Back to GetFilings.com
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Index to Form 10-K
December 31, 2004
Part I
Page No.
-----------
Item 1 - Business 3
Item 2 - Properties 7
Item 3 - Legal Proceedings 8
Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 8
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 8
Item 6 - Selected Consolidated Financial Data 9
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 21
Item 8 - Consolidated Financial Statements and Supplementary Data 24
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 52
Item 9a - Controls and Procedures 52
Item 9b - Other Information 52
Part III
Item 10 - Directors and Executive Officers of the Registrant 52
Item 11 - Executive Compensation 54
Item 12 - Security Ownership of Certain Beneficial Owners and Management 55
Item 13 - Certain Relationships and Related Transactions 55
Item 14 - Principal Accountant Fees & Services 55
Part IV
Item 15 - Exhibits, Financial Statements and Schedules 56
Signatures 57
Certifications 59
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 333-106900
REDWOOD MORTGAGE INVESTORS VIII,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California 94-3158788
(State or other jurisdiction of incorporation (I.R.S. Employer Identification)
or organization)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
(address of principal executive offices) (zip code)
(650) 365-5341
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g)
of the Act: Limited Partnership Units
Indicate by check mark whether the registrant (1) has filed all reports 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 XX No
-------------- -------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No XX
-------------- -------------
As of June 30, 2004, the aggregate value of limited partnership units held
by non-affiliates was $157,071,000. This calculation is based on the capital
account balance of the limited partners and excludes limited partnership units
held by the general partner.
Documents incorporated by reference:
Portions of the Prospectus effective October 7, 2003, and post effective
Amendment No. 4 dated February 11 2005, containing supplement No. 3 dated
February 11, 2005, (the "Prospectus"), are incorporated in Parts II, III, and
IV. Exhibits filed as part of Form S-11 Registration Statement #333-106900 are
incorporated by reference in part IV.
2
Part I
Item 1 - Business
Redwood Mortgage Investors VIII, a California Limited Partnership (the
"Partnership"), was organized in 1993. Michael R. Burwell, Gymno Corporation and
Redwood Mortgage Corp., both California Corporations, are the general partners.
The partnership is organized to engage in business as a mortgage lender, for the
primary purpose of making loans secured primarily by first and second deeds of
trust on California real estate. Loans are arranged and serviced by Redwood
Mortgage Corp. The partnership's objectives are to make loans that will: (i)
yield a high rate of return from mortgage lending; and (ii) preserve and protect
the partnership's capital. Investors should not expect the partnership to
provide tax benefits of the type commonly associated with limited partnership
tax shelter investments. The partnership is intended to serve as an investment
alternative for investors seeking current income. However, unlike other
investments, which are intended to provide current income, an investment in the
partnership will be less liquid, not readily transferable, and not provide a
guaranteed return over its investment life.
Initially, the partnership offered a minimum of $250,000 and a maximum of
$15,000,000 in units, of which $14,932,000 were sold. This initial offering
closed on October 31, 1996. Subsequently, the partnership commenced a second
offering of up to $30,000,000 in units commencing on December 4, 1996. This
offering sold $29,993,000 in units and was closed on August 30, 2000. On August
31, 2000 the partnership commenced its third offering for another 30,000,000
units ($30,000,000). This offering sold $29,999,000 in units and was closed on
April 23, 2002. On October 30, 2002 the partnership commenced its fourth
offering for an additional 50,000,000 units ($50,000,000). This offering sold
$49,985,000 in units and was closed on October 6, 2003. On October 7, 2003 the
partnership commenced its fifth and current offering of 75,000,000 units
($75,000,000). As of December 31, 2004, $47,314,000 in units was sold in this
fifth offering, bringing the aggregate sale of units to $172,223,000. Units in
the fifth offering are being offered on a "best efforts" basis, which means that
no one is guaranteeing that any minimum number of units will be sold, through
broker-dealer member firms of the National Association of Securities Dealers,
Inc.
The partnership began selling units in February 1993, and began investing
in mortgages in April 1993. At December 31, 2004, the partnership has
investments in secured loans with principal balances totaling $171,745,000.
Interest rates ranged from 8.50% to 13.25%. Currently First Trust Deeds comprise
67.01% of the total amount of the secured loan portfolio, an increase of 9.64%
over the 2003 level of 57.37%. Junior loans (2nd and 3rd Trust Deeds) make up
32.99%, a decrease of 9.64% from the 2003 level of 42.63%. Loans secured by
owner-occupied homes, combined with loans secured by non-owner occupied homes,
total 49.12% of the secured loan portfolio. Loans secured by multi-family
properties make up 18.04% of the total secured loans. Commercial loans now
comprise 31.83% of the secured portfolio, a decrease of 3.84% from last year and
land made up 1.01% of the secured loan portfolio. Of the total secured loans,
76.36% are in six counties of the San Francisco Bay Area, and 12.33% are in
counties adjacent to the San Francisco Bay Area. The balance of secured loans,
11.31% are in other counties located in California. Average loan size increased
this year, and is now averaging $2,289,000 per loan, up $472,000 from the
average loan balance of $1,817,000 in 2003. This increase is due to the ability
of the partnership by virtue of its increasing size to invest in larger loans.
Additionally, there is less competition due to fewer lenders being capable of
funding larger loans, which allows the partnership to charge a higher rate of
interest than on smaller sized loans. The average loan as of December 31, 2004,
represents 1.25% of partner capital and 1.33% of outstanding secured loans,
compared to December 31, 2003 when average loan size represented 1.31% of
partners' capital and 1.23% of outstanding secured loans. Some of the loans are
fractionalized between affiliated partnerships with objectives similar to those
of the partnership to further reduce risk. However, as the partnership has grown
in size the number of fractionalized loans has decreased and represents 13.33%
of the loan portfolio. Average equity per loan transaction at the time the loans
were made based upon appraisals and prior liens at such time, which is our loan
plus any senior loans, divided by the property's appraised value, subtracted
from 100%, stood at 43.06%, a decrease in equity of 2.97% from the previous
year. This average equity is considered conservative. Generally, the more
equity, the more protection for the lender. The general partners believe the
partnership's loan portfolio is in good condition with six properties in
foreclosure as of the end of December 2004. The principal balances of these
foreclosed properties represent 8.55% of the secured loan portfolio. Four of
these foreclosures have entered into workout agreements. The number of
foreclosures and principal amounts are relatively low. The partnership does
expect that during 2005 additional foreclosures may need to be filed in order to
collect payment from borrowers who have become delinquent. This is typical of
our market and the partnership expects to have a level of delinquency higher
than banking institutions within its portfolio.
3
Delinquencies are discussed under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
For the year ended December 31, 2004, the partnership acquired one property
through foreclosure and acquired three adjacent parcels of land through deeds in
lieu of foreclosure on three loans to one borrower. During 2003 no foreclosures
were completed. During 2002 the partnership took back real estate collateral on
two defaulted loans. One through a foreclosure sale and the other as a deed in
lieu of foreclosure. To assist in protecting its own assets and to reduce
liability, the partnership subsequently transferred the properties acquired in
2002 to two newly formed Limited Liability Companies, or "LLCs". One of the
LLCs, Russian Hill Property Company, is 100% owned by the partnership and in the
other, Stockton Street Property Company, the partnership owned controlling
interest with an affiliate, the other investor in the foreclosed loan. Assets of
the Stockton Street Property Company were completely sold in 2003. This LLC will
be dissolved after its final tax return for year 2004 is filed. The partnership
also intends to sell the property of Russian Hill Property Company and dissolve
this LLC in the future. The two LLCs are further discussed under Notes to
Consolidated Financial Statements (Note 5). With respect to the properties
acquired in 2004 the partnership may transfer the real estate to one or more
LLCs during 2005. One of the properties is a single-family residence, upon which
the borrower was doing substantial renovation that was not completed at the time
of foreclosure. As of December 31, 2004, the partnership's investment in this
property, net of a $500,000 reserve, totaled $1,437,000. The other three
properties acquired in 2004 were deeded to the partnership in lieu of
foreclosure. They are undeveloped parcels of land comprised of three separate
lots. The land is within the incorporated area of Stanislaus County, California.
Currently the property is on the market for sale. As of December 31, 2004 the
partnership's investment in this property totaled $4,378,000. The property is
jointly owned by two other affiliated partnerships. The partnership has provided
loss reserves of $1,000,000 against all properties owned.
The partnership's net income continued to take an upward trend. The net
income increased from $7,486,000 in 2002 to $9,594,000 in 2003 and to
$12,132,000 in 2004. This was made possible largely through investment of
additional capital derived from sales of partnership units into loans. The
secured loan portfolio increased from $83,650,000 in 2002, to $147,174,000 in
2003 and to $171,745,000 in 2004, an increase of 105.31% over the two-year
period. Although net income increased it did not increase in direct proportion
to the increased size of the loan portfolio mainly because newly originated
loans were placed at lower interest rates. Until the past six months, interest
rates had been declining steadily since 2001. The bank prime rate as of January
1, 2001, 2002, 2003, 2004 and 2005 was 9.50%, 4.75%, 4.25%, 4.00% and 5.25%,
respectively. The partnership has placed its loans at interest rates competitive
in the marketplace. Mortgage interest income increased from $11,416,000 in 2002
to $12,496,000 in 2003 and to $16,437,000 in 2004, an increase of 44% over the
two-year period. During the year 2004 the partnership's annualized yield on
compounding accounts was 7.22% and 6.99% on monthly distributing accounts.
Due to a calendaring oversight, the partnership did not timely renew its
permit with the California Department of Corporations ("DOC"). Upon discovery of
this oversight, the partnership applied for and received from the DOC a new
permit allowing the partnership to continue sales in California. To correct
those sales that occurred without a permit from the DOC in place, the
partnership offered to repurchase the units sold during the period of September
10, 2004 through January 18, 2005. The repurchase offer was made to an aggregate
of $16,370,000 of prior unit sales. The repurchase offer expired on
approximately March 7, 2005. The repurchase offer was accepted by three limited
partners for a total of $74,000 in unit sales and the partnership made a timely
repurchase of the units.
Competition and General Economic Conditions.
The partnership's major competitors in providing mortgage loans are banks,
savings and loan associations, thrifts, conduit lenders, mortgage brokers, and
other entities both larger and smaller than the partnership. The partnership is
competitive in large part because the general partners generate all of their
loans. Many of these competitors are unable, due to their size, to compete with
the partnership's ability to make loans larger than $1,000,000 per transaction.
The partnership's ability to regularly entertain loan requests at or above
$1,000,000 reduces competition and can provide either higher quality loans,
higher returns, or both. The general partners have been in the business of
making or investing in mortgage loans in Northern California since 1978 and have
developed a quality reputation and recognition within the field.
4
Beginning in July of 2004, the Federal Reserve changed its interest rate
policy from one of three years of continuously lowered interest rates, which hit
a 40 year historic interest rate low, to one of tempered but gradual interest
rate increases. In keeping with this new policy since July 2004, the Federal
Reserve has increased the Federal Funds Rate by one quarter percentage point
(1/4 of one percent) at each of its last five meetings to 2.25% as of March 22,
2005. This deliberate upward change in the Federal Funds Rate has caused short
term interest rates to rise, and to a lesser degree, pushed longer term rates up
as well. Nationally and more specifically in Northern California, the location
of the majority of our lending activities, the economies are recovering from the
economic downturn from 2000 to 2003. Employment and job creation is improving
but is still lower than desirable. During 2004, the residential and commercial
real estate markets in Northern California enjoyed a solid year of price
appreciation. With the prospect of solid real estate values, low interest rates,
and an improving economy, lenders of all types are anxious to lend money to
borrowers secured by their real estate. Competition for loans is fierce.
Additionally, those borrowers that had waited hoping to find the bottom of the
interest rate cycle, have decided that the time has come to refinance their
existing higher rate loans. This has caused a significant amount of loan runoff
to lower interest rate lenders than the partnership. These two factors have made
it difficult, particularly in the final quarter of the year 2004, to stay as
fully invested as is optimum. It is anticipated that significant competition for
loans will continue. Excess cash will be invested in short-term alternative
investments, such as money market funds yielding considerably less than the
current loan investment portfolio.
Secured Loan Portfolio.
A summary of the partnership's secured loan portfolio as of December 31,
2004, is set forth below (in thousands):
Loans as a Percentage of Appraised Values
First Trust Deeds $ 115,082
Appraised Value of Properties at Time of Loan 234,372
-------------
Total Investment as a % of Appraisal 49.10%
=============
First Trust Deed Loans 115,082
Second Trust Deed Loans 50,282
Third Trust Deed Loans 6,381
-------------
Total of Trust Deed Loans 171,745
Priority Positions due Other Lenders:
First Trust Deed Loans due Other Lenders 81,579
Second Trust Deed Loans due Other Lenders 17,561
-------------
Total Debt $ 270,885
=============
Appraised Property Value at Time of Loan 475,710
Total Debt as a % of Appraisal based on appraised
values and prior liens at date loan was consummated 56.94%
=============
Number of Secured Loans Outstanding 75
Average Secured Loan $ 2,289
Average Secured Loan as a % of Secured Loans Outstanding 1.33%
Largest Secured Loan Outstanding 12,045
Largest Secured Loan as a % of Secured Loans Outstanding 7.01%
Largest Secured Loan as a % of Partnership Assets 6.00%
Secured Loans as a Percentage of Total Secured Loans Percent
------------------------------------------------------------------ -------------
First Trust Deed Loans 67.01%
Second Trust Deed Loans 29.28%
Third Trust Deed Loans 3.71%
-------------
Total Trust Deed Loan Percentage 100.00%
=============
5
Type of Secured Loans by Property Amount Percent
------------------------------------------------ ------------ ------------
Owner Occupied Homes $ 9,234 5.38%
Non-Owner Occupied Homes 75,125 43.74%
Apartments 30,981 18.04%
Commercial 54,670 31.83%
Land 1,735 1.01%
------------ ------------
Total $ 171,745 100.00%
============ ============
The following is a distribution of secured loans outstanding as of December
31, 2004 by Counties (in thousands):
Total
California County Secured Loans Percent
----------------------------------------------------- --------------- -------------
San Francisco Bay Area Counties
San Francisco $ 35,173 20.48%
Alameda 30,886 17.98%
Contra Costa 25,357 14.77%
Santa Clara 16,987 9.89%
San Mateo 13,256 7.72%
Marin 9,484 5.52%
--------------- -------------
131,143 76.36%
San Francisco Bay Area Adjacent Counties
Sacramento 12,971 7.55%
Napa 4,234 2.47%
San Joaquin 3,971 2.31%
--------------- -------------
21,176 12.33%
Other California Counties
Los Angeles 6,236 3.63%
Riverside 5,150 3.00%
Fresno 3,611 2.10%
All others 4,429 2.58%
--------------- -------------
19,426 11.31%
Total $ 171,745 100.00%
=============== =============
Statement of Condition of Secured Loans
Number of Secured Loans in Foreclosure 6
6
Scheduled maturity dates of secured loans as of December 31, 2004 are as
follows (in thousands):
Year Ending
December 31,
---------------------
2005 $ 68,761
2006 68,829
2007 21,185
2008 3,629
2009 8,844
Thereafter 497
-------------
$ 171,745
=============
The scheduled maturities for 2005 include six loans totaling $8,047,000,
and representing 4.69% of the secured loan portfolio, past maturity at December
31, 2004. Several borrowers are in the process of selling the properties or
refinancing their loans through other institutions, as this is an opportune time
for them to do so and/or take advantage of lower interest rates. The partnership
allows borrowers to occasionally continue to make the payments on debt past
maturity for periods of time. Interest payments on three of these loans were
delinquent 90 days or more. Of these past maturity loans, the partnership has
begun foreclosure on four with principal balances totaling $7,439,000. These
four foreclosures are included in the total number of foreclosures begun by the
partnership, which total six.
