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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the year ended December 31, 2004 |
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Or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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Commission File Number 333-105017
VESTIN FUND III, LLC
(formerly RE Investments III, LLC)
(Exact name of registrant as specified in its charter)
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NEVADA |
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87-0693972 |
(State or other jurisdiction of
Incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
8379 W. Sunset Road, Las Vegas, Nevada 89113
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code
702.227.0965
Securities registered pursuant to Section 12(b) of the
Act:
NONE
Securities registered pursuant to Section 12(g) of the
Act:
NONE
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K
(Sec 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes o No þ
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to
the price at which the common equity was sold, or the average
bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed
second fiscal quarter. Not applicable.
As of March 23, 2005, the Company had 2,705,116 Units
outstanding.
TABLE OF CONTENTS
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PART I
Note Regarding Forward Looking Statements
This report and other written reports and oral statements made
from time to time by us may contain forward looking statements.
Such forward looking statements may be identified by the use of
such words as “expects,” “plans,”
“estimates,” “forecasts,”
“projects,” “anticipates,”
“believes” and words of similar meaning. Forward
looking statements are likely to address such matters as our
business strategy, future operating results, future sources of
funding for mortgage loans or real property purchased by us,
future economic conditions and pending litigation involving us.
Some of the factors which could affect future results are set
forth in the discussion under “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations — Factors Affecting Our Operating
Results.”
General
We were organized in April 16, 2003 as a Nevada limited
liability company. Under our Operating Agreement, our existence
ends on December 31, 2023, unless the members vote to
extend our duration. In this prospectus we refer to Vestin
Fund III, LLC as “the Company,”, “the
Fund”, “we,” “us,” or “our.”
We are not a mutual fund or an investment company within the
meaning of the Investment Company Act of 1940 nor are we subject
to any regulation thereunder. We are engaged in the business of
investing in mortgage loans where the collateral is real
property. We also invest in income-producing real property such
as office properties, and intend to invest in other
income-producing real property, such as industrial and retail
properties, multifamily residential units, and assisted living
facilities. As a company investing in mortgage loans and raising
funds through a public offering, we are subject to the North
American Securities Administration Act Mortgage Program
Guidelines and Real Estate Guidelines (collectively, the
“NASAA Guidelines”) promulgated by the state
securities administrators.
Our Manager is Vestin Mortgage, Inc. (“Manager”), a
Nevada corporation engaged in the business of brokerage,
placement and servicing of commercial loans secured by real
property. Our Manager is a wholly owned subsidiary of Vestin
Group, Inc., a Delaware corporation (“Vestin Group”).
Vestin Group’s common stock currently trades in the pink
sheets published by the National Quotation Bureau. On
March 25, 2005, the Board of Directors of Vestin Group
announced that it has received a proposal from Vestin
Group’s majority shareholder, Michael V. Shustek, to
acquire any and all of the outstanding shares of Vestin Group
common stock which he does not currently own. As a result,
Vestin Group may become a privately held company in the near
future. Through its subsidiaries, Vestin Group is engaged in
asset management, real estate lending and other financial
services and has originated over $1.8 billion in real
estate loans. Our Operating Agreement provides that the Manager
controls the daily operating activities of the Company;
including the power to assign duties, to determine how to invest
our assets, to sign bills of sale, title documents, leases,
notes, security agreements, mortgage investments and contracts,
and to assume direction of the business operations. As a result,
our operating results are dependent on the Manager’s
ability and intent to continue to service the Company’s
assets. The operating agreement also provides that the members
have certain rights, including the right to terminate the
Manager subject to a majority vote of the members.
Vestin Mortgage, Inc. is also the Manager of Vestin Fund I,
LLC (“Fund I”), Vestin Fund II, LLC
(“Fund II”) and inVestin Nevada, Inc., entities
that also invest in mortgage loans.
Real Estate Program Objectives
Once the Fund is fully funded, we anticipate investing
approximately 70% of our net proceeds in real property and
approximately 30% in mortgage loans. However, such percentages
are only a guideline, the actual percentages may vary.
We will invest in income producing multifamily residential
units, assisted living facilities, office buildings, industrial
and retail properties and other income-producing real property,
such as hotels and resorts, restaurants, parking lots and
amusement parks. Our manager intends to apply its prior
experience in investing
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in mortgage loans to its evaluation and investment in real
property on our behalf. Accordingly, we intend to invest in real
property throughout the areas in which Vestin Mortgage and its
correspondents have experience, primarily Arizona, California,
Hawaii, Nevada and Texas. Depending on the market and on our
performance, we may expand our investments throughout the United
States.
We intend to purchase properties in the range of $5 million
to $30 million. However, our actual purchases may vary from
these guidelines.
Our principal investment objectives are:
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Provide monthly cash distributions to investors from the lease
income earned on our properties; |
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Preserve capital contributions; and |
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Realize growth in the value of our properties upon our ultimate
sale of such properties. |
We cannot assure that we will achieve these objectives or that
the total amount of capital we have will not decrease. Vestin
Mortgage may change our investment guidelines, subject to the
fiduciary obligations that it owes to all members and in
accordance with the terms of our operating agreement. However,
Vestin Mortgage may not change our investment objectives, except
upon majority approval of the unit-holders holding a majority of
outstanding units. Vestin Mortgage has no authority to do
anything that would impair our ability to carry on our ordinary
business as a mortgage or real property investor.
Mortgage Program Objectives
We invest in mortgage loans throughout the areas in which Vestin
Mortgage and its correspondents have experience, primarily
Arizona, California, Hawaii, Nevada and Texas. Depending on the
market and on the Fund’s performance, we plan to expand our
investments throughout the United States. However, Vestin
Mortgage has limited experience outside of the Pacific
Southwest. The loans we invest in will be selected for us by
Vestin Mortgage from among loans originated by Vestin Mortgage
or non-affiliated mortgage brokers. When Vestin Mortgage or
someone else originates a loan for us, that person identifies
the borrower, processes the loan application, makes or invests
in the loan, and brokers or sells the loan to us. We believe
that our loans are attractive to borrowers because of the
expediency of Vestin Mortgage’s loan approval process,
which takes about 10 to 20 days. Vestin Mortgage will
obtain, negotiate and make each loan, after which we acquire the
loan, provided that the cost of the mortgage does not exceed the
funds reasonably anticipated to be available to us to purchase
the loan.
As a non-conventional lender, we are more willing to invest in
mortgage loans to borrowers that conventional lenders would not
deem to be creditworthy. Because of our increased willingness to
fund riskier loan types and borrowers, borrowers are willing to
pay us an interest rate that is above the rates charged by
conventional lenders. We intend to invest in a significant
amount of loans in which the real property being developed is
not generating any income to the borrower. We anticipate
investing 10% to 70% of our assets allocated for mortgages in
construction loans and not more than 25% of our mortgage assets
in unimproved land loans. Our second mortgage investments are
riskier because our rights will be subject to the rights of the
first mortgage lender. We may invest up to 10% of our mortgage
assets in second mortgage loans. The “balloon payment”
loans and bridge loans in which we invest are riskier because
the borrower’s repayment depends on their ability to
refinance the loan or develop the property so it can refinance
the loan. We anticipate investing up to 50% of our mortgage
assets in bridge loans. In addition, we expect to invest
approximately 20% to 50% of our assets allocated for mortgages
in commercial property loans, 10% to 25% in acquisition and
development loans and a small percentage in residential property
loans. The actual allocations may vary materially from the
guidelines above depending on the amount available for
investment in mortgages.
In addition to those policies contained in our prospectus and
Operating Agreement, Vestin Mortgage may establish written
policies on loans and borrowings.
Our principal investment objectives are to:
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Produce revenues from the interest income on our mortgage loans; |
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Provide monthly cash distributions to investors from the net
income earned on our mortgage loans; |
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Preserve capital contributions; and |
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Reinvest, to the extent permissible, payments of principal and
proceeds of prepayments, sales and insurance proceeds, net of
expenses. |
Acquisition and Investment Policies
We will seek to invest substantially all of the net Offering
proceeds and distribution reinvestments in mortgage loans and
real property, after paying applicable fees and expenses, if
any. The allocation of our investments between real property and
mortgages will be at the discretion of our Manager depending on
the amounts available for investment and investment
opportunities. Once the Fund is fully funded, we anticipate
investing approximately 70% of our net proceeds in real property
and 30% in mortgage loans. However, such percentages are only a
guideline, the actual percentages may vary. Although the NASAA
Guidelines require reserves of not less than 1% of the Offering
proceeds, approximately 3% of net proceeds will be held as a
working capital cash reserve. Vestin Mortgage will be reimbursed
by us for up to 2% of the gross proceeds received in this
Offering for all expenses advanced. At Vestin Mortgage’s
election, it may receive units in lieu of cash reimbursement.
Such expenses include those incurred by us and owed or paid to
attorneys, accountants, brokers or other non-related third
parties in connection with the preparation of this Offering.
Vestin Mortgage will not be reimbursed or credited for any
further Offering expenses it incurs.
Real Estate Program Policies and Guidelines
We intend to primarily invest in income producing multifamily
residential units, office, industrial, and retail properties,
assisted living facilities and other income-producing real
property. Such properties may include properties used for hotels
and resorts, restaurants, parking lots, amusement parks or other
leasehold properties. We intend to primarily lease the real
property owned by us. We intend to hold our properties until
such time as we believe it is the optimal time to enable us to
capitalize on the potential for increased income and capital
appreciation of our properties.
