:
Collection of principal.......................................151,653,210
Charge-off of loans against allowance for loan losses.............614,645
Loan transferred to investment in real estate joint venture
(balance as of 1/1/01)........................................1,980,447
Foreclosures....................................................3,368,600
--------------
Balance at end of period (12/31/01)..........................$213,703,469
==============
Balance at beginning of period (1/1/02)............................$213,703,469
Additions during period:
New mortgage loans............................................148,595,993
--------------
Subtotal......................................................362,299,462
Deductions during period:
Collection of principal........................................92,718,348
Foreclosures....................................................9,369,993
--------------
Balance at end of period (12/31/02)..........................$260,211,121
==============
During the years ended December 31, 2002, 2001 and 2000, the Partnership
refinanced loans totaling $21,985,000, $13,677,000 and $25,126,000,
respectively, thereby extending the maturity date.
During the year ended December 31, 2000, the Partnership sold two delinquent
loans at book value to the General Partner for notes receivable in the total
amount of $1,178,000. The General Partner subsequently foreclosed on the loans.
The notes were repaid by the General Partner in September 2000.
- --------------
NOTE 3: Included in the above loans are the following loans which exceed 3%
of the total loans as of December 31, 2002. There are no other loans
that exceed 3% of the total loans as of December 31, 2002:
Principal
Amount of
Loans Subject
Final Face Carrying to Delinquent
Interest Maturity Periodic Payment Prior Amount of Amount of Principal or
Description Rate Date Terms Liens Mortgages Mortgages Interest
----------- -------- -------- --------------- ----- --------- --------- ------------
Assisted Living Facility 10.9% 8/12/03 Interest only, None $ 7,800,000 $ 7,800,000 $ 0
Fresno, CA............. balance due at
maturity
Hotel and Casino 12.50% 3/14/03 Interest only, None $20,000,000 $10,000,000 $ 0
Las Vegas, NV.......... balance due at
maturity
Office and Retail 12.00% 2/01/13 Principal and None $13,240,000 $11,222,206 $11,222,206
Buildings in Seattle, interest due
WA, Renton, WA, Nampa, monthly
ID, Reno, NV, Olympia,
WA, Gig Harbor, WA,
Richland, WA & Idaho
Falls, ID
Hotel and Casino 12.00% 5/30/03 Interest only, None $48,000,000 $13,500,000 $ 0
Las Vegas, NV.......... balance due at
maturity
8 Cemeteries and 14.00% 11/6/02 Interest only, None $39,400,000 $14,000,000 $14,000,000
Mortuaries balance due at (Delinquent
Islands of Hawaii, Oahu, maturity Principal)
and Maui...............
- ---------------
NOTE 4: All amounts reported in this Schedule IV represent the aggregate cost
for Federal income tax purposes.
NOTE 5: There is a loan loss allowance in the amount of $621,000 as of
December 31, 2002 on the loan with a carrying amount of $11,222,206
under Note 3 above.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: March 14, 2003 OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
By: Owens Financial Group, Inc., General Partner
Dated: March 14, 2003 By: /s/ William C. Owens
-------------------
William C. Owens, President
Dated: March 14, 2003 By: /s/ Bryan H. Draper
-------------------
Bryan H. Draper, Chief Financial Officer
Dated: March 14, 2003 By: /s/ Melina A. Platt
-------------------
Melina A. Platt, Controller
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, William C. Owens, President and Chief Executive Officer of Owens Financial
Group, Inc., General Partner, certify that:
1. I have reviewed this annual report on Form 10-K of Owens Mortgage
Investment Fund, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls.
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 14, 2003
/s/ William C. Owens
William C. Owens
President and Chief Executive Officer
Owens Financial Group, Inc., General Partner
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Bryan H. Draper, Chief Financial Officer of Owens Financial Group, Inc.,
General Partner, certify that:
1. I have reviewed this annual report on Form 10-K of Owens Mortgage
Investment Fund, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls.
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 14, 2003
/s/ Bryan H. Draper
Bryan H. Draper
Chief Financial Officer
Owens Financial Group, Inc., General Partner