Item 2 - Properties
In 2004 the partnership took back the real estate collateral securing four
loans from defaulted borrowers, one through foreclosure and the others through
deeds in lieu of foreclosure. No collateral was taken back during 2003. During
2002, the partnership took back the real estate collateral security on two of
its loans. For the properties owned in 2002, in order to reduce potential
liabilities the partnership subsequently transferred at its book value the real
estate taken back to two newly formed Limited Liability Companies "LLCs". One
property was transferred to Stockton Street Property Company, LLC. This
property, taken back through foreclosure, was comprised of six condominium
units. Management of the LLC was through its managing member, Michael Burwell, a
general partner of the partnership. All six units held by the Stockton Street
Property Company, LLC were sold in 2003 at an overall loss of $127,000. The
partnership's proportionate share of this loss was $85,000. It is anticipated
that in 2005 the Stockton Street Property Company, LLC will be closed, remaining
assets transferred back to the partnership in proportion to its ownership, and
its operations will cease.
The other property taken back in 2002 was transferred at its book value to
Russian Hill Property Company, LLC. The real estate was held off the market
during 2003 and 2004, as the real estate market for this luxury view condominium
in a prestigious neighborhood of San Francisco was very slow. The management of
this LLC, in consultation with real estate professionals, will continue to
review the market activity during 2005 and will place the property for sale when
the timing is considered to be opportune. The partnership's net interest in the
LLC was $3,979,000 net of a valuation allowance of $500,000. Michael R. Burwell,
general partner of the partnership, is manager of this LLC.
In September, 2004, the partnership acquired a single family residence
through a foreclosure sale. At the time the partnership took ownership of the
property, the partnership's investment totaled $1,937,000 including accrued
interest and advances. The borrower had begun a substantial renovation of the
property, which was not completed at the time of foreclosure. The partnership
has decided to pursue development of the property by processing plans for the
creation of two condominium units on the property. These plans will incorporate
the majority of the existing improvements currently located on the property. A
reserve of $500,000 to cover potential losses has been made for this property,
based upon management's estimate of the fair value of the property.
7
In December, 2004, the partnership acquired an undeveloped parcel of land
in lieu of foreclosure. The land is located in Stanislaus County, California. It
is comprised of three separate lots, which total approximately 14 acres. The
parcels are currently for sale. The partnership's investment in this property
totaled $4,377,000, including accrued interest and advances, as of the date of
the acquisition. This property is jointly owned by two other affiliated
partnerships.
Item 3 - Legal Proceedings
In the normal course of business, the partnership may become involved in
various types of legal proceedings such as assignment of rents, bankruptcy
proceedings, appointment of receivers, unlawful detainers, judicial foreclosure,
etc., to enforce the provisions of the deeds of trust, collect the debt owed
under the promissory notes, or to protect, or recoup its investment from the
real property secured by the deeds of trust. None of these actions would
typically be of any material importance. As of the date hereof, the partnership
is not involved in any legal proceedings other than those that would be
considered part of the normal course of business.
Item 4 - Submission of Matters to Vote of Security Holders (Partners)
No matters have been submitted to a vote of the partnership.
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related
Unitholder Partnership Matters
75,000,000 units at $1 each (minimum purchase of 2,000 units) are currently
being offered ($125,000,000 in units were previously offered and sold through a
series of offerings) through broker-dealer member firms of the National
Association of Securities Dealers on a "best efforts" basis (as indicated in
Part I item 1). Investors have the option of withdrawing earnings on a monthly,
quarterly, or annual basis or compounding the earnings. Limited partners may
withdraw from the partnership in accordance with the terms of the limited
partnership agreement subject to possible early withdrawal penalties. There is
no established public trading market. As of December 31, 2004, 4,857 limited
partners had a capital balance of $183,368,000, net of Formation Loans and
syndication costs.
A description of the partnership units, transfer restrictions and
withdrawal provisions is more fully described under the section of the
prospectus entitled "Description of Units" and "Summary of Limited Partnership
Agreement", pages 72 through 73 of the prospectus, a part of the referenced
registration statement, which is incorporated by reference.
8
Item 6 - Selected Consolidated Financial Data
Redwood Mortgage Investors VIII began operations in April 1993.
Consolidated financial condition and results of operation for the
partnership as of and for the five years ended December 31, 2004 were (in
thousands, except for net income per $1,000 invested by limited partners for
entire period):
Consolidated Balance Sheets
Assets
December 31,
----------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ----------- ----------- ------------
Cash and cash equivalents $ 16,301 $ 8,921 $ 7,188 $ 1,917 $ 1,460
Loans
Loans, secured by deeds of trust 171,745 147,174 83,650 82,790 68,571
Loans, unsecured 34 34 - 4 54
Accrued interest and late fees 4,895 4,735 3,913 3,345 1,039
Advances on loans 131 416 279 195 172
Less allowance for losses (2,343) (2,649) (3,021) (2,247) (1,345)
Other receivables - - 888 - -
Real estate held for sale, net 9,793 3,979 9,286 - -
Other assets 62 44 22 6 13
------------ ------------ ------------ ----------- -----------
$ 200,618 $ 162,654 $ 102,205 $ 86,010 $ 69,964
============ ============ ============ =========== ===========
Liabilities and Partners' Capital
December 31,
----------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ----------- ------------
Liabilities
Accounts payable $ 25 $ 224 $ 449 $ 74 $ 30
Payable to affiliate 638 448 294 109 -
Line of credit 16,000 22,000 - 11,400 16,400
Note payable - - 1,782 - -
Deferred interest - - 112 - 82
Minority interest - - 1,213 - -
Subscriptions to partnership in
applicant status 424 1,210 2,578 673 225
------------ ------------ ------------ ----------- ------------
17,087 23,882 6,428 12,256 16,737
------------ ------------ ------------ ----------- ------------
Partners' capital
Limited partners subject to
Redemption 183,368 138,649 95,690 73,687 53,180
General partners subject to
Redemption 163 123 87 67 47
------------ ------------ ------------ ----------- ------------
Total partners' capital 183,531 138,772 95,777 73,754 53,227
------------ ------------ ------------ ----------- ------------
$ 200,618 $ 162,654 $ 102,205 $ 86,010 $ 69,964
============ ============ ============ =========== ============
9
Consolidated Statements of Income
December 31,
----------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Gross revenue $ 17,133 $ 12,958 $ 11,691 $ 9,088 $ 6,396
Expenses 4,981 3,369 4,204 2,994 2,104
------------ ------------ ------------ ------------ ------------
Income before interest credited to
partners in applicant status 12,152 9,589 7,487 6,094 4,292
Interest credited to partners in
applicant status 20 37 1 1 5
------------ ------------ ------------ ------------ ------------
Minority interest share of subsidiary loss - 42 - - -
Net income $ 12,132 $ 9,594 $ 7,486 $ 6,093 $ 4,287
============ ============ ============ ============ ============
Net income to general partners (1%) 121 96 75 61 43
Net income to limited partners (99%) 12,011 9,498 7,411 6,032 4,244
------------ ------------ ------------ ------------ ------------
Total net income $ 12,132 $ 9,594 $ 7,486 $ 6,093 $ 4,287
============ ============ ============ ============ ============
Net income per $1,000 invested by
limited partners for entire period
(annualized)
- where income is compounded and
retained $ 72 $ 78 $ 87 $ 90 $ 86
============ ============ ============ ============ ============
- where partner receives income in
monthly distributions $ 70 $ 75 $ 84 $ 86 $ 83
============ ============ ============ ============ ============
Annualized yields when income is compounded or distributed monthly for the
years 2000 through 2004 are outlined in the table below:
Compounded Distributed
--------------- ----------------
2000 8.58% 8.26%
2001 8.98% 8.63%
2002 8.69% 8.36%
2003 7.76% 7.50%
2004 7.22% 6.99%
The average annualized yield, when income is compounded and retained, from
inception through December 31, 2004, was 8.24%. The average annualized yield,
when income is distributed monthly, from inception through December 31, 2004 was
7.95%
Certain reclassifications, not affecting previously reported net income or
total partner capital, have been made to the previously issued consolidated
financial statements to conform to the current year presentation.
10
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the consolidated financial statements, management is required
to make estimates based on the information available that affect the reported
amounts of assets and liabilities as of the consolidated balance sheet dates and
income and expenses during the reported periods. Such estimates relate
principally to the determination of (1) the allowance for loan losses (i.e. the
amount of allowance established against loans receivable as an estimate of
potential loan losses) including the accrued interest and advances that are
estimated to be unrecoverable based on estimates of amounts to be collected plus
estimates of the value of the property as collateral and (2) the valuation of
real estate owned through foreclosure. At December 31, 2004, the partnership
owned five real estate properties, which were taken back from defaulted
borrowers.
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral values, to provide for unrecoverable loans and
receivables, including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable (unsecured). The partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
If the probable ultimate recovery of the carrying amount of a loan, with
due consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the investment
shall be reduced to the present value of future cash flows discounted at the
loan's effective interest rate. If a loan is collateral dependent, it is valued
at the estimated fair value of the related collateral.
If events and/or changes in circumstances cause management to have serious
doubts about the collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances,
including accrued interest and advances.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Forward Looking Statements.
Certain statements in this Report on Form 10-K which are not historical
facts may be considered forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, hopes, intentions, beliefs and strategies regarding the
future. Forward-looking statements include statements regarding future interest
rates and economic conditions and their effect on the Partnership and its
assets, trends in the California real estate market, estimates as to the
allowance for loan losses, estimates of future limited partner withdrawals, the
total amount of the Formation Loan, and 2005 annualized yield estimates. Actual
results may be materially different from what is projected by such
forward-looking statements. Factors that might cause such a difference include
unexpected changes in economic conditions and interest rates, the impact of
competition and competitive pricing and downturns in the real estate markets in
which the Company has made loans. All forward-looking statements and reasons why
results may differ included in this Form 10-K are made as of the date hereof,
and we assume no obligation to update any such forward-looking statement or
reason why actual results may differ.
11
Related Parties.
The general partners of the partnership are Redwood Mortgage Corp., Gymno
Corporation and Michael R. Burwell. Most partnership business is conducted
through Redwood Mortgage Corp., which arranges, services and maintains the loan
portfolio for the benefit of the partnership. The fees received by the general
partners are paid pursuant to the partnership agreement and are determined at
the sole discretion of the general partner. In the past the general partner has
elected not to take the maximum compensation. The following is a list of various
partnership activities for which related parties are compensated.
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, the general partners
may collect an amount equivalent to 12% of the loaned amount until 6 months
after the termination date of the offering. Thereafter, the loan brokerage
commissions (points) will be limited to an amount not to exceed 4% of the total
partnership assets per year. The loan brokerage commissions are paid by the
borrowers, and thus, are not an expense of the partnership. In 2004, 2003 and
2002, loan brokerage commissions paid by the borrowers were $2,443,000,
$2,621,000 and $996,000, respectively.
o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the partnership's loans
are paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued thereon. Additional servicing fees are recorded upon the receipt
of any subsequent payments on impaired loans. Mortgage servicing fees of
$1,565,000, $1,057,000 and $1,098,000 were incurred for the years ended December
31, 2004, 2003 and 2002, respectively.
These servicing fees were charged at 1%, on an annual basis, of the
outstanding principal balances. If the maximum mortgage servicing fee of 1.5%,
on an annual basis, had been charged to the partnership, then net income would
have been reduced by approximately $783,000. Reducing net income reduces the
annualized yields. An increase or decrease in this fee within the limits set by
the partnership's agreement directly impacts the yield to the limited partners.
o Asset Management Fees The general partners receive monthly fees for
managing the partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $630,000, $468,000 and $325,000 were incurred by the partnership for
years 2004, 2003 and 2002, respectively.
o Other Fees The partnership agreement provides that the general partners
may receive other fees such as reconveyance, mortgage assumption and mortgage
extension fees. Such fees are incurred by the borrowers and are paid to the
general partners.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective partnership interests. The allocation
to the general partners (combined) shall be a total of 1%.
o Operating Expenses The general partners may be reimbursed by the
partnership for all operating expenses actually incurred by it on behalf of the
partnership, including without limitation, out-of-pocket general and
administration expenses of the partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
o Contributed Capital The general partners jointly or severally are
required to contribute 1/10 of 1% in cash contributions as proceeds from the
offerings are received from the limited partners. As of December 31, 2004 and
2003, a general partner, Gymno Corporation, had contributed $174,000 and
$133,000, respectively, as capital in accordance with Section 4.02(a) of the
partnership agreement.
12
o Sales Commission - "Formation Loan" to Redwood Mortgage Corp. Sales
commissions relating to the capital contributions by limited partners are not
paid directly by the partnership out of the offering proceeds. Instead, the
partnership loans to Redwood Mortgage Corp., a general partner, amounts
necessary to pay all sales commissions and amounts payable in connection with
unsolicited sales. The loan is referred to as the "Formation Loan". It is
unsecured and non-interest bearing and is applied to reduce limited partners
capital in the consolidated balance sheets. The sales commissions range between
0 (for units sold by the general partners) and 9%. It is estimated that the
total amount of the Formation Loan will approximate 7.6% based on the assumption
that 65% of the investors will reinvest earnings, which qualify for the higher
commission percentage. Formation Loans made to Redwood Mortgage Corp. were on a
per offering basis.
The following table summarizes Formation Loan transactions through December
31, 2004 (in thousands):
Offering
-----------------------------------------------------------------------
1st 2nd 3rd 4th 5th Total
----------- ----------- ----------- ----------- ----------- -----------
Limited partner contributions $ 14,932 $ 29,993 $ 29,999 $ 49,985 $ 47,314 $ 172,223
=========== =========== =========== =========== =========== ===========
Formation Loans made 1,075 2,272 2,218 3,777 3,570 12,912
Repayments to date (785) (1,013) (558) (495) (45) (2,896)
Early withdrawal penalties
Applied (75) (112) (78) - - (265)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 $ 215 $ 1,147 $ 1,582 $ 3,282 $ 3,525 $ 9,751
=========== =========== =========== =========== =========== ===========
The amount of the annual installments paid by Redwood Mortgage Corp. are
determined at annual installments of one-tenth of the principal balance of the
Formation Loan at December 31 of each year until the offering period is closed.
Thereafter, the remaining Formation Loan is paid in ten equal amortizing
payments over a period of ten years. Interest has been imputed at the market
rate of interest in effect at the date the offering closed. See footnote 1 to
the consolidated financial statements.
On December 31, 2004, the partnership was in the offering stage of its
fifth offering, ($75,000,000). Contributed capital equaled $14,932,000 for the
first offering, $29,993,000 for the second offering, $29,999,000 for the third
offering, $49,985,000 for the fourth offering and $47,314,000 for the fifth
offering, totaling an aggregate of $172,223,000 as of December 31, 2004. Of this
amount, $424,000 remained in applicant status.
13
Results of Operations - For the years ended December 31, 2004, 2003 and 2002.
Changes in the partnership's operating results for the years ended December
31, 2004, 2003 and 2002 are discussed below:
Changes for the years ended December 31,
---------------------------------------------
2004 2003
------------- -------------
Net income $ 2,538,000 $ 2,108,000
============= =============
Revenue
Interest on loans 3,941,000 1,080,000
Late fees 17,000 87,000
Other 217,000 100,000
------------- -------------
$ 4,175,000 $ 1,267,000
------------- -------------
Expenses
Mortgage servicing fees 508,000 (41,000)
Interest expense 551,000 (445,000)
Amortization of loan origination fees 33,000 11,000
Provision for losses on loans 364,000 2,000
Provision for losses on real estate held for sale - (500,000)
Clerical costs through Redwood Mortgage Corp. 17,000 24,000
Asset management fees 162,000 143,000
Professional services 100,000 45,000
Broker expense (181,000) (263,000)
Amortization of discount on imputed interest 124,000 41,000
Other (41,000) 142,000
------------- -------------
$ 1,637,000 $ (841,000)
------------- -------------
Net income increase $ 2,538,000 $ 2,108,000
============= =============
Although the average interest rate of the loan portfolio declined to 10.02%
from 10.47% for the years ended December 31, 2004 and 2003, respectively, the
interest income of the partnership continued to increase by $3,941,000 (31.54%)
to $16,437,000 in 2004 and by $1,080,000 (9.46%) to $12,496,000 in 2003. This
was primarily due to the increased size of the partnership's secured loan
portfolio, which increased by $24,571,000 (16.70%) to $171,745,000 in 2004 and
by $63,524,000 (75.94%) to $147,174,000 in 2003. Average loan portfolio balances
for the years ended December 31, 2004, 2003 and 2002, were $159,460,000,
$115,412,000 and $83,220,000, respectively. The increases in interest income
were also due to earnings of additional interest of $277,000 and $465,000 for
the years ended December 31, 2004 and 2003, respectively. The lower percentage
rate of interest increase on loans (9.46%) in 2003 was due in part to the lower
interest rate environment in 2003 versus 2002 and less additional interest
earned of $525,000 in 2003 than 2002.