By investing primarily in different types of properties, we
believe we will reduce our overall portfolio risk and enhance
our overall portfolio returns. Once we are fully funded, no
single property will comprise more than 20% of our funds.
We may acquire income-producing properties which have been
developed with funds provided by us pursuant to our mortgage
program. For example, we may make a loan to a developer for the
purchase of unimproved land. After the developer has improved
the land, we may then purchase the real property.
We will seek to invest in properties that will satisfy our
investment objectives of maximizing distributions, preserving
capital and realizing capital appreciation upon the ultimate
sale of our properties. We intend to invest in properties
located in the United States. We will initially seek to invest
in properties located in Arizona, California, Hawaii, Nevada and
Texas. We do not intend to invest in unimproved land or
construction or development of properties.
Vestin Mortgage has not previously been engaged in the business
of direct investment in real property. In making investment
decisions for us, Vestin Mortgage will consider factors such as
the location of the property, its income-producing capacity, the
prospects for long-range appreciation, return on capital and
liquidity and income tax considerations. Vestin Mortgage will
have substantial discretion with respect to the selection of
specific investments.
We will obtain independent appraisals for each property in which
we invest. Additionally, we will not rely or utilize any
appraisals which have not been commissioned by us. However, we
will rely on our own independent analysis of various criteria,
including such appraisals, in determining whether or not to
invest in a particular property. Appraisals are estimates of
value and should not be relied upon as measures of true worth or
realizable value.
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Our obligation to purchase any property will generally be
conditioned upon the delivery and verification of certain
documents from the seller or developer, including, environmental
reports, evidence of marketable title, audited financial
statements covering recent operations of properties with
operating histories and title and liability insurance policies.
We will attempt to ensure all of our properties are adequately
insured to cover casualty losses. However, there are types of
losses which are uninsurable or not economically insurable or
may be insurable subject to limitations, such as large
deductibles or co-payments.
Our investments generally will take the form of holding fee
title in the properties we acquire. We will acquire such
interests directly or through wholly owned subsidiaries, which
may be formed in the future. We may also invest in real property
through joint ventures pursuant to the NASAA Guidelines. In no
event will we acquire an interest in real property through any
structure which would cause us to be deemed an investment
company under the Investment Company Act of 1940.
Leasing
The terms and conditions of any lease we enter into with our
tenants may vary substantially. However, we expect that our
leases will be the type customarily used between landlords and
tenants in the geographic area where the property is located. We
intend to diversify our portfolio. However, we cannot predict at
this time what the allocation will be.
Multifamily. Multifamily leases provide for terms of
6 months to 3 years and require tenants to pay monthly
lease payments and a security deposit equal to one month’s
rent. Under such leases, the landlord is generally directly
responsible for all real estate taxes, sales and use taxes,
special assessments, insurance and building repairs.
Office. Office leases generally have terms of 3 to
10 years and require tenants to pay monthly lease payments
and a security deposit equal to one month’s rent. The
landlord may be responsible for all real estate taxes, sales and
use taxes, special assessments, insurance and building repairs,
utilities and other building operation and management costs.
Industrial. Industrial leases generally have terms of 5
to 20 years and require tenants to pay monthly lease
payments and a security deposit equal to one month’s rent.
The tenant typically is responsible for its share of building
operation and management costs, including real estate taxes,
sales and use taxes, special assessments, insurance and building
repairs, and utilities.
Retail. Retail leases generally have terms of 3 to
5 years with multiple options and require tenants to pay
monthly lease payments and a security deposit equal to one
month’s rent. The tenant typically is responsible for its
share of building operation and management costs, including real
estate taxes, sales and use taxes, special assessments,
insurance and building repairs, and utilities.
Assisted Living. Assisted living leases have terms of 1
to 2 years and require tenants to pay monthly lease
payments and a security deposit equal to one month’s rent.
The landlord is generally directly responsible for all real
estate taxes, sales and use taxes, special assessments,
insurance and building repairs.
Other Income Producing Properties
We will execute new tenant leases and tenant lease renewals,
expansions and extensions with terms that are dictated by the
current market conditions. If it is economically practical, we
will verify the creditworthiness of each tenant. If we verify
the creditworthiness of each tenant, we will use industry credit
rating services for any guarantors of each potential tenant. We
will also obtain relevant financial data from potential tenants
and guarantors, such as income statements, balance sheets and
cash flow statements. We may require personal guarantees from
shareholders of our corporate tenants. However, there can be no
guarantee that the tenants selected will not default on their
leases.
We anticipate that tenant improvements will be funded by us from
our cash flow or our credit line. When one of our tenants
vacates its space in one of our buildings, we may, in order to
attract new tenants, be required
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to expend funds for tenant improvements. In addition, we may
provide free rent for a certain time period, provide tenant
improvement allowances, and provide other concessions in order
to attract new tenants.
Borrowing Policies
We may borrow funds to acquire our properties. We will not incur
debt in an amount greater than the sum of 85% of the aggregate
purchase price of all real property owned by us plus 70% of the
aggregate fair market value of all our other assets.
Vestin Mortgage will have the authority to select the lender and
negotiate the terms of the loan.
Participation
We may also participate in the operation and purchase of real
property with other purchasers, including affiliates as
permitted by NASAA Guidelines. We will own any jointly purchased
real property in direct fee title.
We will participate in the operation and/or purchase with
non-affiliates if we acquire a controlling interest, alone or
with any of our publicly registered affiliates meeting the
requirements below, in such participation. A controlling
interest would enable us to direct or cause the direction of the
management and policies of such participation, which would
include the authority to:
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review all material contracts; |
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cause a sale or refinancing of the property or our interest
therein subject in certain cases to limitations imposed by the
participation agreement between the parties; |
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approve budgets and major capital expenditures, subject to a
stated minimum amount; |
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veto any sale or refinancing of a property, or alternately, to
receive a specified preference on sale or refinancing
proceeds; and |
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exercise a right of first refusal on any desired sale or
refinancing by a participant of its interest in a property
except for transfer to its affiliate. |
In the event of participation with a publicly registered
affiliate, the investment objectives of the participants shall
be substantially identical. There shall be no duplicate fees.
The compensation to the sponsors must be substantially
identical, and the investment of each participant must be
substantially the same terms and conditions. Each participant
shall have right of first refusal to buy the other’s
interest if the co-participant decides to sell its interest. We
may participate in joint ventures or partnerships with
affiliates that are not publicly registered if the investment is
necessary to relieve Vestin Mortgage from any commitment to
purchase a mortgage entered into prior to the closing of the
offering, there are no duplicate fees, the investment of each
entity is on the same terms and condition and the participants
have a right of first refusal to buy if Vestin Mortgage wishes
to sell a mortgage held in the joint venture.
We will not give Vestin Mortgage, Vestin Group or any of their
affiliates any consideration similar to rebates or give-backs or
enter into reciprocal arrangements with Vestin Mortgage or its
affiliates that might be entered into in lieu of participations.
Disposition
We anticipate that periodically and at our termination and
dissolution, we will sell our properties. We intend to hold
various real properties in which we invest until such time as a
sale or other disposition appears to be advantageous to achieve
our investment objectives or until it appears that such
objectives will not be met. We will consider multiple factors in
deciding on whether or not to dispose of our properties,
including potential capital appreciation, cash flow and federal
income tax considerations. We will decide when to sell our
properties based upon economic and market conditions. Vestin
Mortgage may exercise its discretion as to whether and when to
sell a property, and we will have no obligation to sell
properties at any particular time.
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After our members have received a 100% return on their capital
contributions plus an amount equal to 6% per annum
cumulative, Vestin Mortgage will be eligible to receive up to
25% of cash to be distributed from the net proceeds remaining
from the sale or refinancing of properties. Additionally, Vestin
Mortgage or one of its affiliates may receive a real estate
commission of 3% if Vestin Mortgage or one of its affiliates
acts as our broker in the sale or purchase of real property.
Return of the original purchase price paid by us from the
disposition of properties generally will be reinvested during
the first seven years of our operations; thereafter, such
proceeds will be distributed to the Members. Retainable net sale
proceeds do not include amounts in excess of the original
purchase price paid by us on the sale of real property which are
accounted for as part of cash funds from our operations.
However, we may also reinvest a portion of cash funds from our
operations for amounts attributable to amounts in excess of the
original purchase price paid by us on the sale of real property.
Mortgage Program Policies and Guidelines
We anticipate that a majority of our collateral on our mortgage
loans will be the real property that the borrowers are
purchasing, refinancing or developing with the funds that we
make available. We sometimes refer to these real properties as
the security properties. While we may invest in other types of
loans, we believe that most of the loans in which we invest will
have been made to real estate developers with a lesser
proportion of loans involving land loans and bridge financing.
Our mortgage investments will not be insured or guaranteed by
any government agency. We will not give any rebates or enter
into any reciprocal agreement with Vestin Mortgage or any of its
affiliates that enables Vestin Mortgage or its affiliates to
receive a rebate.