Late charge income increases of $17,000 (8%) and $87,000 (76%) for the
years ended December 31, 2004 and 2003 were primarily attributable to the growth
in the loan portfolio.
The increase in other income of $217,000 (83%) and $100,000 (63%) for the
years ended December 31, 2004 and 2003, respectively, was primarily due to
increased imputed interest income from the larger Formation Loan existing of
$9,751,000, $7,550,000 and $5,258,000 for the years ended December 31, 2004,
2003 and 2002, respectively. Imputed interest income was $319,000 and $195,000
for the years ended December 31, 2004 and 2003, respectively. Additionally, the
partnership may accept unsolicited orders for units from investors who utilize
the services of a registered investment advisor. If an investor utilizes the
services of a registered investment advisor in acquiring units, Redwood Mortgage
Corp. will contribute to the partnership an amount equal to the sales
commissions otherwise attributable to a sale of units through a participating
broker dealer. This amount is based on the investor's election to retain
earnings (9%) or have their earnings distributed (5%). In 2004 $111,000 was paid
and recorded under other income.
14
The increase/(decrease) in mortgage servicing fees of $508,000 and
($41,000) for the years ended December 31, 2004 and 2003, respectively, was
primarily attributable to increases in the outstanding loan portfolio. The loan
portfolio increased by $24,571,000 (16.70%) in 2004 and $63,524,000 (75.94%) in
2003. The increase in servicing fees for the year ended December 31, 2004 was
also due to an increased average loan portfolio balance of $159,460,000, which
the partnership maintained in 2004 versus an average balance of $115,412,000 in
2003. The decrease in servicing fees in 2003 was due to additional servicing
fees were earned in 2002 related to impaired loans. The partnership does not
accrue servicing fees to Redwood Mortgage Corp. on impaired loans; rather,
servicing fees on impaired loans are paid as borrower payments are received.
Interest expense on the line of credit is tied to the bank's prime rate.
The decrease in interest expense of $445,000 for the year ended December 31,
2003 was primarily attributable to a substantial reduction in the prime rate.
The prime rate was 4.75% as of December 31, 2001. This rate remained static
until November, 2002 when it was reduced to 4.25%. A further reduction by 0.25%
to 4% was made in June, 2003. The decline in interest expense in 2003 was also
due to a lower average credit line usage of $10,863,000 for the year ended
December 31, 2002 versus $6,170,000 for the year ended December 31, 2003. An
increase in interest expense of $551,000 in 2004 was primarily attributable to
increased borrowing, which averaged $14,000,000 during 2004, and increases in
the prime rate from 4% in January, 2004 to 5.25% as of December 31, 2004, an
average of 4.44%.
The increase in loan origination fees was primarily attributable to the
costs involved in negotiating an extension of the maturity date and an increase
in the credit line facility.
The increase in provision for losses on loans and real estate of $364,000
for the year ended December 31, 2004 was primarily attributable to an increase
in the loan portfolio balance, the potential acquisition of two properties
totaling $6,315,000 and an increase in foreclosures to six loans totaling
$14,682,000 as of December 31, 2004, versus three loans totaling $2,931,000 as
of December 31, 2003. The decrease in the provision of $498,000 for the year
ended December 31, 2003 was primarily attributable to increased stability in
real estate market, the stabilization of the economy, a decline in foreclosures
amounts from $4,029,000 in 2002 to $2,931,000 in 2003 and management's
determination that no additional amounts were needed related to the real estate
held for sale. The increases in clerical costs of $17,000 and $24,000 for the
years ended December 31, 2004 and 2003, respectively, was primarily attributable
to an increase in partnership size.
The increase in professional services of $100,000 and $45,000 for the years
ended December 31, 2004 and 2003, respectively, was primarily attributable to
the increased size of the partnership and increased costs associated with
various partnership regulatory filings and the annual audit.
The broker expense decline of $263,000 for the year ended December 31,
2003, was primarily due to the partnership having an obligation to pay one-half
of additional interest collected on one of its loans to a non-affiliated real
estate broker. This expense ended in 2003 with the full collection of the
additional interest totaling $1,250,000.
The increase in management fees of $162,000 and $143,000 for the years
ended December 31, 2004 and 2003, respectively, was due to an increase in net
asset value under management, which increased from $95,690,000 in 2002 to
$138,649,000 in 2003 and to $183,368,000 in 2004.
The increases in amortization of discount on imputed interest of $124,000
and $41,000 for the years ended December 31, 2004 and 2003, respectively, is
primarily attributable to increases in the Formation Loan from the sale of
additional limited partnership investments.
The increase/(decrease) in other expenses of ($41,000) and $142,000 for the
years ended December 31, 2004 and 2003, respectively, was primarily due to the
loss sustained on the sale of the Stockton Street Property Co., LLC real estate
of $85,000 in 2003, increased subscription interest while new funds from limited
partners awaited entry into the partnership and the expensing of the upkeep
costs of the properties owned by the partnership.
15
Partnership capital continued to increase as the partnership received new
limited partner capital contributions of $40,954,000, $40,030,000 and
$21,563,000 and retained the earnings of limited partners that have chosen to do
so of $7,367,000, $5,958,000 and $4,716,000 for the years 2004, 2003 and 2002,
respectively. The partnership ceased raising funds during the period of May 2002
through October 2002 while it was in application status for a fourth offering of
units. The fourth offering commenced October 30, 2002 and closed on October 6,
2003. On October 7, 2003 the partnership commenced its fifth offering and funds
raised will be used to increase the partnership's capital base and provide funds
for additional mortgage loans. As of December 31, 2004 the limited partners
total units purchased was 171,799,000 units aggregating $172,223,000.
The partnership began funding loans on April 14, 1993 and as of December
31, 2004 had credited earnings to limited partners who elected to retain
earnings at an average annualized yield of 8.24% since inception through
December 31, 2004. Limited partners who elected to have their earnings
distributed monthly had an average annualized yield of 7.95% since inception
through December 31, 2004.
In 1995, the partnership established a line of credit with a commercial
bank secured by its loan portfolio. Since its inception, the credit limit has
increased from $3,000,000 to $42,000,000. The size of the credit line facility
could again increase as the partnership's capital increases. This added source
of funds may help in maximizing the partnership's yield by permitting the
partnership to minimize the amount of funds in lower yield investment accounts
when appropriate loans are not available. Additionally, the loans made by the
partnership bear interest at a rate in excess of the rate payable to the bank
which extended the line of credit. The amount to be retained by the partnership,
after payment of the line of credit cost, will be greater than without the use
of the line of credit. As of December 31, 2004 and 2003, the outstanding balance
on the line of credit was $16,000,000 and $22,000,000, respectively.
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these loans,
borrowers' payment records, etc. Based upon this information and other data, the
allowance for loan losses is increased or decreased. Borrower foreclosures are a
normal aspect of partnership operations. The partnership is not a credit based
lender and hence while it reviews the credit history and income of borrowers,
and if applicable, the income from income producing properties, the general
partners expect that we will on occasion take back real estate security. During
2001, the Northern California real estate market slowed and the national and
local economies slipped into recession. During 2002 and 2003, the economy
stabilized. During 2004 the California economy and the Northern California real
estate market have strengthened. At December 31, 2004 the partnership had eight
loans past due 90 days or more on interest totaling $23,101,000. With respect to
four of these eight loans, we have filed notices of default, beginning the
process of foreclosure. The principal amounts of the four filed notices of
default total $13,192,000 or 7.68% of the loan portfolio. Among these four,
three borrowers totaling $3,839,000 in loans have entered into workout
agreements. Additionally, the partnership has filed two notices of default
against borrowers that are not 90 days delinquent on interest, totaling
$1,491,000. At December 31, 2004 the partnership had notices of default filed on
six loans with an aggregate principal outstanding of $14,682,000.
In addition to the three workout agreements with borrowers in foreclosure,
the partnership also entered into workout agreements with borrowers who are past
maturity or delinquent in their regular payments. At December 31, 2004, the
total number of partnership workout agreements with borrowers was eight,
including matured, foreclosed or 90-day delinquent loans. Typically, a workout
agreement allows the borrower to extend the maturity date of the balloon payment
and/or allows the borrower to make current monthly payments while deferring for
periods of time, past due payments, and allows time to pay the loan in full.
These workout agreements and foreclosures generally exist within our loan
portfolio to greater or lesser degrees, depending primarily on the health of the
economy. The number of foreclosures and workout agreements will rise during
difficult economic times and conversely fall during good economic times. The
number and amount of foreclosures existing at December 31, 2004, in management's
opinion, does not have a material effect on our results of operations or
liquidity. These workouts and foreclosures have been considered when management
arrived at appropriate loan loss reserves and based on our experience, are
reflective of our loan marketplace segment. In 2004, the partnership filed some
foreclosure proceedings to enforce the terms of our loans. In some of these
instances the borrowers have been able to remedy the foreclosures we have filed.
During 2002, we completed the foreclosure of two loans, which resulted in the
partnership taking back two real estate properties. These properties are more
fully discussed under Item 2 - Properties. The partnership's foreclosed
principal balances were $6,565,000 after excluding an affiliated partnership's
interest in one of the properties. During 2003, one of the properties owned
through foreclosure was sold at an overall loss of $127,000, with $85,000 of the
loss allocated to the partnership and the remaining $42,000 allocated to the
minority interest. During 2003 the partnership did not take back any property
through the foreclosure process. In 2004, the partnership took back four
16
properties through foreclosure or deeds in lieu of foreclosure. We may take back
additional real estate through the foreclosure process in 2005. Borrower
foreclosures are a normal aspect of partnership operations and the general
partners anticipate that they will not have a material effect on liquidity. As a
prudent guard against potential losses, the general partners have made
provisions for losses on loans and real estate owned through foreclosure of
$3,343,000 at December 31, 2004. These provisions for losses were made to guard
against collection losses. The total cumulative provision for losses as of
December 31, 2004, is considered by the general partners to be adequate. Because
of the number of variables involved, the magnitude of the swings possible and
the general partners' inability to control many of these factors, actual results
may and do sometimes differ significantly from estimates made by the general
partners.
The partnership may restructure loans. This is done either through the
modification of an existing loan or by re-writing a whole new loan. It could
involve, among other changes, an extension in maturity date, a reduction in
repayment amount, a reduction in interest rate or granting an additional loan.
No loans were restructured in 2004. During 2003, the partnership
restructured three loans by granting one new loan and modifying two other loans.
During 2003, the total amount of restructured loans was $15,599,000.
Borrower Liquidity and Capital Resources.
The partnership relies upon sales of partnership units, loan payoffs,
borrowers' mortgage payments, and, to a lesser degree, its line of credit for
the source of funds for loans. Over the past several years, mortgage interest
rates have decreased somewhat from those available at the inception of the
partnership. If interest rates were to increase substantially, the yield of the
partnership's loans may provide lower yields than other comparable debt-related
investments. As such, additional limited partner unit purchases could decline,
which would reduce the overall liquidity of the partnership. Additionally, since
the partnership has made primarily fixed rate loans, if interest rates were to
rise, the likely result would be a slower prepayment rate for the partnership.
This could cause a lower degree of liquidity as well as a slowdown in the
ability of the partnership to invest in loans at the then current interest
rates. Conversely, in the event interest rates were to decline, the partnership
could see both or either of a surge of unit purchases by prospective limited
partners, and significant borrower prepayments, which, if the partnership can
only obtain the then existing lower rates of interest may cause a dilution of
the partnership's yield on loans, thereby lowering the partnership's overall
yield to the limited partners. The partnership to a lesser degree relies upon
its line of credit to fund loans. Generally, the partnership's loans are fixed
rate, whereas the credit line is a variable rate loan. In the event of a
significant increase in overall interest rates, the credit line rate of interest
could increase to a rate above the average portfolio rate of interest. Should
such an event occur, the general partners would desire to pay off the line of
credit. Retirement of the line of credit would reduce the overall liquidity of
the partnership. Cash is constantly being generated from borrower payments of
interest, principal and loan payoffs. Currently, cash flow greatly exceeds
partnership expenses and earnings requirements. Cash is constantly being
generated from borrower interest payments, late charges, amortization of loan
principal and loan payoffs. Currently, cash flow exceeds partnership expenses,
earnings and limited partner capital payout requirements. Excess cash flow will
be invested in new loan opportunities, when available, and will be used to
reduce the partnership credit line or in other partnership business. Excess cash
flow is invested in new loan opportunities, when available, and is used to
reduce the partnership credit line or for other partnership business.
At the time of subscription to the partnership, limited partners must elect
either to receive monthly, quarterly or annual cash distributions from the
partnership, or to compound earnings in their capital account. If an investor
initially elects to receive monthly, quarterly or annual distributions, such
election, once made, is irrevocable. If the investor initially elects to
compound earnings in his/her capital account, in lieu of cash distributions, the
investor may, after three (3) years, change the election and receive monthly,
quarterly or annual cash distributions. Earnings allocable to limited partners
who elect to compound earnings in their capital account, will be retained by the
partnership for making further loans or for other proper partnership purposes,
and such amounts will be added to such limited partners' capital accounts.
During the years stated below, the partnership, after allocation of
syndication costs, made the following allocation of earnings both to the limited
partners who elected to compound their earnings, and those that chose to
distribute:
2004 2003 2002
------------- ------------- -------------
Compounding $7,367,000 $5,958,000 $4,716,000
Distributing $4,452,000 $3,362,000 $2,517,000
17
Capital balances of limited partners electing to receive cash distributions
of earnings represented 36%, 36% and 35% of the limited partners' outstanding
capital accounts as of December 31, 2004, 2003 and 2002, respectively. These
percentages have remained relatively stable. The general partners anticipate
that after all capital has been raised, the percentage of limited partners
electing to withdraw earnings will decrease due to the dilution effect which
occurs when compounding limited partners' capital accounts grow through earnings
reinvestment.
The partnership also allows the limited partners to withdraw their capital
account subject to certain limitations and penalties (see "Withdrawal From
Partnership" in the Limited Partnership Agreement). Once a limited partner's
initial five-year holding period has passed, the general partners expect to see
an increase in liquidations due to the ability of limited partners to withdraw
without penalty. This ability to withdraw five years after a limited partner's
investment has the effect of providing limited partner liquidity and the general
partners expect a portion of the limited partners to avail themselves of this
liquidity. This has the anticipated effect of increasing the net capital of the
partnership, primarily through retained earnings during the offering period. The
general partners expect to see increasing numbers of limited partner withdrawals
during a limited partner's 5th through 10th anniversary, at which time the bulk
of those limited partners who have sought withdrawal have been liquidated. Since
the five-year hold period for most limited partners has yet to expire, as of
December 31, 2004, many limited partners may not as yet avail themselves of this
provision for liquidation. Earnings and capital liquidations including early
withdrawals during the three years ended December 31, 2004 were:
2004 2003 2002
------------- ------------- -------------
Cash distributions $4,452,000 $3,362,000 $2,517,000
Capital liquidation* $1,988,000 $1,845,000 $1,049,000
------------- ------------- -------------
Total $6,440,000 $5,207,000 $3,566,000
============= ============= =============
* These amounts represent gross of early withdrawal penalties.