Vestin Mortgage will continuously evaluate prospective
investments, select the mortgages in which we invest and make
all investment decisions on our behalf in its sole discretion,
unless the Operating Agreement provides otherwise. In evaluating
prospective mortgage loan investments, Vestin Mortgage considers
such factors as the following:
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the ratio of the amount of the investment to the value of the
property by which it is secured; |
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the potential for capital appreciation or depreciation of the
property securing the investment; |
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expected levels of rental and occupancy rates (if applicable); |
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potential for rental increases (if applicable); |
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current and projected revenues from the property; |
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the status and condition of the record title of the property
securing the investment; |
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geographic location of the property securing the
investment; and |
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the financial condition of the borrowers and their principals,
if any, who guarantee the loan. |
Vestin Mortgage may obtain our loans from non-affiliated
mortgage brokers and previous borrowers and by solicitation of
new borrowers in those states where permissible. We may purchase
existing loans that were originated by third party lenders and
acquired by Vestin Mortgage to facilitate our purchase of the
loans. Vestin Mortgage will sell the loans to us for no greater
than Vestin Mortgage’s cost, not including its service fees
and compensation. There are no specific requirements or
guidelines governing Vestin Mortgage’s discretion in
determining which mortgage loans it will place with us and which
it will place with other funding sources.
When selecting mortgage loans for us, Vestin Mortgage will
adhere to the following guidelines, which are intended to
control the quality of the collateral given for our loans:
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1. Priority of Mortgages. We anticipate investing at
least 90% of our assets allocated for mortgages in secured first
mortgages. First mortgages are mortgages secured by a full or
divided interest in a first deed of trust secured by the
property. Other mortgages that we invest on the secured property
will not be junior to more than one other mortgage. The only
subordinated mortgages we currently intend to invest in |
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at this time are second mortgages, although in the future we may
invest in wraparound, or all-inclusive, mortgages. |
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2. Loan-to-Value Ratio. We do not anticipate the
amount of our loan combined with the outstanding debt secured by
a senior mortgage on a security property will exceed the
following percentage of the appraised value of the security
property at origination: |
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Loan-to-Value Ratio |
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Residential
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75% |
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Unimproved Land
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60% (of the anticipated as-if developed value) |
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Acquisition and Development
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60% (of the anticipated as-if developed value) |
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Commercial Property
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75% (of the anticipated post-development value) |
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Construction
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75% (of the anticipated as-if developed value) |
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Bridge
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75% (of the anticipated as-if developed value) |
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Leasehold Interest
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75% (of value of leasehold interest) |
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We may deviate from these guidelines under certain
circumstances. For example, Vestin Mortgage, in its discretion,
may increase any of the above loan-to-value ratios if, in its
opinion, a given loan is supported by credit adequate to justify
a higher loan-to-value ratio, including personal guarantees.
Occasionally, our collateral may include personal property as
well as real property. We do not have specific requirements with
respect to the projected income or occupancy levels of a
property securing our investment in a particular loan. These
loan-to-value ratios will not apply to financing offered by us
to the purchaser of any real estate acquired through
foreclosure, or to refinance an existing loan that is in default
when it matures. In those cases, Vestin Mortgage, in its sole
discretion, shall be free to accept any reasonable financing
terms it deems to be in our best interest. Nevertheless, in no
event will the loan-to-value ratio on any loan exceed 80% of the
independently appraised as-if developed value of the property at
the time of loan origination. The target loan-to-value ratio for
our loan portfolio as a whole is approximately 70%. |
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Vestin Mortgage will receive an appraisal at the time of loan
underwriting, which may precede the placement of the loan with
us. Copies of these appraisals will be available for your review
at the offices of Vestin Mortgage for a period of six
(6) years. Generally, these appraisals will be completed
within twelve months prior to funding of the loan. Also, the
appraisal may have been previously performed for the borrower.
The appraisal may be for the current estimated “as-if
developed” value of the property. We will use appraisers
who are licensed or qualified as independent appraisers and
certified by or hold designations from one or more of the
following organizations: the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, the
National Association of Review Appraisers, the Appraisal
Institute, the Society of Real Estate Appraisers, M.A.I.,
Class IV Savings and Loan appraisers or from among
appraisers with other qualifications acceptable to Vestin
Mortgage. |
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However, appraisals are only estimates of value and cannot be
relied on as measures of realizable value. The appraisal may be
for the current estimated “as-if developed” or
“as-if completed” value of the property or, in the
case of acquisition and development loans or construction loans,
for the estimated value of the property upon completion of the
project. As-if completed or as-if developed values on raw land
loans or acquisition and development loans often dramatically
exceed the immediate sales value and may include anticipated
zoning changes, selection by a purchaser against multiple
alternatives, and successful development by the purchaser; upon
which development is dependent on availability of financing. An
employee or agent of Vestin Mortgage will review each appraisal
report and will conduct a physical inspection for each property.
A physical inspection includes an assessment of the subject
property, the adjacent properties and the neighborhood but
generally does not include entering any structures on the
property. |
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We depend upon our real estate security to protect us on the
loans that we make. We depend upon the skill of independent
appraisers to value the security underlying our loans. However,
notwithstanding |
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the experience of the appraisers, they may make mistakes, or the
value of the real estate may decrease due to subsequent events.
In addition, most of the appraisals will be prepared on an
“as if-developed” basis. If the loan goes into default
prior to completion of the project, the market value of the
property may be substantially less than the appraised value. As
a result, there may be less security than anticipated at the
time the loan was originally made. If there is less security and
a default occurs, we may not recover the full amount of our
loan, thus reducing the amount of funds available to distribute. |
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3. Terms of Mortgage Loans. Most of our loans will
range from a six-month term to a five-year term. Our original
loan agreements, however, will permit extensions to the term of
the loan by mutual consent. Such extensions will generally be
provided on loans where the original term was 12 months or
less and where a borrower requires additional time to complete a
construction project or negotiate take-out financing. |
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We anticipate that substantially all of our loans will provide
for payments of interest only with a “balloon” payment
of principal payable in full at the end of the term. In
addition, we may invest in mortgage loans which require
borrowers to maintain interest reserves funded from the
principal amount of the loan for a period of time. |
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4. Escrow Conditions. Our loans will often be funded
by us through an escrow account held by a title insurance
company, subject to the following conditions: |
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Borrowers will obtain title insurance coverage for all loans,
with the title insurance policy naming us as the insured and
providing title insurance in an amount at least equal to the
principal amount of the loan. Title insurance insures only the
validity and priority of our deed of trust, and does not insure
us against loss by other causes, such as diminution in the value
of the security property. |
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Borrowers will obtain fire and casualty insurance for all loans
secured by unimproved real property, naming us as loss payee in
an amount sufficient to cover the replacement cost of
improvements. |
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All insurance policies, notes, deeds of trust or mortgages,
escrow agreements, and any other loan documents for a particular
transaction will name us as payee and beneficiary. Mortgage
loans will not be written in the name of Vestin Mortgage or any
other nominee. |
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5. Purchase of Mortgage Investments from Affiliates.
We may acquire mortgage loans from our affiliates, including
Vestin Mortgage. If the loans were acquired to facilitate their
acquisition by us, provided that such loan is purchased by us
for a price not in excess of the par value of the note or its
fair market value, whichever is lower, plus allowable fees and
expenses in accordance with applicable NASAA guidelines, but
without the allowance of any other compensation for the loans.
Except for the compensation paid to Vestin Mortgage described
elsewhere in this prospectus, all income generated and expense
associated with the mortgage so acquired shall be treated as
belonging to us. |
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6. Note Hypothecation. We may also acquire
mortgage loans secured by assignments of secured promissory
notes. These mortgage loans must satisfy our stated investment
standards, including our loan-to-value ratios, and also may not
exceed 80% of the principal amount of the assigned note. For
example, if the property securing a note we acquire is
commercial property, the total amount of outstanding debts
secured by the property must not exceed 75% of the appraised
“as-if developed” value of the property, and the
mortgage loan will not exceed 80% of the principal amount of the
assigned note. For mortgage loans secured by promissory notes,
we will rely on the appraised “as-if developed” value
of the underlying property, as determined by a written appraisal
which was conducted within the then-preceding twelve months at
the time of loan origination. If an appraisal was not conducted
within that period, then we will arrange for a new appraisal to
be prepared for the property. |
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7. Participation. We may also participate in loans
with other lenders, including affiliates as permitted by NASAA
Guidelines, by providing funds or purchasing an undivided
interest in a loan |
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meeting our investment guidelines described above. We will
directly own any loans purchased jointly with other lenders. We
would be more likely to participate in loans if, for example: |
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we did not have sufficient funds to invest in an entire loan. |
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we received offering proceeds that were insufficient to
adequately diversify our portfolio. |
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we are seeking to increase the diversification in our loan
portfolio. |
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Vestin Mortgage originated a loan that fit within our investment
guidelines, but it would constitute more than 20% of our
anticipated capital contribution or otherwise be
disproportionately large given our then existing portfolio. |
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we will participate in loans with non-affiliates if we acquire a
controlling interest, alone or with any of our publicly
registered affiliates meeting the requirements below, in such
participation. A controlling interest would enable us to direct
or cause the direction of the management and policies of such
participation, which would include the authority to: |
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review all material contracts; |
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cause a sale of the mortgage or our interest therein subject in
certain cases to limitations imposed by the participation
agreement between the parties; |
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approve budgets and major capital expenditures, subject to a
stated minimum amount; |
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veto any sale of a mortgage, or alternatively, to receive a
specified preference on sale or proceeds; and |
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exercise a right of first refusal on any desired sale by a
participant of its interest in a loan except for transfer to its
affiliate. |
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In the event of participation with a publicly registered
affiliate, the investment objectives of the participants shall
be substantially identical. There shall be no duplicate fees.
The compensation to the sponsors must be substantially
identical, and the investment of each participant must be on
substantially the same terms and conditions. Each participant
shall have a right of first refusal to buy the other’s
interest if the co-participant decides to sell its interest. We
will not participate in joint ventures or partnerships with
affiliates that are not publicly registered, except as permitted
by NASAA Guidelines. |
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We will not give Vestin Mortgage, Vestin Group or any of their
affiliates any consideration similar to rebates or give-backs or
enter into reciprocal arrangements with Vestin Mortgage or its
affiliates that might be entered into in lieu of participations. |
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8. Diversification. The NASAA Guidelines provide
that we neither invest in nor make mortgage loans on any one
property which would exceed, in the aggregate, an amount equal
to 20% of our capital, nor may we invest in or make mortgage
loans to or from any one borrower which would exceed, in the
aggregate, an amount greater than 20% of our capital. |
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9. Reserve Fund. Although the NASAA Guidelines
require reserves of not less than 1% of the offering proceeds,
we will establish contingency working capital reserves of
approximately 3% of the net proceeds of this Offering to cover
our unexpected cash needs. |
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10. Credit Evaluations. Before making a loan, Vestin
Mortgage must first determine a borrower has sufficient equity
in the security property to meet the loan-to-value ratios
described above. Vestin Mortgage may also consider the income
level and creditworthiness of a borrower to determine its
ability to repay the mortgage loan. |
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11. Sale of Mortgage Investments. Although Vestin
Mortgage has no plan to do so, Vestin Mortgage may sell our
mortgage loans or interests in our loans to either affiliates or
non-affiliated parties when Vestin Mortgage believes it is
advantageous to us to do so. However, as noted elsewhere in this
prospectus, we do not expect that the loans will be marketable
or that a secondary market will ever |
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develop for them. We may sell our mortgage loans to Vestin
Mortgage under limited circumstances pursuant to the NASAA
Guidelines. |
Mortgage Loans to Affiliates
We do not invest in mortgage loans made to Vestin Mortgage,
Vestin Group or any of our affiliates. However, we may acquire
an investment in a mortgage loan payable by Vestin Mortgage when
Vestin Mortgage has assumed the obligations of the borrower
under that loan, through a foreclosure on the property.
Purchase of Loans from Vestin Mortgage and its Affiliates
In addition to those loans Vestin Mortgage selects for us, we
may purchase loans that were originated by Vestin Mortgage or
other parties and first held for Vestin Mortgage’s own
portfolio, as long as the loan satisfies all of our lending
criteria. This requirement also applies to any loan originated
by an affiliate of Vestin Mortgage, such as Vestin Group,
Michael Shustek, Chief Executive Officer of Vestin Group, or
another principal of Vestin Mortgage. However, we do not acquire
loans from or sell loans to mortgage programs in which Vestin
Mortgage has an interest unless it is in compliance with NASAA
Guidelines.
Types of Loans We Intend to Invest In
We primarily invest in loans which are secured by first or
second mortgages on real property. Such loans fall into the
following categories: raw and unimproved land, acquisition and
development, construction, commercial, residential and bridge
loans. We make investments based upon the guidelines set forth
below. However, the actual allocation may vary from the
guidelines below depending on the amount available for
investment in mortgages, and may vary materially prior to the
completion of the Offering of our units.
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Raw and Unimproved Land Loans |
Approximately 15% to 25% of the loans we invest in may be loans
made for the purchase or development of raw, unimproved land.
Generally, we determine whether to invest in these loans based
upon the appraised value of the property and the borrower’s
actual capital investment in the property. Generally, we invest
in loans up to 60% of the “as-if developed” appraised
value of the property and we generally require that the borrower
has invested in the property actual capital expenditures of at
least 25% of the property’s value. “As-if
developed” values on raw and unimproved land loans often
dramatically exceed the immediate sales value and may include
anticipated zoning changes, selection of a purchaser against
multiple alternatives, and successful development by the
purchaser, upon which development is dependent on availability
of financing. As of December 31, 2004, approximately 16% of
our loans were in this category.
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Acquisition and Development Loans |
Approximately 10% to 25% of the loans we invest in may be
acquisition and development loans. These loans enable borrowers
to acquire and/or complete the basic infrastructure and
development of their property prior to the construction of
buildings or structures. Such development may include installing
utilities, sewers, water pipes, and/or streets. We generally
invest in loans with a face value of up to 60% of the appraised
value of the property. Loan to value ratios on acquisition and
development loans are calculated using “as-if
developed” appraisals. Such appraisals have the same
valuation limitations as raw and unimproved land loans,
described above. As of December 31, 2004, approximately 46%
of our loans were in this category.
Approximately 10% to 70% of the loans we invest in may be
construction loans. A construction loan provides funds for the
construction of one or more structures on developed land. Funds
under this type of loan generally are not forwarded to the
borrower until work in the previous phase of the project has
been completed and an independent inspector has verified certain
aspects of the construction and its costs. We will typically
require material and labor lien releases by the borrower per
completed phase of the project. We review the property appraisal
and proposed improvements, and will generally finance up to 75%
of the appraised value of
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the property and proposed improvements. Such appraisals have the
same valuation limitations as raw and unimproved land loans,
described above. As of December 31, 2004, approximately 2%
of our loans were in this category.
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Commercial Property Loans |
Approximately 20% to 50% of the loans we invest in may be
commercial property loans. Commercial property loans provide
funds to allow commercial borrowers to acquire income producing
property or to make improvements or renovations to the property
in order to increase the net operating income of the property so
that it may qualify for institutional refinancing. Generally, we
review the property appraisal and generally invest in loans for
up to 75% of such appraised value of the property. As of
December 31, 2004, approximately 25% of our loans were in
this category.
A small percentage of the loans we invest in may be residential
loans. Such loans facilitate the purchase or refinance of one to
four family residential property units provided the borrower
uses one of the units on the property as such borrower’s
principal residence. Generally, we invest in loans for up to 75%
of the appraised value of the property. As of December 31,
2004, there were no loans in this category.
Up to 15% of our loans may be bridge loans. Such loans provide
interim financing (12 to 24 months) to enable commercial
borrowers to qualify for permanent refinancing. We review the
property appraisal and generally invest in loans of up to 75% of
that value of the property. Such appraisals may be based on
either an “as-is basis” or “as-if developed”
basis, depending on the circumstances, and therefore, may not be
an accurate indicator of the fair value of the property. As of
December 31, 2004, approximately 11% of our loans were in
this category.
The types of collateral that secure the loans brokered by us
include a first deed of trust, a second deed of trust or a
leasehold interest.
Most of our loans are secured by a first deed of trust. Thus as
a lender, we will have rights as a first mortgage lender of the
collateralized property. As of December 31, 2004, more than
81% of our loans were secured by a first deed of trust.
Up to 10% of our loans may be secured by second deeds of trust.
In a second mortgage loan, the rights of the lender (such as the
right to receive payment on foreclosure) will be subject to the
rights of the first mortgage lender. In a wraparound loan, the
lender’s rights will be comparably subject to the rights of
a first mortgage lender, but the aggregate indebtedness
evidenced by the loan documentation will be the first mortgage
loan plus the new funds the lender invests. The lender would
receive all payments from the borrower and forward to the senior
lender its portion of the payments the lender receives. As of
December 31, 2004, less than 19% of our loans were secured
by a second deed of trust.
Up to 20% of the loans we invest in may be in loans where the
collateral is an interest in a lease. As of December 31,
2004, we did not have any loans secured by a leasehold interest.
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Prepayment Penalties and Exit Fees
We anticipate that a majority of the loans we invest in will not
contain prepayment penalties or exit fees. If our loans are at a
high rate of interest in a market of falling interest rates, the
failure to have a prepayment penalty provision or exit fee in
the loan allows the borrower to refinance the loan at a lower
rate of interest, thus providing a lower yield to us on the
reinvestment of the prepayment proceeds. However, these loans
will usually be written with relatively high minimum interest
rates, which we would expect to minimize the risk of lower
yields.
Extensions to Term of Loan
Our original loan agreements will permit extensions to the term
of the loan by mutual consent. Such extensions are generally
provided on loans where the original term was 12 months or
less and where a borrower requires additional time to complete a
construction project or negotiate take-out financing. However,
we will only grant extensions when a borrower is in full
compliance with the terms of the loan, including, but not
limited to, the borrower’s obligation to make interest
payments on the loan.
Interest Reserves
We sometimes invest in loans which include a commitment for an
interest reserve which is usually established at loan closing.
We or other lenders may advance the interest reserve with the
amount of the borrower’s indebtedness increased by the
amount of such advances. As of December 31, 2004, interest
reserves had been established on approximately $0.5 million
of our outstanding loans.