Additionally, limited partners may liquidate their investment over a
one-year period subject to certain limitations and penalties. During the past
three years ended December 31, 2004, capital liquidated subject to the 10%
penalty for early withdrawal was:
2004 2003 2002
------------- -------------- -------------
$794,000 $786,000 $244,000
This represents 0.43%, 0.57% and 0.26% of the limited partners' ending
capital for the years ended December 31, 2004, 2003 and 2002, respectively.
These withdrawals are within the normally anticipated range and represent a
small percentage of limited partner capital.
In some cases in order to satisfy Broker Dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the partnership on a basis which utilizes a per unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the partnership to integrate with
certain software used by the Broker Dealers and other reporting entities. In
those cases, the partnership will report to Broker Dealers, Trust Companies and
others a "reporting" number of units based upon a $1.00 per unit calculation.
The number of reporting units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the partnership account statement
provided to investors. The reporting units are solely for Broker Dealers
requiring such information for their software programs and do not reflect actual
units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the partnership. Each investor's
capital account balance is set forth periodically on the partnership account
statement provided to investors. The amount of partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per unit estimated value
of the client's investment in the partnership in accordance with NASD Rule 2340.
18
While the general partners have set an estimated value for the partnership
units, such determination may not be representative of the ultimate price
realized by an investor for such units upon sale. No public trading market
exists for the partnership's units and none is likely to develop. Thus, there is
no certainty that the units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
partnership, which may include early withdrawal penalties (See the section of
the Prospectus entitled "Risk Factors - Purchase of Units is a Long Term
Investment").
Current Economic Conditions.
Since January, 2001, and through December 31, 2003, the Federal Reserve
reduced interest rates significantly by cutting the Federal Funds Rate to 1.00%.
From July 1 through December 31, 2004, the Federal Reserve increased the Federal
Funds Rate four times by one quarter percentage point (1/4 of one percent) each
time to 2.00%. The effect of these changes has greatly reduced short-term
interest rates and to a lesser extent reduced long-term interest rates. The
recent upward movement in the Federal Funds Rate during 2004 has raised
short-term rates but has not yet raised long-term interest rates significantly.
New loans will be originated at then existing interest rates. In the future the
general partners anticipate that interest rates likely will change from their
current levels. The general partners cannot, at this time, predict at what
levels interest rates will be in the future. The general partners anticipate
that new loans will be placed during 2005 at rates similar to those that
prevailed in 2004. The lowering of interest rates has encouraged those borrowers
that have mortgages with higher interest rates than those currently available to
seek refinancing of their obligations. The partnership may face prepayments in
the existing portfolio from borrowers taking advantage of these lower rates.
However, demand for loans from qualified borrowers continues to be strong and as
prepayments occur, the general partners expect to replace paid off loans with
loans at somewhat lower interest rates. At this time, the general partners
believe that the average loan portfolio interest rate will remain relatively
stable over the year 2005. Based upon the rates payable in connection with the
existing loans, and anticipated interest rates to be charged by the partnership
and the general partners' experience, the general partners anticipate that the
annualized yield will range between 6.75% and 7.25% in 2005.
The partnership makes loans primarily in Northern California. As of
December 31, 2004, approximately 76.36% of the loans held were in the six San
Francisco Bay Area Counties, 12.33% were in counties adjacent to the San
Francisco Bay Area and the balance 11.31% were in other counties throughout
California. Like the rest of the nation, the San Francisco Bay Area felt the
recession and accompanying slow down in economic growth and increasing
unemployment.
Recently the national and Northern California economies seem to be
improving. Job creation remains a concern, as little job creation seems to be
evident. The partnership makes loans primarily in Northern California and real
estate values of residential, commercial, multi-family properties and land are
of particular interest to the partnership. Real estate is the primary security
for the partnership's loans.
The residential real estate market in California continues to appreciate.
The San Francisco Chronicle dated January 20, 2005 reported that "Despite
earlier forecasts of softer housing demand in 2004, low interest rates drove the
Bay Area real estate market to record levels last year. The median sale price of
a single-family home in 2004 was $532,000, a 17% rise over $455,000 in 2003 and
the highest for any year since 1988, real estate information firm DataQuick
reported Wednesday. A total of 134,848 houses and condos changed hands in the
nine counties in 2004, blowing past the previous peak of 122,149 set in 2003.
December, traditionally a slow time for real estate sales, closed out 2004 in
strong - although not record-setting - fashion. The median price for a
single-family home hit $554,000, a 17% jump over the December 2003 median. The
record median of $560,000 was set in November. The housing boom wasn't expected
to last through 2004. In the face of anticipated interest rate hikes, many
economists had predicted that local and national real estate markets would cool.
But after mortgage rates rose for several weeks in the spring, disappointing job
growth reignited fears about the economy, driving rates lower. The uncertainty
created by both rising and falling rates prompted buyers to jump into the
housing market. John Karevoll, [a researcher at DataQuick in La Jolla (San Diego
County)] expects appreciation rates to ease from the mid to high teens to the
single digits once the benchmark 30-year fixed mortgage rate climbs closer to
6.5 or 7.0% later in the year. Last week, mortgage giant Freddie Mac said the
30-year fixed rate hit 5.74%.
19
While the residential market outlook remains strong overall the commercial
real estate market appears equally as strong.
As reported in the San Francisco Business Times for the week of January
7-13, 2005 "The numbers are in and they're looking pretty. San Francisco office
market fundamentals improved during the last quarter of 2004, with overall
vacancy shrinking to between 15.4% and 19%, depending on which brokerage firm is
crunching the numbers. Main reasons? Dwindling supply due to stalemated
construction, a handful of residential conversions and a hopped-up tally of
positive net absorption. According to Tove Nilsen, Colliers International's
director of market research, the S.F office market as a whole logged 699,843
square feet of positive absorption during the last quarter of the year, bringing
the annual total to 1.2 million square feet. Cushman & Wakefield Senior Research
Associate Brad Van Blois (who counts 1.198 Million square feet of overall net
absorption for the year) attributes a big chunk of that - 302,610 square feet -
to fresh companies moving to town. Space-hungry/expanding companies also made
this the sixth consecutive quarter for positive net absorption - a marked
turnaround from the exodus of mid-2000 to mid-2003. And rents? They stabilized.
For the year, city-wide Class A direct rent decreased 1.9% to $28.80 per square
foot, Class B space slipped 1.6% to $22.80 and Class C declined 4.3% to $19.44,
according to Cushman & Wakefield. Class A rents in the commercial business
district also dropped, to $30.48 in the fourth quarter compared to $30.60 during
the same period last year, also according to Van Blois. But prime Class A space
in the financial district is getting harder to come by, with the sweetest
sublease space now soaked up by other tenants and mostly commodity space left.
Class A space in the financial district was $31.15, up from $30.36 the previous
quarter, according to Nilsen. As expected, commercial building sales - the hot
ticket for all of last year - beat all previous records. Low interest rates and
pent up demand pushed dozens of investors to buy a whopping $2.5 billion in
commercial buildings in the city this year, beating the $2.4 billion record set
in 2000, according to Nilsen. [Van Blois] added: "The market fundamentals have
improved each quarter, and it's encouraging, but overall we still have a long
way to go." Sales stayed steady through the year end, with 23 commercial and
industrial properties closing escrow during the month of November, according to
Jennifer Raike of Old Republic Title Co.'s monthly list of transactions."
As of December 31, 2004, the partnership had an average loan to value ratio
based upon appraisals and prior liens as of the date the loan was made of
56.94%. This did not account for any increases or decreases in property values
since the date the loan was made, nor does it include any reductions in
principal through amortization of payments after the loan was made. This low
loan to value ratio will assist the partnership in weathering loan delinquencies
and foreclosures should they eventuate.
Contractual Obligations
A summary of the contractual obligations of the partnership as of December
31, 2004 is set forth below (in thousands):
Contractual Obligation Total Less than 1 Year 1-3 Years 3-5 Years
-------------------------- -------------- ----------------- -------------- --------------
Line of credit $ 16,000 $ - $ 5,333 $ 10,667
Construction loans 9,286 9,286 - -
Rehabilitation loans 8,880 8,880 - -
-------------- ----------------- -------------- --------------
Total $ 34,166 $ 18,166 $ 5,333 $ 10,667
============== ================= ============== ==============
20
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 our line of
credit as of December 31, 2004. The presentation, for each category of
information, aggregates the assets and liabilities by their maturity dates for
maturities occurring in each of the years 2005 through 2009 and separately
aggregates the information for all maturities arising after 2009. The carrying
values of these assets and liabilities approximate their fair market values as
of December 31, 2004 (in thousands).
2005 2006 2007 2008 2009 Thereafter Total
--------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 8,772 $ 8,772
Average interest rate 1.20% 1.20%
Loans secured by deeds of trust $68,761 $68,829 $21,185 $ 3,629 $ 8,844 $ 497 $171,745
Average interest rate 10.79% 9.61% 9.68% 9.42% 9.28% 8.50% 10.02%
Interest bearing liabilities
Line of credit $16,000 - - - - - $ 16,000
Average interest rate 5.00% - - - - - 5.00%
Market Risk.
The partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the partnership's primary market risk exposure with
respect to its obligations is to changes in interest rates, which will affect
the interest cost of outstanding amounts on the line of credit. The partnership
may also suffer market risk tied to general trends affecting real estate values
that may impact the partnership's security for its loans.
The partnership's primary market risk in terms of its profitability is the
exposure to fluctuations in earnings resulting from fluctuations in general
interest rates. The majority of the partnership's mortgage loans 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. If interest rates increase, the interest
rates the partnership obtains from reinvested funds will generally increase, but
the value of the partnership's existing loans at fixed rates will generally tend
to decrease. The risk is mitigated by the fact that the partnership does not
intend to sell its loan portfolio, rather such loans are held until they are
paid off. If interest rates decrease, the amounts becoming available to the
partnership for investment due to repayment of partnership loans may be
reinvested at lower rates than the partnership had been able to obtain in prior
investments, or than the rates on the repaid loans. In addition, interest rate
decreases may encourage borrowers to refinance their loans with the partnership
at a time where the partnership is unable to reinvest in loans of comparable
value.
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.
PORTFOLIO REVIEW - For the years ended December 31, 2004, 2003 and 2002
Secured Loan Portfolio.
The partnership's secured loan portfolio consists primarily of short-term
(one to five years), fixed rate loans secured by real estate. As of December 31,
2004, 2003 and 2002 the partnership's loans secured by real property collateral
in the six San Francisco Bay Area counties (San Francisco, San Mateo, Santa
Clara, Alameda, Contra Costa, and Marin) represented $131,143,000 (76.36%),
$107,211,000 (72.85%) and $61,741,000 (73.81%), respectively, of the outstanding
secured loan portfolio. The remainder of the portfolio represented loans secured
by real estate located primarily in Northern California. No partnership loan
equals or exceeds 10% of the partnership's assets.
21
The following table sets forth the distribution of loans held by the
partnership by property type for the years ended December 31, 2004, 2003 and
2002 (in thousands):
December 31,
--------------------------------------------------------------------------------------
2004 2003 2002
------------------------ ------------------------- --------------------------
Single family homes (1-4 units) $ 84,359 49.12% $ 66,631 45.27% $ 36,574 43.72%
Apartments (over 4 units) 30,981 18.04% 22,649 15.39% 6,572 7.86%
Commercial 54,670 31.83% 52,502 35.67% 32,089 38.36%
Land 1,735 1.01% 5,392 3.67% 8,415 10.06%
----------- ---------- ----------- ---------- ----------- ----------
Total $ 171,745 100.00% $ 147,174 100.00% $ 83,650 100.00%
=========== ========== =========== ========== =========== ==========
As of December 31, 2004, the partnership held 75 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the partnership as of December 31, 2004.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF SECURED LOANS
As of December 31, 2004 (in thousands)
# of Loans Amount Percent
----------- ----------- ------------
1st Mortgages 43 $ 115,082 67.01%
2nd Mortgages 28 50,282 29.28%
3rd Mortgages 4 6,381 3.71%
=========== =========== ============
Total 75 $ 171,745 100.00%
Maturing in 2005 21 $ 68,761 40.04%
Maturing in 2006 24 68,829 40.07%
Maturing in 2007 11 21,185 12.34%
Maturing after 12/31/07 19 12,970 7.55%
=========== =========== ============
Total 75 $ 171,745 100.00%
Average secured loan as a % of secured loan portfolio $ 2,289 1.33%
Largest secured loan as a % of secured loan portfolio 12,045 7.01%
Smallest secured loan as a % of secured loan portfolio 50 0.03%
Average secured loan-to-value at time of loan based on
appraisals and prior liens at time of loan 56.94%
Largest secured loan as a % of partnership assets 12,045 6.00%
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the loan portfolio as affected by
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
22
The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the partnership is not subject to these regulations and has
not adopted certain of these practices. Rather, the general partners, in
connection with the periodic closing of the accounting records of the
partnership and the preparation of the financial statements, determine whether
the allowance for loan losses is adequate to cover potential loan losses of the
partnership. As of December 31, 2004 the general partners have determined that
the allowance for loan losses and real estate held for sale of $3,343,000 (1.82%
of net assets) is adequate in amount. Because of the number of variables
involved, the magnitude of the swings possible and the general partners'
inability to control many of these factors, actual results may and do sometimes
differ significantly from estimates made by the general partners. As of December
31, 2004, eleven loans were delinquent over 90 days in interest payments and/or
past maturity with an aggregate principal outstanding of $25,013,000. Of these
delinquent loans, five loans with an aggregate principal outstanding of
$6,424,000 were subject to workout agreements.
The partnership also makes loans requiring periodic disbursements of funds.
As of December 31, 2004 there were thirteen such loans. These loans include
loans for the ground up construction of buildings and loans for rehabilitation
of existing structures. Interest on these loans is computed with the simple
interest method and only on the amounts disbursed on a daily basis.
A summary of the status of the partnership's loans, which are periodically
disbursed as of December 31, 2004, is set forth below (in thousands):
Complete Construction Rehabilitation
----------------------- -----------------
Disbursed funds $14,362 $41,373
Undisbursed funds $ 9,286 $ 8,880
"Construction Loans" are determined by the management to be those loans
made to borrowers for the construction of entirely new structures or dwellings,
whether residential, commercial or multifamily properties. For each such
Construction Loan, the partnership has approved a maximum balance for such loan;
however, disbursements are made in phases throughout the construction process.
As of December 31, 2004, the partnership had commitments for Construction Loans
totaling $23,648,000, of which $14,362,000 in Construction Loans had been
disbursed and had an additional $9,286,000 is yet to be disbursed. The
$23,648,000 of Construction Loans committed exceeds 10% of the loan portfolio
which is in excess of the partnership's limit on Construction Loan funding. The
partnership will not make any additional Construction Loan obligations until
such time as the aggregate amount of the outstanding Construction Loan
commitments is less than 10% of the loan portfolio. During February, 2005, one
of these loans with a total commitment of $8,400,000 was paid in full.
The partnership also makes loans, the proceeds of which are used to
remodel, add to and/or rehabilitate an existing structure or dwelling, whether
residential, commercial or multifamily properties and which, in the
determination of management, are not construction loans. These loans are
referred to by management as "Rehabilitation Loans". As of December 31, 2004 the
partnership had funded $41,373,000 in Rehabilitation Loans and $8,880,000
remained to be disbursed for a combined total of $50,253,000. While the
partnership does not classify Rehabilitation Loans as Construction Loans,
Rehabilitation Loans do carry some of the same risks as Construction Loans.
There is no limit on the amount of Rehabilitation Loans the partnership may
make.