Balloon Payment
Currently all of the loans we invest in or purchase will require
the borrower to make a “balloon payment” on the
principal amount upon maturity of the loan. There are no
specific criteria used in evaluating the credit quality of
borrowers for mortgage loans requiring balloon payments.
Furthermore, a substantial period of time may elapse between the
review of the financial statements of the borrower and the date
when the balloon payment is due. As a result, there is no
assurance that a borrower will have sufficient resources to make
a balloon payment when due. To the extent that a borrower has an
obligation to pay mortgage loan principal in a large lump sum
payment, its ability to repay the loan may be dependent upon its
ability to sell the property, obtain suitable refinancing or
otherwise raise a substantial amount of cash. As a result, these
loans can involve a higher risk of default than loans where the
principal is paid at the same time as the interest payments.
Repayment of Mortgages on Sales of Properties
We may require a borrower to repay a mortgage loan upon the sale
of the mortgaged property rather than allow the buyer to assume
the existing loan. We will require repayment if we determine
that repayment appears to be advantageous to us based upon
then-current interest rates, the length of time that the loan
has been held by us, the creditworthiness of the buyer and our
objectives. We will either invest our net proceeds from any
capital transaction in new mortgage loans or hold the net
proceeds as cash or distribute them to our members. These net
proceeds will also include the principal of a loan deemed to be
repaid for tax purposes as a result of the nature of a loan
modification or loan extension. Our Operating Agreement provides
that whether we choose to distribute the proceeds or reinvest
them, members will be deemed to have received a distribution of
capital and recontributed the same amount to us. Capital
transactions include payments of principal, foreclosures, and
prepayments of mortgages, to the extent classified as a return
of capital under the Internal Revenue Code, and any other
disposition of a mortgage or property.
Variable Rate Loans
Occasionally we may acquire variable rate loans. Variable rate
loans originated by Vestin Mortgage may use as indices the one
and five year Treasury Constant Maturity Index, the Prime Rate
Index or the Monthly Weighted Average Cost of Funds Index for
Eleventh District Savings Institutions (Federal Home
Loan Bank Board). Vestin Mortgage may negotiate spreads
over these indices of 2.5% to 5.5%, depending upon market
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conditions when the loan is made. As of December 31, 2004,
we did not hold any variable rate loans, and all of the loans in
the mortgage loans portfolio were fixed rate loans.
It is possible that the interest rate index used in a variable
rate loan will rise (or fall) more slowly than the interest rate
of other loan investments available to us. Vestin Mortgage
attempts to minimize this interest rate differential by tying
variable rate loans to indices that are sensitive to
fluctuations in market rates. Additionally, most variable rate
loans originated by Vestin Mortgage contain provisions under
which the interest rate cannot fall below the initial rate.
Variable rate loans generally have interest rate caps. We
anticipate that the interest rate cap will be a ceiling that is
2% to 4% above the initial rate with a floor rate equal to the
initial rate. For these loans there is the risk that the market
rate may exceed the interest cap rate.
Variable rate loans of five to ten year maturities are not
assumable without the prior consent of Vestin Mortgage. We do
not expect to invest or purchase a significant amount of other
assumable loans. To minimize our risk, any borrower assuming an
existing mortgage loan will be subject to the same underwriting
criteria as the original borrower.
Borrowing
We may incur indebtedness:
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to finance our investments in mortgage loans, |
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to prevent a default under mortgage loans that are senior to our
mortgage loans, |
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to discharge senior mortgage loans if this becomes necessary to
protect our investment in mortgage loans, or |
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to operate or develop a property that we acquired under a
defaulted loan. |
Our indebtedness will not exceed 70% of the fair market value of
our mortgage loans. This indebtedness may be with recourse to
our assets.
In addition, we may enter into structured arrangements with
lenders in order to provide them with a senior position in
mortgage loans which we might jointly fund. For example, we
might establish a wholly-owned special purpose corporation which
would borrow funds from an institutional lender under an
arrangement where the resulting mortgage loans would be assigned
to a trust, and the trust would issue a senior certificate to
the institutional lender and a junior certificate to the special
purpose corporation. This would assure the institutional lender
of repayment in full prior to our receipt of any repayment on
the jointly funded mortgage loans.
No Trust or Investment Company Activities
We have not qualified as a real estate investment trust under
the Internal Revenue Code, and therefore we are not subject to
the restrictions on its activities that are imposed on real
estate investment trusts. We conduct our business so that we are
not an “investment company” within the meaning of the
Investment Company Act of 1940. Last, we intend to conduct our
business so that we are not to be deemed a “dealer” in
mortgage loans for federal income tax purposes.
Various Other Policies and Procedures
Without approval of a majority of the members, we will not:
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issue securities senior to the units or issue any units or other
securities for other than cash; |
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invest in the securities of other issuers for the purpose of
exercising control, except when exercising our rights as a
secured lender; |
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underwrite securities of other issuers; |
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discontinue providing our members with the reports described in
this prospectus; |
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offer securities in exchange for property; or |
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change the nature of our business or our investment policies. |
Competition and General Economic Conditions
There are hundreds of commercial banks, insurance companies,
mortgage brokers, pension funds and other institutional lenders
competing to make the type of loans in which we invest. No
particular competitor dominates the market. For the past few
years, the institutional lenders have not been as active in the
commercial mortgage market as in prior years. Recently, however,
many major institutional lenders have re-entered the commercial
mortgage market due to a stronger economy, stabilized or
increased property values and leasing rates, and the decrease in
demand for residential loans. As a result, we anticipate
competition for investments in mortgages secured by commercial
properties, which creates pressure on lenders to lower interest
rates. Consequently, we may not be able to obtain as high
interest rates on mortgage investments as we would otherwise
obtain, which would affect our revenues and the distributions.
There are numerous investors in income producing real estate
including, REITs, insurance companies, pension funds, property
management companies and high net worth individuals. Many of
these investors have substantially more financial resources and
experience than we have, which may enable them to acquire the
most attractive properties on the market. We may also invest in
real estate in areas where competition for tenants lowers
leasing rates. Consequently, we may earn less lease revenue
which would lower our distributions.
Regulation
Our operations are conducted by Vestin Mortgage. Vestin
Mortgage’s operations as a mortgage company are subject to
extensive regulation by federal, state and local laws and
governmental authorities. Vestin Mortgage conducts its real
estate mortgage business under a license issued by the State of
Nevada. As of October 1, 2003, Vestin Mortgage is now
regulated by the Mortgage Lending Division of the State of
Nevada. Under applicable Nevada law, the division has broad
discretionary authority over Vestin Mortgage’s activities,
including the authority to conduct periodic regulatory audits of
all aspects of Vestin Mortgage’s operations.
We and Vestin Mortgage are also subject to the Equal Credit
Opportunity Act of 1974, which prohibits creditors from
discriminating against loan applicants on the basis of race,
color, sex, age or marital status, and the Fair Credit Reporting
Act of 1970, which requires lenders to supply applicants with
the name and address of the reporting agency if the applicant is
denied credit. We are also subject to various other federal and
state securities laws regulating the issuance and sale of
securities, as well as the Employee Retirement Income Security
Act of 1974.
Investment capital raised by us is subject to the Mortgage
Program Guidelines of the North American Securities
Administrators Association (“NASAA”). These guidelines
are adopted by various state agencies charged with protecting
the interest of the investors. Administrative fees, loan fees,
and other compensation paid to Vestin Mortgage and its
affiliates are generally limited by the NASAA program
guidelines. These guidelines also include certain investment
procedures and criteria which are required for new loan
investments.
Since our business is regulated, the laws, rules and regulations
applicable to us are subject to regular modification and change.
There can be no assurance that laws, rules or regulations will
not be adopted in the future that could make compliance much
more difficult or expensive, restrict our ability to broker or
service loans, further limit or restrict the amount of
commissions, interest and other charges earned on loans brokered
by us, or otherwise adversely affect our business or prospects.
Policies on Limitation on Investments
We will not invest in other limited partnerships except as
permitted under the NASAA Guidelines. We will not invest in
limited partnership interests of any other limited partnership
of which Vestin Mortgage
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serves as a managing or general partner unless Vestin Mortgage
does not receive duplicate fees or compensation beyond what is
permissible by the NASAA Guidelines.
We will not engage in the following:
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issue senior securities; |
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acquire property for membership interests; |
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issue any units after termination of this Offering or issue
units in exchange for property; |
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underwrite securities of other issuers; |
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make loans to Vestin Mortgage or its affiliates. |
We do not intend to become an investment company under the
Investment Company Act of 1940. We will only repurchase our
securities in response to a request for redemption pursuant to
our operating agreement.
Employees
We do not have any employees. As of March 23, 2005, our
Manager, Vestin Mortgage, and its parent company, Vestin Group,
Inc., employed 30 personnel of which one was a part-time
employee. Of these employees, 5 were employed to identify,
arrange, and service loans, 5 were employed to by the broker
dealer engaged to perform the administrative functions in
selling our units, and 20 performed general and administrative
as well as information technology and marketing functions.
Available Information
Our Internet website address is www.vestinfund.com. We
make available free of charge through www.vestingroup.com
our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and all
amendments to those reports, as soon as reasonably practicable,
after such material is electronically filed or furnished to the
Securities and Exchange Commission.
Our Manager, Vestin Mortgage, operates from its executive
offices at 8379 West Sunset Road, Las Vegas, Nevada 89113. We do
not have any separate offices.
Our Manager shares an office building which is owned by us of
approximately 42,000 square feet with its parent
corporation, Vestin Group, which in turn leases its principal
executive offices from us. The lease agreement governing this
property expires in March 2014 and the base rent is
approximately $71,645 per month.
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Legal Proceedings |
Legal matters involving Our Manager
Vestin Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a
company wholly owned by Michael Shustek, the largest shareholder
and CEO of Vestin Group, are defendants in a civil action
entitled Desert Land, L.L.C. et al. v. Owens Financial
Group, Inc. et al (the “Action”). The Action was
initiated by Desert Land, L.L.C. (“Desert Land”) on
various loans arranged by Del Mar Mortgage, Inc. and/or Vestin
Mortgage. On April 10, 2003, the United States District
Court for the District of Nevada (the “Court”) entered
judgment jointly and severally in favor of Desert Land against
Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc.
Judgment was predicated upon the Court’s finding that Del
Mar Mortgage, Inc. received an unlawful penalty fee from the
plaintiffs.
Defendants subsequently filed a motion for reconsideration. The
Court denied the motion and, on August 13, 2003, held that
Vestin Group, Vestin Mortgage, and Del Mar Mortgage, Inc. are
jointly and severally liable for the judgment in the amount of
$5,683,312 (which amount includes prejudgment interest
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and attorney’s fees). On August 27, 2003, the Court
stayed execution of the judgment against Vestin Group and Vestin
Mortgage based upon the posting of a bond in the amount of
$5,830,000. Mr. Shustek personally posted a cash bond
without any cost or obligation to Vestin Group and Vestin
Mortgage. Additionally, Del Mar Mortgage, Inc. has indemnified
Vestin Group and Vestin Mortgage for any losses and expenses in
connection with the Action, and Mr. Shustek has guaranteed
the indemnification. On September 12, 2003, all of the
defendants held liable to Desert Land appealed the judgment to
the Ninth Circuit United States Court of Appeals. We are not a
party to the Action.
Our Manager is involved in a number of legal proceedings
concerning matters arising in connection with the conduct of its
business activities. Our Manager believes it has meritorious
defenses to each of these actions and intends to defend them
vigorously. Our Manager believes that it is not a party to any
pending legal or arbitration proceedings that would have a
material adverse effect on our Manager’s financial
condition or results of operations or cash flows, although it is
possible that the outcome of any such proceedings could have a
material impact on our Manager’s net income in any
particular period.
Legal matters involving the Company
The staff of the Pacific Regional Office of the Securities and
Exchange Commission (“SEC”) has been conducting an
informal inquiry into certain matters related to us, Vestin
Group, Fund I and Fund II. We have fully cooperated
during the course of the informal inquiry. On January 6,
2005, we received from the SEC an “Order Directing Private
Investigation and Designating Officers to Take Testimony”
which appears to focus on the financial reporting of us,
Fund I and Fund II. We intend to continue to cooperate
fully in this matter and believe we have complied with SEC
disclosure requirements. We cannot at this time predict the
outcome of this matter.
We may become involved in a number of legal proceedings
concerning matters arising in connection with the conduct of our
business activities. The outcome of any such proceedings could
have a material impact on our net income in any particular
period.
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| Item 4. |
Submission of Matters to a Vote of Security Holders |
On January 17, 2005, our Members approved certain
amendments to our Operating Agreement at a Special Meeting of
the Members. The amendments are described in an 8-K report we
filed with the SEC on January 20, 2005, as amended on
January 21, 2005.
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity and Related
Stockholder Matters |
Market Information
There is no established public trading market for the trading of
Units.
Holders
a. As of March 23, 2005, approximately 790 Unit
holders held 2,705,116 Units of interest in the Company.
Dividend Policy
We generally distribute to members on a monthly basis most of
our Net Income Available for Distribution (as defined in our
Operating Agreement). Net Income Available for Distribution is
based upon cash flow from operations, less certain reserves, and
may exceed net income as calculated in accordance with U.S.
generally accepted accounting principles. Our Operating
Agreement also permits distributions of capital. We made
distributions of $1,349,851 (prior to reinvested distributions)
during the year ended December 31, 2004, all of which was
paid from Net Income Available for Distribution.
17
Recent Sales of Unregistered Securities
None.
Equity Compensation Plan Information
None.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
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| |
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Maximum Number | |
| |
|
|
|
|
|
|
|
(or Approximate | |
| |
|
|
|
|
|
Total Number of | |
|
Dollar Value) of | |
| |
|
|
|
|
|
Units Purchased as | |
|
Units that May yet | |
| |
|
|
|
|
|
Part of Publicly | |
|
be Purchased Under | |
| |
|
Total Number of | |
|
Average Price | |
|
Announced Plans | |
|
the Plans or | |
| Period |
|
Units Purchased(1) | |
|
Paid per Unit | |
|
or Programs | |
|
Programs | |
| |
|
| |
|
| |
|
| |
|
| |
|
October 2004
|
|
|
280,120 |
|
|
$ |
10.00 |
|
|
|
None |
|
|
|
None |
|
|
November 2004
|
|
|
279,914 |
|
|
$ |
10.00 |
|
|
|
None |
|
|
|
None |
|
|
December 2004
|
|
|
70,850 |
|
|
$ |
10.30 |
|
|
|
None |
|
|
|
None |
|
|
|
| (1) |
Pursuant to our Operating Agreement, members may request to have
their units redeemed. However, in order to comply with our
Operating Agreement and the Internal Revenue Code, we may redeem
no more than 10% of the aggregate members’ capital in any
calendar year. |
|
|
| Item 6. |
Selected Financial Data |
| |
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|
|
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| |
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December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
Investments in mortgage loans (net of allowance)
|
|
$ |
13,519,998 |
|
|
$ |
— |
|
|
Cash, cash equivalents, certificates of deposits and short-term
investments
|
|
$ |
6,285,989 |
|
|
$ |
4,952 |
|
|
Interest and other receivables
|
|
$ |
127,263 |
|
|
$ |
— |
|
|
Investment in real property
|
|
$ |
9,813,977 |
|
|
$ |
— |
|
|
Capitalized loan fees (net of allowance)
|
|
$ |
110,566 |
|
|
$ |
— |
|
|
Assets under secured borrowing
|
|
$ |
2,590,491 |
|
|
$ |
— |
|
|
Deferred offering costs
|
|
$ |
926,054 |
|
|
$ |
667,437 |
|
|
Total assets
|
|
$ |
33,374,338 |
|
|
$ |
672,389 |
|
|
Liabilities
|
|
$ |
8,612,004 |
|
|
$ |
673,088 |
|
|
Members’ capital
|
|
$ |
24,762,334 |
|
|
$ |
(699 |
) |
|
Total liabilities and Members’ capital
|
|
$ |
33,374,338 |
|
|
$ |
672,389 |
|
18
| |
|
|
|
|
|
|
|
|
| |
|
|
|
For the Period | |
| |
|
12 Months | |
|
from April 16, | |
| |
|
Ended | |
|
2003 (Inception) | |
| |
|
December 31, | |
|
to December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
2,359,786 |
|
|
$ |
— |
|
|
Expenses
|
|
$ |
989,853 |
|
|
$ |
699 |
|
|
Net income (loss)
|
|
$ |
1,369,933 |
|
|
$ |
(699 |
) |
|
Net income (loss) allocated to Members
|
|
$ |
1,369,933 |
|
|
$ |
(699 |
) |
|
Net income (loss) allocated to Members per weighted average
membership units
|
|
$ |
0.78 |
|
|
$ |
— |
|
|
Cash distributions
|
|
$ |
1,349,851 |
|
|
$ |
— |
|
|
Cash distributions per weighted average membership units
|
|
$ |
0.77 |
|
|
$ |
— |
|
|
Weighted average membership units
|
|
|
1,751,700 |
|
|
|
— |
|
The information in this table should be read in conjunction with
the accompanying audited financial statements and notes to
financial statements included elsewhere in this document.
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Background
We were organized in April 16, 2003 as a Nevada limited
liability company. Under our Operating Agreement, our existence
ends on December 31, 2023, unless the members vote to
extend our duration. In this prospectus we refer to Vestin
Fund III, LLC as “the Company,”, “the
Fund”, “we,” “us,” or “our.”
We are not a mutual fund or an investment company within the
meaning of the Investment Company Act of 1940 nor are we subject
to any regulation thereunder. We are engaged in the business of
investing in mortgage loans where the collateral is real
property. We also invest in income-producing real property such
as office properties, and intend to invest in other
income-producing real property, such as industrial and retail
properties, multifamily residential units, and assisted living
facilities. As a company investing in mortgage loans and raising
funds through a public offering, we are subject to the North
American Securities Administration Act Mortgage Program
Guidelines and Real Estate Guidelines (collectively, the
“NASAA Guidelines”) promulgated by the state
securities administrators.
Our Manager is Vestin Mortgage, Inc. (the “Manager”),
a Nevada corporation engaged in the business of brokerage,
placement and servicing of commercial loans secured by real
property. Our Manager is a wholly owned subsidiary of Vestin
Group, Inc., a Delaware corporation (“Vestin Group”).