23
Item 8 - Consolidated Financial Statements and Supplementary Data
A - Consolidated Financial Statements
The following consolidated financial statements of Redwood Mortgage
Investors VIII are included in Item 8:
o Report of Independent Registered Public Accounting Firm
o Consolidated Balance Sheets - December 31, 2004, and December 31, 2003
o Consolidated Statements of Income for the years ended December 31, 2004,
2003 and 2002
o Consolidated Statements of Changes In Partners' Capital for the years ended
December 31, 2004, 2003 and 2002
o Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2003 and 2002
o Notes to Consolidated Financial Statements
B - Consolidated Financial Statement Schedules
The following consolidated financial statement schedules of Redwood
Mortgage Inventors VIII are included in Item 8.
o Schedule II - Valuation and Qualifying Accounts
o Schedule IV - Loans on Real Estate
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
24
REDWOOD MORTGAGE INVESTORS VIII
(A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2004
25
TABLE OF CONTENTS
Page No.
------------
Report of Independent Registered Public Accounting Firm 27
Consolidated Balance Sheets 28
Consolidated Statements of Income 29
Consolidated Statements of Changes in Partners' Capital 30
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements 33
Supplemental Schedules
Schedule II - Valuation and Qualifying Accounts 48
Schedule IV - Mortgage Loans on Real Estate 49
Rule 12-29 Loans on Real Estate
26
ARMANINO McKENNA LLP
CERTIFIED PUBLIC ACCOUNTANTS
12667 Alcosta Blvd., Suite 500
San Ramon, CA 94583
(925) 790-2600
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners
Redwood Mortgage Investors VIII
Redwood City, California
We have audited the accompanying consolidated balance sheets of Redwood
Mortgage Investors VIII (a California limited partnership) as of December 31,
2004 and 2003 and the related consolidated statements of income, changes in
partners' capital and cash flows for each of the three years in the period ended
December 31, 2004. These consolidated financial statements are the
responsibility of Redwood Mortgage Investors VIII's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. Redwood Mortgage
Investors VIII is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of Redwood
Mortgage Investors VIII's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Redwood Mortgage Investors VIII as of December 31, 2004 and 2003 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 in conformity with generally
accepted accounting principles in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the
basic consolidated 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 consolidated financial statements. Such information has been subjected
to the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken as a
whole.
ARMANINO McKENNA LLP
San Ramon, California
February 14, 2005
(except for footnote 14,
for which the date is March 10, 2005)
27
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Balance Sheets
December 31, 2004 and 2003
(in thousands)
ASSETS
2004 2003
------------- -------------
Cash and cash equivalents $ 16,301 $ 8,921
------------- -------------
Loans
Loans secured by deeds of trust 171,745 147,174
Loans, unsecured 34 34
Allowance for loan losses (2,343) (2,649)
------------- -------------
Net loans 169,436 144,559
------------- -------------
Interest and other receivables
Accrued interest and late fees 4,895 4,735
Advances on loans 131 416
------------- -------------
Total interest and other receivables 5,026 5,151
------------- -------------
Other assets
Loan origination fees, net 62 44
Real estate held for sale, net 9,793 3,979
------------- -------------
Total other assets 9,855 4,023
------------- -------------
Total assets $ 200,618 $ 162,654
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ 16,000 $ 22,000
Accounts payable 25 224
Payable to affiliate 638 448
------------- -------------
Total liabilities 16,663 22,672
------------- -------------
Investors in applicant status 424 1,210
------------- -------------
Partners' capital
Limited partners' capital, subject to redemption, net
of unallocated syndication costs of $1,084 and $875
for 2004 and 2003, respectively; and net of formation
loan receivable of $9,751 and $7,550 for 2004 and 2003,
respectively 183,368 138,649
General partners' capital, net of unallocated syndication
costs of $11 and $9 for 2004 and 2003, respectively 163 123
------------- -------------
Total partners' capital 183,531 138,772
------------- -------------
Total liabilities and partners' capital $ 200,618 $ 162,654
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
28
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Income
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands, except for per limited partner amounts)
2004 2003 2002
------------- -------------- -------------
Revenues
Interest on loans $ 16,437 $ 12,496 $ 11,416
Late fees 218 201 114
Other 478 261 161
------------- -------------- -------------
17,133 12,958 11,691
------------- -------------- -------------
Expenses
Mortgage servicing fees 1,565 1,057 1,098
Interest expense 622 71 516
Amortization of loan origination fees 56 23 12
Provision for losses on loans 1,146 782 780
Provision for losses on real estate held for sale - - 500
Asset management fees 630 468 325
Clerical costs from Redwood Mortgage Corp. 307 290 266
Professional services 211 111 66
Broker expense - 181 444
Amortization of discount on imputed interest 319 195 154
Other 145 228 44
------------- -------------- -------------
5,001 3,406 4,205
------------- -------------- -------------
Income before minority interest 12,132 9,552 7,486
Minority interest share of subsidiary loss - 42 -
------------- -------------- -------------
Net income $ 12,132 $ 9,594 $ 7,486
============= ============== =============
Net income
General partners (1%) $ 121 $ 96 $ 75
Limited partners (99%) 12,011 9,498 7,411
------------- -------------- -------------
$ 12,132 $ 9,594 $ 7,486
============= ============== =============
Net income per $1,000 invested by
limited partners for entire period
Where income is compounded $ 72 $ 78 $ 87
Where partner receives income in monthly distributions $ 70 $ 75 $ 84
The accompanying notes are an integral part of these consolidated financial
statements.
29
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Changes in Partners' Capital
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands)
Limited Partners
-------------------------------------------------------------
Partners Capital Total
In Account Unallocated Formation Limited
Applicant Limited Syndication Loan, Partners'
Status Partners Costs Gross Capital
------------ ------------ ------------- ------------ ------------
Balances at December 31, 2001 $ 673 $ 78,214 $ (400) $ (4,127) $ 73,687
Contributions on application 21,563 - - - -
Formation loan increases - - - (1,677) (1,677)
Formation loan payments received - - - 530 530
Interest credited to partners in applicant 1 - - - -
status
Transfers to partners' capital (19,659) 19,659 - - 19,659
Net income - 7,411 - - 7,411
Syndication costs incurred - - (377) - (377)
Allocation of syndication costs - (178) 178 - -
Partners' withdrawals - (3,543) - - (3,543)
Early withdrawal penalties - (23) 7 16 -
------------ ------------ ------------- ------------ ------------
Balances at December 31, 2002 2,578 101,540 (592) (5,258) 95,690
Contributions on application 40,030 - - - -
Formation loan increases - - - (2,929) (2,929)
Formation loan payments received - - - 575 575
Interest credited to partners in applicant 37 - - - -
status
Interest withdrawn (14) - - - -
Transfers to partners' capital (41,421) 41,421 - - 41,421
Net income - 9,498 - - 9,498
Syndication costs incurred - - (478) - (478)
Allocation of syndication costs - (178) 178 - -
Partners' withdrawals - (5,128) - - (5,128)
Early withdrawal penalties - (79) 17 62 -
------------ ------------ ------------- ------------ ------------
Balances at December 31, 2003 1,210 147,074 (875) (7,550) 138,649
Contributions on application 40,954 - - - -
Formation loan increases - - - (3,117) (3,117)
Formation loan payments received - - - 855 855
Interest credited to partners in applicant 20 - - - -
status
Interest withdrawn (8) - - - -
Transfers to partners' capital (41,752) 41,752 - - 41,752
Net income - 12,011 - - 12,011
Syndication costs incurred - - (417) - (417)
Allocation of syndication costs - (192) 192 - -
Partners' withdrawals - (6,365) - - (6,365)
Early withdrawal penalties - (77) 16 61 -
------------ ------------ ------------- ------------ ------------
Balances at December 31, 2004 $ 424 $ 194,203 $ (1,084) $ (9,751) $ 183,368
============ ============ ============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
30
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Changes in Partners' Capital (continued)
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands)
General Partners
------------------------------------------------
Capital Total
Account Unallocated General Total
General Syndication Partners' Partners'
Partners Costs Capital Capital
-------------- -------------- ------------- --------------
Balances at December 31, 2001 $ 71 $ (4) $ 67 $ 73,754
Contributions on application - - - -
Formation loan increases - - - (1,677)
Formation loan payments received - - - 530
Interest credited to partners in applicant status - - - -
Capital contributed 22 - 22 19,681
Net income 75 - 75 7,486
Syndication costs incurred - (4) (4) (381)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (73) - (73) (3,616)
Early withdrawal penalties - - - -
-------------- -------------- ------------- --------------
Balances at December 31, 2002 93 (6) 87 95,777
Contributions on application - - - -
Formation loan increases - - - (2,929)
Formation loan payments received - - - 575
Interest credited to partners in applicant status - - - -
Interest withdrawn - - - -
Capital contributed 40 - 40 41,461
Net income 96 - 96 9,594
Syndication costs incurred - (5) (5) (483)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (95) - (95) (5,223)
Early withdrawal penalties - - - -
-------------- -------------- ------------- --------------
Balances at December 31, 2003 132 (9) 123 138,772
Contributions on application - - - -
Formation loan increases - - - (3,117)
Formation loan payments received - - - 855
Interest credited to partners in applicant status - - - -
Interest withdrawn - - - -
Capital contributed 41 - 41 41,793
Net income 121 - 121 12,132
Syndication costs incurred - (4) (4) (421)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (118) - (118) (6,483)
Early withdrawal penalties - - - -
-------------- -------------- ------------- --------------
Balances at December 31, 2004 $ 174 $ (11) $ 163 $ 183,531
============== ============== ============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
31
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands)
2004 2003 2002
------------ ------------- ------------
Cash flows from operating activities
Net income $ 12,132 $ 9,594 $ 7,486
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization of loan fees 56 23 12
Imputed interest income (319) (195) (154)
Amortization of discount 319 195 154
Provision for loan and real estate losses 1,146 782 1,280
Realized loss on sale of real estate - 127 -
Minority interest share of subsidiary loss - (42) -
Change in operating assets and liabilities
Unsecured loans - - 4
Accrued interest and late fees (2,566) (3,448) (1,253)
Advances on loans 74 (500) (312)
Other receivables - 888 (888)
Loan origination fees (74) (45) (28)
Accounts payable (199) (225) 375
Payable to affiliate 190 154 185
Deferred interest - (112) 112
------------ ------------- ------------
Net cash provided by operating activities 10,759 7,196 6,973
------------ ------------- ------------
Cash flows from investing activities
Loans originated (81,579) (96,820) (32,601)
Principal collected on loans 52,359 35,097 26,083
Payments for development of real estate - (706) (219)
Proceeds from disposition of real estate - 6,036 -
------------ ------------- ------------
Net cash used in investing activities (29,220) (56,393) (6,737)
------------ ------------- ------------
Cash flows from financing activities
Borrowings (repayments) on line of credit, net (6,000) 22,000 (11,400)
Repayments on note payable - (1,782) (7)
Contributions by partner applicants 41,007 40,093 21,586
Partners' withdrawals (6,483) (5,223) (3,616)
Syndication costs paid (421) (483) (381)
Formation loan lending (3,117) (2,929) (1,677)
Formation loan collections 855 575 530
Distributions to minority interest - (1,321) -
------------ ------------- ------------
Net cash provided by financing activities 25,841 50,930 5,035
------------ ------------- ------------
Net increase in cash and cash equivalents 7,380 1,733 5,271
Cash and cash equivalents - beginning of year 8,921 7,188 1,917
------------ ------------- ------------
Cash and cash equivalents - end of year $ 16,301 $ 8,921 $ 7,188
============ ============= ============
Supplemental disclosures of cash flow information
Cash paid for interest $ 622 $ 71 $ 516
The accompanying notes are an integral part of these consolidated financial
statements.
32
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
1. Organizational and General
Redwood Mortgage Investors VIII, a California Limited Partnership (the
"Partnership"), was organized in 1993. The general partners are Michael R.
Burwell, an individual, Gymno Corporation and Redwood Mortgage Corp., both
California corporations. The Partnership was organized to engage in business as
a mortgage lender for the primary purpose of making loans secured by deeds of
trust on California real estate. Loans are being arranged and serviced by
Redwood Mortgage Corp., a general partner. At December 31, 2004, the Partnership
was in its fifth offering stage, wherein contributed capital totaled
$172,223,000 of approved aggregate offerings of $200,000,000. As of December 31,
2004 and 2003, $424,000 and $1,210,000, respectively, remained in applicant
status, and total Partnership units sold were in the aggregate of $172,223,000
and $131,269,000, respectively.
A minimum of $250,000 and a maximum of $15,000,000 in Partnership units
were initially offered through qualified broker-dealers. This initial offering
closed in October 1996. In December 1996, the Partnership commenced a second
offering of an additional $30,000,000 which closed on August 30, 2000. On August
31, 2000, the Partnership commenced a third offering for an additional
$30,000,000 which closed in April 2002. On October 31, 2002, the Partnership
commenced a fourth offering for an additional $50,000,000 which closed in
October 2003. On October 7, 2003, the Partnership commenced a fifth offering for
an additional $75,000,000.
Sales commissions - formation loans
Sales commissions are not paid directly by the Partnership out of the
offering proceeds. Instead, the Partnership loans to Redwood Mortgage Corp., one
of the general partners, amounts to pay all sales commissions and amounts
payable in connection with unsolicited orders. This loan is unsecured and
non-interest bearing and is referred to as the "formation loan."
The formation loan relating to the initial offering ($15,000,000) totaled
$1,075,000, which was 7.2% of limited partners' contributions of $14,932,000. It
is being repaid, without interest, in ten annual installments of $107,000, which
commenced on January 1, 1997, following the year the initial offering closed.
The formation loan relating to the second offering ($30,000,000) totaled
$2,272,000, which was 7.6% of limited partners' contributions of $29,993,000. It
is being repaid, without interest, in ten equal annual installments of $201,000,
which commenced on January 1, 2001, following the year the second offering
closed. Payments on this loan were also made during the offering period prior to
the close of the offering.
The formation loan relating to the third offering ($30,000,000) totaled
$2,218,000, which was 7.4% of the limited partners' contributions of
$29,999,000. It is being repaid, without interest, in ten annual installments of
$178,000, which commenced on January 1, 2003, following the year the third
offering closed. Payments on this loan were also made during the offering stage
prior to the close of the offering.
The formation loan relating to the fourth offering ($50,000,000) totaled
$3,777,000, which was 7.6% of the limited partners contributions of $49,985,000.
It is being repaid, without interest, in ten annual installments of $365,000,
which commenced on January 1, 2004, following the year the fourth offering
closed. Payments on this loan were also made during the offering stage prior to
the close of the offering.
33
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
1. Organizational and General (continued)
Sales commissions - formation loans (continued)
The formation loan relating to the fifth offering ($75,000,000) totaled
$3,570,000 as of December 31, 2004, which was 7.5% of the limited partners
contributions of $47,314,000 through December 31, 2004. An equal annual
repayment schedule on this loan, without interest, will commence in the year
subsequent to the closing of this offering. Payments on this loan are being made
during the offering stage prior to the close of the offering.
For the offerings, sales commissions paid to brokers range from 0% (units
sold by general partners) to 9% of gross proceeds. The Partnership anticipates
that the sales commissions will approximate 7.6% based on the assumption that
65% of investors will elect to reinvest earnings, thus generating full 9%
commissions. The principal balance of the formation loan will increase as
additional sales of units are made. The amount of the annual installment payment
to be made by Redwood Mortgage Corp., during the offering stage, will be
determined at annual installments of one-tenth of the principal balance of the
formation loan as of December 31 of each year.
The following summarizes formation loan transactions to December 31, 2004
(in thousands):
Initial Second Third Fourth Fifth
Offering of Offering of Offering of Offering of Offering of
$15,000 $30,000 $30,000 $50,000 $75,000 Total
------------ ------------- ------------ ------------- ------------ -----------
Limited Partner
contributions $ 14,932 $ 29,993 $ 29,999 $ 49,985 $ 47,314 $ 172,223
============ ============= ============ ============= ============ ===========
Formation loan made $ 1,075 $ 2,272 $ 2,218 $ 3,777 $ 3,570 $ 12,912
Discount on
imputed interest (25) (303) (291) (571) (748) (1,938)
------------ ------------- ------------ ------------- ------------ -----------
Formation loan
made, net 1,050 1,969 1,927 3,206 2,822 10,974
Repayments to date (785) (1,013) (558) (495) (45) (2,896)
Early withdrawal
penalties applied (75) (112) (78) - - (265)
------------ ------------- ------------ ------------- ------------ -----------
Formation loan, net
at December 31, 2004 190 844 1,291 2,711 2,777 7,813
Unamortized discount
on imputed interest 25 303 291 571 748 1,938
------------ ------------- ------------ ------------- ------------ -----------
Balance,
December 31, 2004 $ 215 $ 1,147 $ 1,582 $ 3,282 $ 3,525 $ 9,751
============ ============= ============ ============= ============ ===========
Percent loaned 7.2% 7.6% 7.4% 7.6% 7.5% 7.5%
The formation loan has been deducted from limited partners' capital in the
consolidated balance sheets. As amounts are collected from Redwood Mortgage
Corp., the deduction from capital will be reduced. Interest has been imputed at
the market rate of interest in effect at the date the offerings closed. An
estimated amount of imputed interest is recorded for offerings still
outstanding. During 2004, 2003 and 2002 amortization expense of $319,000,
$195,000 and $154,000, respectively, was recorded related to the discount on
imputed interest.
34
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
1. Organizational and General (continued)
Syndication costs
The Partnership bears its own syndication costs, other than certain sales
commissions, including legal and accounting expenses, printing costs, selling
expenses and filing fees. Syndication costs are charged against partners'
capital and are being allocated to individual partners consistent with the
partnership agreement.
Through December 31, 2004, syndication costs of $2,974,000 had been
incurred by the Partnership with the following distribution (in thousands):
Costs incurred $ 2,974
Early withdrawal penalties applied (104)
Allocated to date (1,775)
-----------
December 31, 2004 balance $ 1,095
===========
Syndication costs attributable to the initial offering ($15,000,000) were
limited to the lesser of 10% of the gross proceeds or $600,000 with any excess
being paid by the general partners. Applicable gross proceeds were $14,932,000.
Related expenditures totaled $582,000 ($570,000 syndication costs plus $12,000
organization expense) or 3.9%.
Syndication costs attributable to the second offering ($30,000,000) were
limited to the lesser of 10% of the gross proceeds or $1,200,000 with any excess
being paid by the general partners. Gross proceeds of the second offering were
$29,993,000. Syndication costs totaled $598,000 or 2% of contributions.
Syndication costs attributable to the third offering ($30,000,000) were
limited to the lesser of 10% of the gross proceeds or $1,200,000 with any excess
being paid by the general partners. Gross proceeds of the third offering were
$29,999,000. Syndication costs totaled $643,000 or 2.1% of contributions.
Syndication costs attributable to the fourth offering ($50,000,000) were
limited to the lesser of 10% of the gross proceeds or $2,000,000 with any excess
to be paid by the general partners. Gross proceeds of the fourth offering were
$49,985,000. Syndication costs totaled $658,000 or 1.3% of contributions.
Syndication costs attributable to the fifth offering ($75,000,000) will be
limited to the lesser of 10% of the gross proceeds or $3,000,000 with any excess
to be paid by the general partners. As of December 31, 2004, the fifth offering
had incurred syndication costs of $505,000 (1.1% of contributions).
Term of the partnership
The Partnership is scheduled to terminate on December 31, 2032, unless
sooner terminated as provided in the partnership agreement.
35
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
2. Summary of Significant Accounting Policies
Basis of presentation
The Partnership's consolidated financial statements include the accounts of
its 100%-owned subsidiaries, Russian Hill Property Company, LLC ("Russian") and
Borrette Property Company, LLC ("Borrette"), and its 66%-owned subsidiary,
Stockton Street Property Company, LLC ("Stockton"). All significant intercompany
transactions and balances have been eliminated in consolidation.
Certain reclassifications, not affecting previously reported net income or
total partner capital, have been made to the previously issued consolidated
financial statements to conform to the current year presentation.
Management estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions about the reported amounts
of assets and liabilities, and disclosures of contingent assets and liabilities,
at the dates of the consolidated financial statements and the reported amounts
of revenues and expenses during the reported periods. Such estimates relate
principally to the determination of the allowance for loan losses, including the
valuation of impaired loans and the valuation of real estate held for sale.
Actual results could differ significantly from these estimates.
Loans, secured by deeds of trust
Loans generally are stated at their outstanding unpaid principal balance
with interest thereon being accrued as earned.
If the probable ultimate recovery of the carrying amount of a loan, with
due consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement, and the shortfall in
the amounts due are not insignificant, the carrying amount of the loan is
reduced to the present value of future cash flows discounted at the loan's
effective interest rate. If a loan is collateral dependent, it is valued at the
estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances,
including accrued interest and advances. At December 31, 2004 and 2003, there
were no loans categorized as impaired by the Partnership. The average recorded
investment in impaired loans was $0 for 2004 and 2003 and $355,000 for 2002.
At December 31, 2004 and 2003, the Partnership had eleven and sixteen loans
past maturity or past due 90 days or more in interest payments totaling
$25,013,000 and $27,182,000, respectively. In addition, accrued interest, late
charges and advances on these loans totaled $3,202,000 and $3,813,000 at
December 31, 2004 and 2003, respectively. The Partnership does not consider
these loans to be impaired because there is sufficient collateral to cover the
amount outstanding to the Partnership and is still accruing interest on these
loans. As presented in Note 11 to the consolidated financial statements, the
average loan to appraised value of security based upon appraised values and
prior indebtedness at the time the loans were consummated for loans outstanding
at December 31, 2004 and 2003 was 56.94% and 53.97%, respectively. When loans
are considered impaired, the allowance for loan losses is updated to reflect the
change in the valuation of collateral security. However, a low loan to value
ratio has the tendency to minimize reductions for impairment.
During 2003, the Partnership restructured three loans into a new loan and
restructured two loans into an existing loan, both with lower interest rates.
The amount restructured was $15,599,000.
36
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
2. Summary of Significant Accounting Policies (continued)
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral values, to provide for unrecoverable loans and
receivables, including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable (unsecured). The Partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
The composition of the allowance for loan losses as of December 31, 2004
and 2003 was as follows (in thousands):
2004 2003
------------ -----------
Specified loans $ 137 $ 49
General 2,206 2,600
------------ -----------
$ 2,343 $ 2,649
============ ===========
Activity in the allowance for loan losses is as follows for the years ended
December 31 (in thousands):
2004 2003 2002
------------ ----------- -----------
Beginning balance $ 2,649 $ 3,021 $ 2,247
Restructured loans - - 11
Additions charged to income 1,146 782 780
Transfers (500) - -
Write-offs (952) (1,154) (17)
------------ ----------- -----------
$ 2,343 $ 2,649 $ 3,021
============ =========== ===========
Cash and cash equivalents
The Partnership considers all highly liquid financial instruments with
maturities of three months or less at the time of purchase to be cash
equivalents.
Real estate held for sale
Real estate held for sale includes real estate acquired through foreclosure
and is stated at the lower of the recorded investment in the loan, plus any
senior indebtedness, or at the property's estimated fair value, less estimated
costs to sell.
The Partnership periodically compares the carrying value of real estate to
expected undiscounted future cash flows for the purpose of assessing the
recoverability of the recorded amounts. If the carrying value exceeds future
undiscounted cash flows, the assets are reduced to estimated fair value.
37
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
2. Summary of Significant Accounting Policies (continued)
Loan origination fees
The Partnership capitalizes fees for obtaining bank financing. The fees are
amortized over the life of the financing using the straight-line method.
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the consolidated financial statements since income taxes
are the obligation of the partners if and when income taxes apply. Net income
per $1,000 invested
Amounts reflected in the statements of income as net income per $1,000
invested by limited partners for the entire period are amounts allocated to
limited partners who held their investment throughout the period and have
elected to either leave their earnings to compound or have elected to receive
periodic distributions of their net income. Individual income is allocated each
month based on the limited partners' pro rata share of partners' capital.
Because the net income percentage varies from month to month, amounts per $1,000
will vary for those individuals who made or withdrew investments during the
period, or selected other options.
Late fee revenue
Late fees are generally charged at 6% of the monthly installment payment
past due. During 2004, 2003 and 2002, late fee revenue of $218,000, $201,000 and
$114,000, respectively, was recorded. The Partnership has a recorded late fee
receivable at December 31, 2004 and 2003 of $180,000 and $193,000, respectively.
Recently issued accounting pronouncements
In December 2003, the American Institute of Certified Public Accountants
(AICPA) Accounting Standards Executive Committee (AcSEC) issued Statement of
Position 03-03, "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer"(SOP 03-3). SOP 03-03 is effective for loans acquired in fiscal years
beginning after December 15, 2004, with early adoption encouraged. SOP 03-03
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt securities acquired in a transfer if those differences are attributable, at
least in part, to credit quality. It includes loans acquired in business
combinations and applies to all nongovernmental entities, including
not-for-profit organizations. The SOP does not apply to loans originated by the
entity. The implementation of SOP 03-03 is not expected to have any significant
effect on the Partnership.
3. Other Partnership Provisions
The Partnership is a California limited partnership. The rights, duties and
powers of the general and limited partners of the Partnership are governed by
the limited partnership agreement and Sections 15611 et seq. of the California
Corporations Code.
The general partners are in complete control of the Partnership business,
subject to the voting rights of the limited partners on specified matters. Any
one of the general partners acting alone has the power and authority to act for
and bind the Partnership.
38
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
3. Other Partnership Provisions (continued)
A majority of the outstanding limited partnership interests may, without
the permission of the general partners, vote to: (i) terminate the Partnership,
(ii) amend the limited partnership agreement, (iii) approve or disapprove the
sale of all or substantially all of the assets of the Partnership and (iv)
remove or replace one or all of the general partners.
The approval of all the limited partners is required to elect a new general
partner to continue the Partnership business where there is no remaining general
partner after a general partner ceases to be a general partner other than by
removal.
Applicant status
Subscription funds received from purchasers of Partnership units are not
admitted to the Partnership until subscription funds are needed to fund a loan,
to fund the formation loan, create appropriate reserves, or to pay
organizational expense or other proper partnership purposes. During the period
prior to the time of admission, which is anticipated to be between 1 - 90 days,
purchasers' subscriptions will remain irrevocable and will earn interest at
money market rates, which are lower than the anticipated return on the
Partnership's loan portfolio.
During 2004, 2003 and 2002, interest totaling $20,000, $37,000 and $1,000,
respectively, was credited to partners in applicant status. As loans were made
and partners were transferred to regular status to begin sharing in income from
loans secured by deeds of trust, the interest credited was either paid to the
investors or transferred to partners' capital along with the original
investment.
Election to receive monthly, quarterly or annual distributions
At subscription, investors elect to receive monthly, quarterly or annual
distributions of earnings allocations, or to allow earnings to compound. Subject
to certain limitations, a compounding investor may subsequently change his
election, but an investor's election to have cash distributions is irrevocable.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of Partnership units
and accordingly an investment in the Partnership is non-liquid. Limited partners
have no right to withdraw from the Partnership or to obtain the return of their
capital account for at least one year from the date of purchase of units.
In order to provide a certain degree of liquidity to the limited partners
after the one-year period, limited partners may withdraw all or part of their
capital accounts from the Partnership in four quarterly installments beginning
on the last day of the calendar quarter following the quarter in which the
notice of withdrawal is given, subject to a 10% early withdrawal penalty. The
10% penalty is applicable to the amount withdrawn as stated in the notice of
withdrawal and will be deducted from the capital account.
39
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
3. Other Partnership Provisions (continued)
Liquidity, capital withdrawals and early withdrawals (continued)
After five years from the date of purchase of the units, limited partners
have the right to withdraw from the Partnership on an installment basis.
Generally this is done over a five-year period in twenty quarterly installments.
Once a limited partner has been in the Partnership for the minimum five-year
period, no penalty will be imposed if withdrawal is made in twenty quarterly
installments or longer. Notwithstanding the five-year (or longer) withdrawal
period, the general partners may liquidate all or part of a limited partner's
capital account in four quarterly installments beginning on the last day of the
calendar quarter following the quarter in which the notice of withdrawal is
given. This withdrawal is subject to a 10% early withdrawal penalty applicable
to any sums withdrawn prior to the time when such sums could have been withdrawn
without penalty.
The Partnership will not establish a reserve from which to fund withdrawals
and, accordingly, the Partnership's capacity to return a limited partner's
capital is restricted to the availability of Partnership cash flow. Furthermore,
no more than 20% of the total limited partners' capital accounts outstanding at
the beginning of any year, shall be liquidated during any calendar year.
4. General Partners and Related Parties
The following are commissions and/or fees, which are paid to the general
partners:
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, the general partners may collect an amount equivalent to
12% of the loaned amount until 6 months after the termination date of the
offering. Thereafter, loan brokerage commissions (points) will be limited to an
amount not to exceed 4% of the total Partnership assets per year. The loan
brokerage commissions are paid by the borrowers and thus, are not an expense of
the Partnership. In 2004, 2003 and 2002, loan brokerage commissions paid by the
borrowers were $2,443,000, $2,621,000 and $996,000, respectively.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued thereon. Additional service fees are recorded upon the receipt of
any subsequent payments on impaired loans. Mortgage servicing fees of
$1,565,000, $1,057,000 and $1,098,000 were incurred for 2004, 2003 and 2002,
respectively. The Partnership had a payable to Redwood Mortgage Corp. for
servicing fees of $638,000 and $448,000 at December 31, 2004 and 2003,
respectively.
Asset management fee
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations up to 1/32 of 1% of the "net asset value" (3/8 of
1% annual). Asset management fees of $630,000, $468,000 and $325,000 were
incurred for 2004, 2003 and 2002, respectively.
40
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
4. General Partners and Related Parties (continued)
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to the general partners.
Operating expenses
Redwood Mortgage Corp., a general partner, is reimbursed by the Partnership
for all operating expenses incurred by it on behalf of the Partnership,
including without limitation, out-of-pocket general and administration expenses
of the Partnership, accounting and audit fees, legal fees and expenses, postage
and preparation of reports to limited partners. During 2004, 2003 and 2002,
operating expenses totaling $307,000, $290,000 and $266,000, respectively, were
reimbursed to Redwood Mortgage Corp.
Contributed capital
The general partners jointly or severally are to contribute 1/10 of 1% of
limited partners' contributions in cash contributions as proceeds from the
offerings are received from the limited partners. As of December 31, 2004 and
2003, Gymno Corporation, a general partner, had capital in accordance with
Section 4.02(a) of the Partnership Agreement.
5. Real Estate Held for Sale
The following schedule reflects the cost of the properties and recorded
reductions to estimated fair values, including estimated costs to sell, at
December 31 (in thousands):
2004 2003
------------ -----------
Costs of properties $ 10,793 $ 4,479
Reduction in value (1,000) (500)
------------ -----------
Real estate held for sale, net $ 9,793 $ 3,979
============ ===========
In December, 2004, the Partnership acquired land through a deed in lieu of
foreclosure. At this date the Partnership's investment totaled $4,377,000
including accrued interest and advances. Management believes that the full value
of this investment will be recovered from eventual sale of the property based
upon its current estimate of the property's fair value.
In September, 2004, the Partnership acquired a single family residence
through a foreclosure sale. At the time the Partnership took ownership of the
property, the Partnership's investment totaled $1,937,000 including accrued
interest and advances. The borrower had begun a substantial renovation of the
property, which was not completed at the time of foreclosure. The Partnership
has decided to pursue development of the property by processing plans for the
creation of two condominium units on the property. These plans will incorporate
the majority of the existing improvements currently located on the property.
Management has transferred $500,000 from the allowance for loan losses as a
reserve to cover potential losses for this property, based upon management's
estimate of the fair value of the property.