Vestin Group’s common stock currently trades in the pink
sheets published by the National Quotation Bureau. On
March 25, 2005, the Board of Directors of Vestin Group
announced that it had received from Vestin Group’s
controlling shareholder, Michael V. Shustek, a proposal to buy
any and all of the outstanding shares of Vestin Group common
stock which he does not currently own. As a result, Vestin Group
may become a privately held company in the near future. Through
its subsidiaries, Vestin Group is engaged in asset management,
real estate lending and other financial services and has
originated over $1.8 billion in real estate loans. Our
Operating Agreement provides that the Manager controls the daily
operating activities of the Company; including the power to
assign duties, to determine how to invest our assets, to sign
bills of sale, title documents, leases, notes, security
agreements, mortgage investments and contracts, and to assume
direction of the business operations. As a result, our operating
results are dependent on the Manager’s ability and intent
to continue to service the Company’s assets. The operating
agreement also provides that the members have certain rights,
including the right to terminate the Manager subject to a
majority vote of the members.
Vestin Mortgage, Inc. is also the Manager of Vestin Fund I,
LLC (“Fund I”), Vestin Fund II, LLC
(“Fund II”) and inVestin Nevada, Inc., entities
that invest in commercial mortgages.
19
Overview
On November 7, 2003, our Registration Statement as filed
with the Securities and Exchange Commission became effective for
the initial public offering of up to 10,000,000 units at
$10 per unit (“Unit”). We sold the minimum number
of Units required to break escrow and commenced operations on
February 12, 2004. We invested in our first mortgage loan
in February 2004 and acquired our first real property during the
last quarter of 2004. By December 31, 2004, we had sold
2,425,244 units. We are continuing to sell Units pursuant
to our Registration Statement. As a result of the foregoing, our
results of operations for 2004 are not indicative of future
operating results. Our future performance will depend in
significant part upon our ability to raise additional funds and
upon the performance of our investments. Our operations over a
ten and a half month period in 2004 are not sufficient to
evaluate our likely performance in the future.
Summary of Financial Results
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| |
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For the | |
| |
|
|
|
Period from | |
| |
|
|
|
April 16, 2003 | |
| |
|
Year Ended | |
|
(Inception) to | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Total revenues
|
|
$ |
2,359,786 |
|
|
$ |
— |
|
|
Total expenses
|
|
|
989,853 |
|
|
|
699 |
|
| |
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
1,369,933 |
|
|
$ |
(699 |
) |
| |
|
|
|
|
|
|
|
Net income allocated to members per Weighted average membership
units
|
|
$ |
0.78 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Annualized rate of return to members(a)
|
|
|
8.84 |
% |
|
|
— |
% |
| |
|
|
|
|
|
|
|
Cash distributions
|
|
$ |
1,349,851 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Cash distributions per weighted average membership unit
|
|
$ |
0.77 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Weighted average membership units
|
|
|
1,751,700 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| (a) |
The annualized rate of return to members is calculated based
upon the net income allocated to members per weighted average
units as of December 31, 2004 divided by the number of days
during the period (323 days from February 12, 2004 the
day the minimum $10 million was achieved through
December 31, 2004) and multiplied by three hundred and
sixty five (365) days, then divided by ten (the $10 cost per
unit). |
Total Revenues. Revenues for the year ended
December 31, 2004 were approximately $2.4 million and
were derived primarily from interest income on mortgage loans of
approximately $2.0 million. Additionally, revenues included
approximately $0.3 million in rental income from income
producing real property.
Approximately $368,000 of our interest revenue for the year
ended December 31, 2004 was derived from interest reserves.
Revenues may be expected to increase in the future if we are
successful in raising additional funds to invest in commercial
mortgage loans and income-producing real property. On the other
hand, our revenues could be adversely affected if a significant
percentage of our mortgage loans become non-performing or if we
experience lease terminations for properties we own. Revenues
could also be adversely affected if we are not able to use the
capital we have raised to invest in mortgage loans or real
estate in a timely manner.
Total Expenses. For the year ended December 31,
2004, expenses totaled approximately $1.0 million, which is
primarily related to management fees of approximately $36,000,
interest expense related to secured borrowings of approximately
$630,000, interest expense on borrowings of approximately
$80,000, professional fees of approximately $62,000, and
depreciation and amortization of approximately $81,000.
20
In addition, our Manager will be reimbursed for out of pocket
offering expenses in an amount not to exceed 2% of the gross
proceeds of the offering of our units. As of December 31,
2004, approximately $926,000 of offering costs were incurred by
us and paid by our Manager on our behalf, which was recorded as
deferred offering costs. These deferred offering costs, which
are primarily legal, accounting and registration fees, will be
converted to membership units at a price of $10 per unit
once we raise enough capital to ensure the deferred offering
costs do not exceed 2% of the gross proceeds of the offering.
Any additional offering costs paid by our Manager will be
converted to membership units of up to 2% of the gross proceeds
of the offering. Any additional costs above 2% of the gross
proceeds of the offering will be absorbed by Vestin Mortgage.
Net Income. Net income for the year ended
December 31, 2004 totaled approximately $1.4 million.
Annualized Rate of Return to Members. For the year ended
December 31, 2004, annualized rate of return to members
totaled 8.84%.
Distributions to Members. For the year ended
December 31, 2004, members received distributions totaling
$1,349,851. The foregoing distributions were paid entirely from
Net Income Available for Distribution as defined in our
operating agreement. Net Income Available for Distribution is
based upon cash flow from operations, less certain reserves, and
may exceed net income as calculated in accordance with GAAP.
Investments in Mortgage Loans Secured by Real Estate
Portfolio
Investments in mortgage loans as of December 31, 2004 are
as follows:
| |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number | |
|
|
|
Weighted | |
|
|
|
|
| |
|
of | |
|
|
|
Average | |
|
Portfolio | |
|
Loan to | |
| Loan Type |
|
Loans | |
|
Balance** | |
|
Interest Rate | |
|
Percentage | |
|
Value* | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Acquisition and development
|
|
|
3 |
|
|
$ |
6,319,351 |
|
|
|
10.90% |
|
|
|
46.49% |
|
|
|
56.74% |
|
|
Bridge
|
|
|
1 |
|
|
|
1,500,000 |
|
|
|
10.00% |
|
|
|
11.04% |
|
|
|
50.62% |
|
|
Commercial
|
|
|
2 |
|
|
|
3,348,152 |
|
|
|
13.27% |
|
|
|
24.63% |
|
|
|
73.28% |
|
|
Construction
|
|
|
1 |
|
|
|
265,451 |
|
|
|
12.00% |
|
|
|
1.95% |
|
|
|
66.53% |
|
|
Land
|
|
|
3 |
|
|
|
2,159,544 |
|
|
|
12.81% |
|
|
|
15.89% |
|
|
|
71.82% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
10 |
|
|
$ |
13,592,498 |
|
|
|
11.71% |
|
|
|
100.00% |
|
|
|
62.73% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
* |
Loan to value ratios are based on appraisals obtained at the
time of loan origination and may not reflect subsequent changes
in value estimates. Such appraisals, which may be commissioned
by the borrower, are generally dated no greater than
12 months prior to the date of loan origination. The
appraisals may be for the current estimate of the “as-if
developed” value of the property, which approximates the
post-construction value of the collateralized property assuming
that such property is developed. “As-if developed”
values on raw land loans or acquisition and development loans
often dramatically exceed the immediate sales value and may
include anticipated zoning changes, selection by a purchaser
against multiple alternatives, and successful development by the
purchaser; upon which development is dependent on availability
of financing. As most of the appraisals will be prepared on an
“as-if developed” basis, if a loan goes into default
prior to any development of a project, the market value of the
property may be substantially less than the appraised value. As
a result, there may be less security than anticipated at the
time the loan was originally made. If there is less security and
a default occurs, the Company may not recover the full amount of
the loan. |
|
21
The following is a schedule of investments in mortgage loans by
lien position. Up to 10% of our loans may be secured by second
deeds of trust based upon the total offering of
$100 million. From time to time, until the offering is
complete, the percentage of second mortgages we invest in may
exceed 10%.
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
|
| |
|
2004 | |
|
Portfolio | |
| Loan Type |
|
Balance** | |
|
Percentage | |
| |
|
| |
|
| |
|
First mortgages
|
|
$ |
11,014,604 |
|
|
|
81.03% |
|
|
Second mortgages
|
|
|
2,577,894 |
|
|
|
18.97% |
|
| |
|
|
|
|
|
|
| |
|
$ |
13,592,498 |
|
|
|
100.00% |
|
| |
|
|
|
|
|
|
The following is a schedule of contractual maturities of
investments in mortgage loans as of December 31, 2004:
| |
|
|
|
|
|
2005
|
|
$ |
6,109,620 |
|
|
2006
|
|
|
7,482,878 |
|
| |
|
|
|
| |
|
$ |
13,592,498 |
|
| |
|
|
|
The following is a schedule by geographic location of
investments in mortgage loans as of:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
|
| |
|
2004 | |
|
Portfolio | |
| |
|
Balance** | |
|
Percentage | |
| |
|
| |
|
| |
|
Arizona
|
|
$ |
6,864,538 |
|
|
|
50.50% |
|
|
California
|
|
|
1,648,152 |
|
|
|
12.12% |
|
|
Nevada
|
|
|
4,079,808 |
|
|
|
30.02% |
|
|
Oklahoma
|
|
|
1,000,000 |
|
|
|
7.36% |
|
| |
|
|
|
|
|
|
| |
|
$ |
13,592,498 |
|
|
|
100.00% |
|
| |
|
|
|
|
|
|
|
|
| ** |
The following table reconciles the balance of the loan portfolio
to the amount shown on the accompanying Balance Sheet. |
| |
|
|
|
|
| |
|
December 31, | |
| |
|
2004 | |
| |
|
| |
|
Balance per Loan Portfolio
|
|
$ |
13,592,498 |
|
|
Less:
|
|
|
|
|
|
Allowance for Loan Losses
|
|
|
(72,500 |
) |
| |
|
|
|
|
Balance per Balance Sheet
|
|
$ |
13,519,998 |
|
| |
|
|
|
We have six mortgage loan products consisting of bridge,
commercial, construction, acquisition and development, land, and
residential loans. The effective interest rates on all product
categories range from 10% to 15%. Revenue by product will
fluctuate based upon relative balances during the period.