41
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
5. Real Estate Held for Sale (continued)
During 2002, the Partnership contributed its interests in two foreclosed
real properties into two limited liability companies ("LLCs").
Russian
During 2002, a single-family residence that secured a Partnership loan
totaling $4,402,000, including accrued interest and advances, was transferred
via a statutory warranty deed to a new entity named Russian Hill Property
Company, LLC ("Russian"). Russian was formed by the Partnership to complete the
development and sale of the property. The assets, liabilities and operating
results of Russian have been consolidated into the accompanying consolidated
financial statements of the Partnership. Costs related to the sale and
development of this property were capitalized during 2003. Commencing January
2004, costs related to sales and maintenance of the property are being expensed.
At December 31, 2004 and 2003, the Partnership's total investment in Russian was
$3,979,000, net of a valuation allowance of $500,000.
Stockton
During 2002, six condominium units that secured a Partnership loan totaling
$2,163,000, including accrued interest and advances, were transferred via a
statutory warranty deed to a new entity named Stockton Street Property Company,
LLC ("Stockton"). In addition, senior debt was assumed by Stockton on the
property in the amount of $1,789,000 (see Note 7). Stockton was formed by the
Partnership and an affiliate to complete development and sales of the
condominium units. The Partnership is co-manager of Stockton along with the
other member and is to receive 66% of the profits or losses. The assets,
liabilities and operating results of Stockton have been consolidated into the
accompanying consolidated financial statements of the Partnership. Development
costs were capitalized during construction; thus, there was no income or expense
recognized by Stockton during a portion of 2003. As of December 31, 2003,
advances of approximately $132,000 were made for construction and other related
development costs and $48,000 of interest expense was capitalized, respectively.
As of December 31, 2003, the property had been sold and a net loss of $127,000
was incurred, of which $42,000 was allocated to the minority interest.
6. Bank Line of Credit
The Partnership has a $42,000,000 bank line of credit through November 25,
2005, with borrowings at prime and secured by its loan portfolio. The
outstanding balances were $16,000,000 and $22,000,000 at December 31, 2004 and
2003, respectively. The interest rate was 5.00% at December 31, 2004 and 4.00%
at December 31, 2003. The line of credit requires the Partnership to comply with
certain financial covenants. The Partnership was in compliance with these
covenants at December 31, 2004 and 2003.
7. Note Payable
During 2002, the Partnership assumed a bank loan of $1,789,000 in
connection with the foreclosure on a property (see Note 5). The loan was secured
by the property and bore interest at 5.68%. As of December 31, 2003, this loan
has been paid in full upon the sale of the related property.
42
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
8. Income Taxes
The following reflects a reconciliation of partners' capital reflected in
the consolidated financial statements to the tax basis of Partnership capital
(in thousands):
2004 2003
------------- -------------
Partners' capital per consolidated
financial statements $ 183,531 $ 138,772
Non-allocated syndication costs 1,095 884
Allowance for loan losses and
real estate held for sale 3,343 3,149
Formation loans receivable 9,751 7,550
------------- -------------
Partners' capital - tax basis $ 197,720 $ 150,355
============= =============
In 2004 and 2003, approximately 46% and 47%, respectively, of taxable
income was allocated to tax-exempt organizations (i.e., retirement plans).
9. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
(a) Cash and cash equivalents. The carrying amount equals fair value. All
amounts, including interest bearing, are subject to immediate withdrawal.
(b) Secured loans carrying value was $171,745,000 and $147,174,000 at
December 31, 2004 and 2003, respectively. The fair value of these loans of
$173,067,000 and $148,552,000, respectively, was estimated based upon projected
cash flows discounted at the estimated current interest rates at which similar
loans would be made. The applicable amount of the allowance for loan losses
along with accrued interest and advances related thereto should also be
considered in evaluating the fair value versus the carrying value.
10. Non-cash Transactions
During 2004, the Partnership foreclosed on, or acquired property through
deeds in lieu of foreclosure, four properties (see Note 5), which resulted in an
increase in real estate held for sale and allowance for real estate held for
sale of $6,315,000 and $500,000, respectively and a decrease in loans
receivable, accrued interest, advances and allowance for loan losses of
$4,422,000, $1,840,000, $53,000 and $500,000, respectively.
During 2003, the Partnership restructured three loans that resulted in an
increase to secured loans receivable of $2,989,000 and a decrease to accrued
interest and advances of $2,626,000 and $363,000, respectively.
During 2003, a previously secured loan became unsecured which resulted in a
decrease to secured loans receivable of $34,000 and an increase to unsecured
loans of $34,000.
43
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
11. Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At December 31, 2004 and
2003, there were 75 and 81 secured loans outstanding, respectively, with the
following characteristics (dollars in thousands):
2004 2003
------------- -------------
Number of secured loans outstanding 75 81
Total secured loans outstanding $ 171,745 $ 147,174
Average secured loan outstanding $ 2,289 $ 1,817
Average secured loan as percent of total secured loans 1.33% 1.23%
Average secured loan as percent of partners' capital 1.25% 1.31%
Largest secured loan outstanding $ 12,045 $ 16,010
Largest secured loan as percent of total secured loans 7.01% 10.88%
Largest secured loan as percent of partners' capital 6.56% 11.54%
Largest secured loan as a percent of total assets 6.00% 9.84%
Number of counties where security
is located (all California) 17 20
Largest percentage of secured loans
in one county 20.48% 26.47%
Average secured loan to appraised value
of security based on appraised values and
prior liens at time loan was consummated 56.94% 53.97%
Number of secured loans in foreclosure status 6 3
Amount of secured loans in foreclosure $ 14,682 $ 2,931
44
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
11. Asset Concentrations and Characteristics (continued)
The following secured loan categories were held at December 31, 2004 and
2003 (in thousands):
2004 2003
------------- ------------
First trust deeds $ 115,082 $ 84,437
Second trust deeds 50,282 61,247
Third trust deeds 6,381 1,490
------------- ------------
Total loans 171,745 147,174
Prior liens due other lenders at time of loan 99,140 116,870
------------- ------------
Total debt $ 270,885 $ 264,044
============= ============
Appraised property value at time of loan $ 475,710 $ 489,219
Total secured loans as a percent of appraisals 56.94% 53.97%
Secured loans by type of property
Owner occupied homes $ 9,234 $ 13,656
Non-owner occupied homes 75,125 52,975
Apartments 30,981 22,649
Commercial 54,670 52,502
Land 1,735 5,392
------------- ------------
$ 171,745 $ 147,174
============= ============
The interest rates on the loans range from 8.50% to 13.25% at December 31,
2004 and 7.50% to 18.00% at December 31, 2003.
Scheduled maturity dates of secured loans as of December 31, 2004 are as
follows (in thousands):
Year Ending December 31,
------------------------------
2005 $ 68,761
2006 68,829
2007 21,185
2008 3,629
2009 8,844
Thereafter 497
-------------
$ 171,745
=============
45
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
11. Asset Concentrations and Characteristics (continued)
The scheduled maturities for 2005 include six loans totaling $8,047,000,
and representing 4.69% of the portfolio, which are past maturity at December 31,
2004. Interest payments on three of these loans were delinquent and are included
in the total of loans 90 days or more delinquent presented in Note 2. Several
borrowers are in process of selling the properties or refinancing their loans
through other institutions, to take advantage of lower interest rates.
Occasionally, the Partnership allows borrowers to continue to make the payments
on debt past maturity for periods of time. Of these six past maturity loans, the
Partnership has begun foreclosure proceedings by filing a notice of default, on
four with aggregate principal balances totaling $7,439,000.
Cash deposits at December 31, 2004 exceeded FDIC insurance limits (up to
$100,000 per bank) by approximately $10,744,000.
12. Commitments and Contingencies
Construction / rehabilitation loans
The Partnership makes construction and rehabilitation loans which are not
fully disbursed at loan inception. The Partnership has approved the borrowers up
to a maximum loan balance; however, disbursements are made periodically during
completion phases of the construction or rehabilitation or at such other times
as required under the loan documents. At December 31, 2004, there were
$18,166,000 of undisbursed loan funds which will be funded by a combination of
borrower monthly mortgage payments, line of credit draws, retirements of
principal on current loans, cash and capital contributions from investors. The
Partnership does not maintain a separate cash reserve to hold the undisbursed
obligations, which are intended to be funded.
Workout agreements
The Partnership has negotiated various workout agreements with borrowers
whose loans are past maturity or who are delinquent in making payments. The
Partnership is not obligated to fund additional money as of December 31, 2004.
There are eight loans totaling $8,415,000 in workout agreements as of December
31, 2004.
Legal proceedings
The Partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the Partnership.
46
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
13. Selected Financial Information (Unaudited)
Calendar Quarter
(in thousands, except for per limited partner amounts)
------------------------------------------------------
First Second Third Fourth Annual
---------- ---------- ---------- ---------- ----------
Revenues
2004 $ 3,850 $ 3,785 $ 4,504 $ 4,994 $ 17,133
2003 $ 2,789 $ 3,072 $ 3,225 $ 3,872 $ 12,958
Expenses
2004 $ 1,117 $ 907 $ 1,418 $ 1,559 $ 5,001
2003 $ 659 $ 711 $ 722 $ 1,272 $ 3,364
Net income allocated to general partners
2004 $ 27 $ 29 $ 31 $ 34 $ 121
2003 $ 21 $ 24 $ 25 $ 26 $ 96
Net income allocated to limited partners
2004 $ 2,706 $ 2,849 $ 3,055 $ 3,401 $ 12,011
2003 $ 2,109 $ 2,337 $ 2,478 $ 2,574 $ 9,498
Net income per $1,000 invested
where income is
Reinvested and compounded
2004 $ 18 $ 18 $ 18 $ 18 $ 72
2003 $ 20 $ 19 $ 18 $ 21 $ 78
Withdrawn
2004 $ 18 $ 17 $ 17 $ 18 $ 70
2003 $ 20 $ 19 $ 18 $ 18 $ 75
14. Subsequent Events
Subsequent to December 31, 2004 and through February 11, 2005, the
Partnership had received $5,091,000 of new investor money for the current
offering and had admitted $3,668,000 of partners in applicant status into the
Partnership. The admitted amount includes $424,000 that awaited admission at
December 31, 2004.
Subsequent to December 31, 2004 and through February 11, 2005, the
Partnership had foreclosed and acquired one property. As of December 31, 2004,
the Partnership's investment in the loan totaled $1,336,000.
Due to a calendaring oversight, the Partnership did not timely renew its
permit with the California Department of Corporations ("DOC"). Upon discovery of
this oversight, the Partnership applied for and received from the DOC a new
permit allowing the Partnership to continue sales in California. To correct the
$16,370,000 in sales that occurred without a permit from the DOC in place, the
Partnership offered to repurchase the Units sold during this period. Upon
expiration of the offer in March 2005, $74,000 was repurchased by the
Partnership.
47
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Schedule II - Valuation and Qualifying Accounts
December 31, 2004
(in thousands)
Col. C - Additions
Col B. -------------------------------- Col E.
Balance at Charged to Charged Balance
Col A. Beginning Costs and to Other Col. D at End
Description of Period Expenses Accounts Deductions of Period
- ---------------------------------------- -------------- -------------- -------------- --------------- ------------
Year Ended December 31, 2002
Deducted from asset accounts
Allowance for loan losses $ 2,247 $ 780 $ 11 (a) $ (17) (b) $ 3,021
Cumulative write-down of
real estate held for sale (REO) - 500 - - 500
-------------- -------------- -------------- --------------- ------------
$ 2,247 $ 1,280 $ 11 $ (17) (b) $ 3,521
============== ============== ============== =============== ============
Year Ended December 31, 2003
Deducted from asset accounts
Allowance for loan losses $ 3,021 $ 782 $ - $ (1,154) (b) $ 2,649
Cumulative write-down of
real estate held for sale (REO) 500 - - - 500
-------------- -------------- -------------- --------------- ------------
$ 3,521 $ 782 $ - $ (1,154) (b) $ 3,149
============== ============== ============== =============== ============
Year Ended December 31, 2004
Deducted from asset accounts
Allowance for loan losses $ 2,649 $ 1,146 $ (500) $ (952) (b) $ 2,343
Cumulative write-down of
real estate held for sale (REO) 500 - 500 - 1,000
-------------- -------------- -------------- --------------- ------------
$ 3,149 $ 1,146 $ - $ (952) (b) $ 3,343
============== ============== ============== =============== ============
(a) - Represents restructuring of loans.
(b) - Represents write-offs of loans.
48
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Schedule IV - Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
(in thousands)
Col. H
Principal
Col. F Amount
Face Col. G of Loans
Col. C Col. D Amount of Carrying Subject to Col. I Col. J
Col. B Final Periodic Col. E Mortgage Amount of Delinquent Type California
Col. A Interest Maturity Payment Prior Original Mortgage Principal of Geographic
Descrip. Rate Date Terms Liens Amount Investment or Interest Lien Location
- ------------------------------------------------------------------------------------------------------------------------------
Comm. 11.75% 12/01/09 $ 3 $ - $ 148 $ 128 $ - 1st Yuba
Res. 12.00% 05/01/03 12 - 1,210 1,210 1,210 1st Marin
Apts. 12.50% 11/15/02 4 47 39 292 292 2nd Contra Costa
Comm. 11.50% 02/01/05 4 493 400 395 - 2nd San Francisco
Apts. 12.00% 07/01/06 40 - 4,000 7,057 7,057 1st San Francisco
Comm. 12.00% 05/01/07 8 2,916 799 788 788 2nd Santa Clara
Res. 12.00% 05/01/03 13 - 1,325 1,325 1,325 1st Marin
Res. 13.25% 01/01/04 20 - 3,515 1,304 1,304 1st Napa
Comm. 11.50% 08/01/06 3 - 350 271 - 1st San Mateo
Land 9.50% 07/01/05 8 - 987 987 - 1st Santa Clara
Res. 10.00% 12/01/02 3 - 318 316 316 1st San Mateo
Comm. 7.50% 02/28/07 5 - 770 770 - 1st Santa Clara
Comm. 7.50% 02/28/07 2 - 320 320 - 1st Alameda
Comm. 13.00% 06/01/05 41 8,100 4,550 6,020 6,020 2nd Santa Clara
Comm. 10.50% 08/01/04 31 - 3,600 3,600 3,600 1st Santa Clara
Res. 10.25% 06/01/06 4 1,647 263 215 - 2nd Santa Clara
Res. 10.50% 09/01/07 2 1,468 805 520 - 3rd Santa Clara
Res. 11.50% 09/01/05 12 - 1,300 1,299 - 1st Alameda
Res. 10.50% 09/01/05 2 710 269 269 - 2nd San Mateo
Res. 10.50% 10/01/05 16 - 1,781 1,781 1,781 1st San Mateo
Comm. 10.50% 10/01/07 4 - 441 435 - 1st San Mateo
Comm. 11.25% 12/01/07 9 718 900 892 - 1st & 3rd El Dorado
Res. 10.00% 11/01/05 11 500 1,320 1,320 1,320 2nd Napa
Comm. 10.00% 01/01/08 13 - 1,500 1,500 - 1st River Side
Comm. 10.00% 12/31/04 87 - 10,440 10,440 - 1st San Francisco
Res. 11.50% 12/01/05 41 - 7,700 8,364 - 1st San Mateo
Comm. 10.00% 04/01/05 47 - 5,293 6,236 - 1st Los Angeles
Apts. 10.00% 06/01/05 16 2,147 1,950 1,549 - 2nd Contra Costa
Apts. 13.00% 01/02/06 29 14,800 2,660 2,660 - 2nd Santa Clara
Comm. 12.00% 07/01/06 25 - 2,500 2,500 - 1st Sacramento
Res. 11.00% 07/01/05 9 - 6,074 3,610 - 1st Fresno
Comm. 11.00% 07/01/06 33 - 3,570 3,570 - 1st Alameda
Apts. 9.50% 01/01/09 4 - 413 409 - 1st San Joaquin
Comm. 9.50% 12/01/05 22 - 2,750 2,750 - 1st San Francisco
Res. 9.25% 12/01/08 1 376 130 129 - 2nd Santa Clara
Apts. 9.50% 11/01/05 29 3,115 3,650 3,650 - 2nd River Side
Comm. 9.00% 01/01/06 25 - 3,375 3,375 - 1st San Joaquin
Res. 10.00% 12/25/05 133 5,577 16,010 12,045 - 2nd Alameda
Res. 8.50% 01/01/06 8 - 1,070 1,062 - 1st Placer
Comm. 9.50% 01/01/06 13 - 1,610 1,610 - 1st Alameda
49
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Schedule IV - Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
(in thousands)
Col. H
Principal
Col. F Amount
Face Col. G of Loans
Col. C Col. D Amount of Carrying Subject to Col. I Col. J
Col. B Final Periodic Col. E Mortgage Amount of Delinquent Type California
Col. A Interest Maturity Payment Prior Original Mortgage Principal of Geographic
Descrip. Rate Date Terms Liens Amount Investment or Interest Lien Location
- ------------------------------------------------------------------------------------------------------------------------------
Res. 8.50% 10/01/10 4 190 500 497 - 2nd Alameda
Res. 10.00% 01/25/06 6 22,354 8,245 4,868 - 3rd San Mateo
Apts. 10.00% 03/10/07 43 - 5,200 5,200 - 1st Santa Clara
Res. 8.50% 04/01/06 6 1,655 800 800 - 2nd San Francisco
Res. 9.00% 05/01/09 3 2,400 335 335 - 2nd San Francisco
Res. 9.25% 04/01/06 9 - 1,180 1,180 - 1st San Francisco
Apts. 9.25% 06/01/06 5 - 666 666 - 1st San Francisco
Res. 9.25% 05/01/09 9 735 1,085 1,081 - 2nd San Mateo
Comm. 9.50% 05/01/09 3 242 375 374 - 2nd San Francisco
Res. 9.25% 06/01/09 3 - 403 403 - 1st Contra Costa
Apts. 9.25% 06/01/06 7 - 881 881 - 1st San Francisco
Res. 8.50% 06/01/09 - 313 50 50 - 2nd San Mateo
Apts. 9.25% 06/01/06 7 - 875 875 - 1st San Francisco
Res. 9.25% 06/01/09 2 - 188 187 - 1st San Joaquin
Res. 10.75% 07/01/06 20 - 8,400 2,172 - 1st San Francisco
Comm. 9.00% 06/01/09 4 2,850 500 498 - 2nd Santa Clara
Comm. 10.00% 06/01/07 39 - 4,650 4,650 - 1st Marin
Land 9.00% 07/01/09 6 - 750 748 - 1st Lake
Res. 9.25% 07/01/09 6 716 690 689 - 2nd San Mateo
Res. 8.75% 01/01/06 78 - 15,615 6,344 - 1st Alameda
Res. 10.50% 07/01/06 14 - 2,400 1,600 - 1st San Diego
Comm. 9.00% 08/01/09 2 785 300 299 - 2nd Marin
Comm. 9.00% 08/01/09 15 - 2,000 1,600 - 1st San Francisco
Comm. 9.50% 08/01/09 16 - 1,947 1,943 - 1st Alameda
Res. 9.25% 10/01/07 3 764 385 385 - 2nd San Francisco
Res. 8.75% 09/01/06 86 - 11,684 11,506 - 1st Contra Costa
Res. 10.00% 09/01/06 37 11,685 7,821 4,382 - 2nd Contra Costa
Res. 9.25% 10/01/06 83 1,389 10,540 10,471 - 2nd Sacramento
Res. 9.00% 11/01/08 15 - 2,000 2,000 - 1st Marin
Apts. 8.75% 01/01/07 50 - 6,900 6,900 - 1st Contra Costa
Apts. 10.00% 01/01/07 2 6,900 1,890 324 - 2nd Contra Costa
Comm. 11.00% 05/01/09 1 612 100 100 - 3rd San Francisco
Apts. 11.00% 06/01/06 1 881 641 143 - 2nd San Francisco
Apts. 11.00% 06/01/06 2 875 908 375 - 2nd San Francisco
Res. 11.00% 04/01/06 - 1,180 425 246 - 2nd San Francisco
---------------------------------------------------------------
Total $ 1,379 $ 99,140 $ 201,434 $ 171,745 $ 25,013
===============================================================
Note: Most loans have balloon payments due at maturity
50
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Schedule IV - Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate (continued)
(in thousands)
Reconciliation of carrying amount (cost) of loans at close of periods
Year ended December 31,
------------------------------------------------
2004 2003 2002
-------------- -------------- -------------
Balance at beginning of year $ 147,174 $ 83,650 $ 82,790
Additions during period
New loans 81,579 96,820 32,601
Other - 2,989 1,060
-------------- -------------- -------------
Total additions 81,579 99,809 33,661
-------------- -------------- -------------
Deductions during period
Collections of principal 52,359 35,097 26,083
Foreclosures 4,422 - 5,986
Cost of loans sold - - -
Amortization of premium - - -
Other 227 1,188 732
-------------- -------------- -------------
Total deductions 57,008 36,285 32,801
-------------- -------------- -------------
Balance at close of year $ 171,745 $ 147,174 $ 83,650
============== ============== =============
51
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with the partnership's independent public
accountants during the years ended December 31, 2004 and 2003.
Item 9a. - Controls and Procedures
The partnership carried out an evaluation, under the supervision and with
the participation of the general partners of the effectiveness of the design and
operation of the partnership's disclosure controls and procedures as of the end
of the period covered by this report pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the general
partners concluded that the partnership's disclosure controls and procedures
were effective in timely alerting the general partners to material information
relating to the Partnership that is required to be included in our periodic
filings with the Securities and Exchange Commission.
There were no significant changes in the partnership's internal control
over financial reporting during the partnership's fourth fiscal quarter that
have materially affected, or are likely to materially affect, the partnership's
internal control over financial reporting.
Item 9b. - Other Information
None
Part III
Item 10 - Directors and Executive Officers of the Registrant
The partnership has no Officers or Directors. Rather, the activities of the
partnership are managed by three general partners, one of whom is an individual,
Michael R. Burwell. The other two general partners are Gymno Corporation and
Redwood Mortgage Corp. Both are California corporations, formed in 1986 and
1978, respectively. Mr. Burwell is one of the two shareholders of Gymno
Corporation, a California corporation, on an equal (50-50) basis. Redwood
Mortgage Corp. is a subsidiary of The Redwood Group Ltd., whose principal
stockholders are the Burwell Trusts, the other shareholder of Gymno Corporation.
The General Partners.
Michael R. Burwell. Michael R. Burwell, age 48, General Partner, past
member of Board of Trustees and Treasurer, Mortgage Brokers Institute
(1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage
Corp. (1979-present); Director, Secretary and Treasurer A & B Financial
Services, Inc. (1980-present); President, Director, Chief Financial Officer and
Secretary (since 1986) of Gymno Corporation; President, Director, Secretary and
Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as
a real estate sales person.
Gymno Corporation. Gymno Corporation, General Partner, is a California
corporation formed in 1986 for the purpose of acting as a general partner of
this partnership and of other limited partnerships formed by the individual
general partners. The shares in Gymno Corporation are held equally by Michael R.
Burwell and the estate of D. Russell Burwell. Upon the completion of the
administration of D. Russell Burwell's estate, Michael R. Burwell will have a
controlling interest in Gymno Corporation. Michael R. Burwell is a director of
Gymno and the director position held by D. Russell Burwell is currently vacant.
Michael R. Burwell is its President, Chief Financial Officer and Secretary.
Redwood Mortgage Corp. Redwood Mortgage Corp. is a licensed real estate
broker incorporated in 1978 under the laws of the State of California, and is
engaged primarily in the business of arranging and servicing mortgage loans.
Redwood Mortgage Corp. will act as the loan broker and servicing agent in
connection with loans, as it has done on behalf of several other limited
partnerships formed by the general partners.
52
Financial Oversight by General Partners.
The partnership does not have a board of directors or an audit committee.
Accordingly, the general partners serve the equivalent function of an audit
committee for, among other things, the following purposes: appointment,
compensation, review and oversight of the work of our independent public
accountants, and establishing the enforcing of the Code of Ethics. However,
since the partnership does not have an audit committee and the general partners
are not independent of the partnership, the partnership does not have an "audit
committee financial expert."
Code of Ethics.
The general partners have adopted a Code of Ethics applicable to the
general partners and to any agents, employees or independent contractors engaged
by the general partners to perform the functions of a principal financial
officer, principal accounting officer or controller of the partnership, if any.
You may obtain a copy of this Code of Ethics, without charge, upon request by
calling our Investor Services Department at (650) 365-5341.
53
Item 11 - Executive Compensation
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
As indicated above in Item 10, the partnership has no Officers or
Directors. The partnership is managed by the general partners. There are certain
fees and other items paid to management and related parties.
A more complete description of management compensation is found in the
prospectus (S-11) dated October 7, 2003, page 5, under the section "Compensation
of the General Partners and the Affiliates", which is incorporated by reference.
Such compensation is summarized below.
The following compensation has been paid to the general partners and
affiliates for services rendered during the year ended December 31, 2004. All
such compensation is in compliance with the guidelines and limitations set forth
in the prospectus.
Entity Receiving Compensation Description of Compensation and Services Rendered Amount
------------------------------------------------------------------------------------------------------------------
I. Redwood Mortgage Corp. Mortgage Servicing Fee for servicing loans.....................$1,565,000
(General Partner)
General Partners &/or Affiliates Asset Management Fee for managing assets.........................$630,000
General Partners 1% interest in profits...........................................$121,000
Less allocation of syndication costs...............................$2,000
---------------
$119,000
General Partners &/or Affiliates Portion of early withdrawal penalties applied to
reduce Formation Loan.............................................$61,000
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY
COMPANIES RELATED TO THE GENERAL PARTNERS DURING THE YEAR ENDED DECEMBER 31,
2004 (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP)
Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in
connection with the review, selection, evaluation,
negotiation, and extension of the loans paid by the
borrowers and not by the partnership.............................$2,443,000
Redwood Mortgage Corp. Processing and Escrow Fees for services in borrowers
connection with notary, document preparation, credit
investigation, and escrow fees payable by the
and not by the partnership..........................................$35,000
Gymno Corporation Reconveyance Fee....................................................$24,429
III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN
EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE
CONSOLIDATED STATEMENTS OF INCOME DURING THE YEAR ENDED DECEMBER 31, 2004 . . .
.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $307,000
54
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The general partners own a combined total of 1% of the partnership
including a 1% portion of income and losses.
Item 13 - Certain Relationships and Related Transactions
Refer to footnotes 3 and 4 of the Notes to Consolidated Financial
Statements in Part II item 8, which describes related party fees and data.
Also refer to the Prospectus dated October 7, 2003, (incorporated herein by
reference) on page 5 "Compensation of General Partners and Affiliates".
Item 14 - Principal Accountant Fees and Services
Fees for services performed for the partnership by the principal accountant
for 2004 and 2003 are as follows:
Audit Fees The aggregate fees billed during the years ended December 31,
2004 and 2003 for professional services rendered for the audit of the
partnership's annual financial statements included in the partnership's Annual
Report on Form 10-K, review of financial statements included in the
partnership's Quarterly Reports on Form 10-Q and for services provided in
connection with regulatory filings were $161,839 and $101,302, respectively.
Audit Related Fees There were no fees billed during the years ended
December 31, 2004 and 2003 for audit-related services.
Tax fees The aggregate fees billed for tax services for the years ended
December 31, 2004 and 2003, were $9,027 and $5,487, respectively. These fees
relate to professional services rendered primarily for tax compliance.
All Other Fees There were no other fees billed during the years ended
December 31, 2004 and 2003.
All audit and non-audit services are approved by the general partner prior
to the accountant being engaged by the partnership.
55
Part IV
Item 15 - Exhibits, Financial Statements and Schedules
A. Documents filed as part of this report are incorporated:
1. In Part II, Item 8 under A - Consolidated Financial Statements.
2. The Consolidated Financial Statement Schedules are listed in Part
II - Item 8 under B - Consolidated Financial Statement Schedules.
3. Exhibits.
Exhibit No. Description of Exhibits
------------- ----------------------------------------------------------
3.1 Limited Partnership Agreement
3.2 Form of Certificate of Limited Partnership Interest
3.3 Certificate of Limited Partnership
10.1 Escrow Agreement
10.2 Servicing Agreement
10.3 (a) Form of Note secured by Deed of Trust for Construction
Loans, which provides for principal and interest payments.
(b) Form of Note secured by Deed of Trust for Commercial and
Multi-Family loans which provides for principal and
interest payments
(c) Form of Note secured by Deed of Trust for Commercial and
Multi-Family loans which provides for interest only
payments
(d) Form of Note secured by Deed of Trust for Single Family
Residential Loans, which provides for interest and
principal payments.
(e) Form of Note secured by Deed of Trust for Single Family
Residential loans, which provides for interest only
payments.
10.4 (a) Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing to accompany Exhibits 10.3(a),
and (c).
(b) Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing to accompany Exhibit 10.3 (b).
(c) Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing to accompany Exhibit 10.3 (c).
10.5 Promissory Note for Formation Loan
10.6 Agreement to Seek a Lender
31.1 Certification of General Partner pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of General Partner pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.3 Certification of General Partner pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of General Partner pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of General Partner pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.3 Certification of General Partner pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
All of the above exhibits, other than exhibit 31.1, 31.2, 31.3, 32.1, 32.2
and 32.3, were previously filed as the exhibits to Registrant's Registration
Statement on Form S-11 (Registration No. 333-106900 and incorporated by
reference herein).
B. See A (3) above.
C. See A (2) above. Additional reference is made to the prospectus (filed as
part of the S-11 registration statement) dated October 7, 2003, supplement
No. 3 dated February 11, 2005 (post effective amendment No. 4 to the S-11
registration statement), for financial data related to Gymno Corporation,
and Redwood Mortgage Corp., the Corporate General Partners.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 31st day of March,
2005.
REDWOOD MORTGAGE INVESTORS VIII
By: /S/ Michael R. Burwell
---------------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
------------------------------------------
Michael R. Burwell, President, Secretary,
and Principal Financial Officer
By: Redwood Mortgage Corp.
By: /S/ Michael R. Burwell
-------------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer
57
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity indicated on the 31st day of March, 2005.
Signature Title Date
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell General Partner March 31, 2005
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell President of Gymno Corporation, March 31, 2005
(Principal Executive Officer);
Director of Gymno Corporation
Secretary/Treasurer of Gymno
Corporation (Principal Financial
and Accounting Officer);
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell President, Secretary/Treasurer of March 31, 2005
Redwood Mortgage Corp. (Principal
Financial and Accounting Officer);
Director of Redwood Mortgage Corp.
58
Exhibit 31.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner of the Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VIII, 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, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's annual control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial data; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
March 31, 2005
59
Exhibit 31.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner of the partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VIII, 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, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's annual control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial data; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, President, and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2005
60
Exhibit 31.3
PRESIDENT'S CERTIFICATION
I, Michael R. Burwell, president of Redwood Mortgage Corporation, General
Partner, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VIII, 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, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation, and
(c) disclosed in this report any change in the Registrant's annual control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President,
Redwood Mortgage Corporation,
General Partner
March 31, 2005
61
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-K for the period ended December 31, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
March 31, 2005
62
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-K for the period ended December 31, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial
Officer of Gymno Corporation, General Partner of the partnership, certify that
to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- ----------------------------------
Michael R. Burwell, President, and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2005
63
Exhibit 32.3
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-K for the period ended December 31, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President, Redwood Mortgage
Corporation, General Partner, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- ------------------------------
Michael R. Burwell, President,
Redwood Mortgage Corporation,
General Partner
March 31, 2005
64