Our Manager has evaluated the collectibility of the loans in our
portfolio in light of the types and dollar amounts of loans in
the portfolio, adverse situations that may affect the
borrower’s ability to repay, prevailing economic conditions
and the underlying collateral securing the loan. We do not
currently have any non-performing loans. Our Manager believes a
general allowance for loan losses totaling $72,500 included in
the accompanying balance sheet as of December 31, 2004 is
adequate to address estimated credit losses in our investment in
mortgage loan portfolio as of that date. No specific allowances
were deemed necessary.
Decisions regarding an allowance for loan losses require
management’s judgment. As a result, there is an inherent
risk that such judgment will prove incorrect. In such event,
actual losses may exceed (or be less than) the amount of any
allowance. To the extent that we experience losses greater than
the amount of the
22
allowance, we may incur a charge to earnings that will adversely
affect our operating results and the amount of any cash
available for distribution.
Our Manager often grants extensions on loans pursuant to the
terms of the original loan agreements, which permit extensions
by mutual consent. Such extensions are generally provided on
loans where the original term was 12 months or less and
where a borrower requires additional time to complete a
construction project or negotiate take out financing. However,
our Manager only grants extensions when a borrower is in full
compliance with the terms of the loan, including, but not
limited to the borrower’s obligation to make interest
payments on the loan. As of December 31, 2004, we did not
have any investments in loans which have been extended.
Investment in Real Property
During the year ended December 31, 2004, we acquired an
office building which has approximately 42,000 square feet
of rentable space, located at 8379 West Sunset Blvd in Las
Vegas, Nevada. The purchase price and related closing costs was
approximately $9.8 million. As of December 31, 2004,
the building was fully leased to our Manager and is earning
rental revenues of $71,645 per month. We provided
$4,850,000 of the purchase price from our capital and borrowed
$4,950,000 for the remainder of the purchase price. We
subsequently conveyed the real property to VF III HQ, LLC,
a wholly owned single asset subsidiary formed for the purpose of
owning this asset. For further information about this property,
see Item 13 Certain Relationships and Related Transactions.
In August 2004, our Manager relocated its corporate headquarters
to this facility. As further discussed in “Segment
Information” below, net income on this segment of our
business was approximately $91,000 which represents
4.5 months of operating activity. The following represents
our estimated yield on this investment from a cash flow
perspective.
| |
|
|
|
|
|
Net income from real estate segment
|
|
$ |
91,494 |
|
|
Add back depreciation and amortization
|
|
|
80,740 |
|
| |
|
|
|
|
Cash yield
|
|
$ |
172,234 |
|
| |
|
|
|
|
Cash investment
|
|
$ |
4,850,000 |
|
| |
|
|
|
|
Months in operation
|
|
|
4.5 |
|
| |
|
|
|
|
Annualized cash yield on real estate segment
|
|
|
9 |
% |
| |
|
|
|
Asset Quality and Loan Reserves
Losses may occur from investing in mortgage loans. The amounts
of losses will vary as the loan portfolio is affected by
changing economic conditions and the financial condition of
borrowers.
The conclusion that a mortgage loan is uncollectible or that
collectibility is doubtful is a matter of judgment. On a
quarterly basis, the Manager evaluates our mortgage loan
portfolio for impairment. The fact that a loan is temporarily
past due does not necessarily mean that the loan is impaired.
Rather, all relevant circumstances are considered by our Manager
to determine impairment and the need for specific reserves. Such
evaluation, which includes a review of all loans on which full
collectibility may not be reasonably assured, considers among
other matters:
|
|
|
| |
• |
prevailing economic conditions; |
| |
| |
• |
historical experience; |
| |
| |
• |
the nature and volume of the loan portfolio; |
| |
| |
• |
the borrowers’ financial condition and adverse situations
that may affect the borrowers’ ability to pay; |
23
|
|
|
| |
• |
evaluation of industry trends; and |
| |
| |
• |
estimated net realizable value of any underlying collateral in
relation to the loan amount. |
Based upon this evaluation, a determination is made as to
whether the allowance for loan losses is adequate to cover any
potential losses. Additions to the allowance for loan losses are
made by charges to the provision for loan losses. Recoveries of
previously charged off amounts are credited to the allowance for
loan losses or included in income. As of December 31, 2004,
we recorded a provision of $72,500 as a general allowance for
loan losses. At December 31, 2004, all of our loans were
performing. Our Manager had determined the allowance is
sufficient to cover any inherent losses in our loan portfolio.
The following is a rollforward of the general allowance for loan
losses for the year ended December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
|
|
|
Balance at | |
| |
|
December 31, |
|
|
|
|
|
December 31, | |
| Description |
|
2003 |
|
Provisions | |
|
Deductions |
|
2004 | |
| |
|
|
|
| |
|
|
|
| |
|
General Valuation Allowance
|
|
$ |
— |
|
|
$ |
72,500 |
|
|
$ |
— |
|
|
$ |
72,500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
We do not have any interests in off-balance sheet special
purpose entities nor do we have any interests in non-exchange
traded commodity contracts.
Contractual Obligations
The following summarizes our contractual obligations at
December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payment Due by Period |
| |
|
|
| |
|
|
|
Less than | |
|
|
|
More than |
| Contractual Obligation |
|
Total | |
|
1 Year | |
|
1-3 Years |
|
3-5 Years |
|
5 Years |
| |
|
| |
|
| |
|
|
|
|
|
|
|
Secured borrowings
|
|
$ |
2,590,491 |
|
|
$ |
2,590,491 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Critical Accounting Estimates
Revenue Recognition
Interest income on loans is accrued by the effective interest
method. We do not recognize interest income from loans once they
are determined to be impaired. A loan is impaired when, based on
current information and events, it is probable that we will be
unable to collect all amounts due according to the contractual
terms of the loan agreement or when the payment of interest is
90 days past due.
Investments in Mortgage Loans
Investments in mortgage loans are secured by trust deeds and
mortgages. Generally, all of our mortgage loans require interest
only payments with a balloon payment of the principal at
maturity. We have both the intent and ability to hold mortgage
loans until maturity and therefore, mortgage loans are
classified and accounted for as held for investment and are
carried at amortized cost. Loans sold to or purchased from
affiliates are accounted for at the principal balance and no
gain or loss is recognized by us or any affiliate. Loan to value
ratios are based on appraisals obtained at the time of loan
origination and may not reflect subsequent changes in value
estimates. Such appraisals are generally dated within
12 months of the date of loan origination and may be
commissioned by the borrower. The appraisals may be for the
current estimate of the “as-if developed” value of the
property, which approximates the post-construction value of the
collateralized property assuming that such property is
developed. “As-if developed” values on raw land loans
or acquisition and development loans often dramatically exceed
the immediate sales value and may include anticipated zoning
changes and timely successful development by the purchaser. As
most of the appraisals will be prepared on an “as-if
developed” basis, if a loan goes into default prior to any
development of a project, the market value of the property may
be substantially less than the appraised value. As a result,
there may be less
24
security than anticipated at the time the loan was originally
made. If there is less security and a default occurs, we may not
recover the full amount of the loan.
Allowance for Loan Losses
We maintain an allowance for loan losses on our investments in
mortgage loans for estimated credit impairment. The
Manager’s estimate of losses is based on a number of
factors including the types and dollar amounts of loans in the
portfolio, adverse situations that may affect the
borrower’s ability to repay, prevailing economic conditions
and the underlying collateral securing the loan. Additions to
the allowance are provided through a charge to earnings and are
based on an assessment of certain factors, which may indicate
estimated losses on the loans. Actual losses on loans are
recorded as a charge-off or a reduction to the allowance for
loan losses. Subsequent recoveries of amounts previously charged
off are added back to the allowance or included as income. Our
Manager believes that the allowance for loan losses totaling
$72,500 as of December 31, 2004, included in the
accompanying balance sheet is adequate to address estimated and
expected credit impairment.
Investments in Real Property
Real property is stated at cost, less accumulated depreciation.
Amounts capitalized as investments in real property consist of
the cost of acquisition or construction and any tenant
improvements or major improvements that extend the useful life
of the related asset. All repairs and maintenance are expensed
as incurred. Upon acquisition, the purchase price of the
property is allocated to land, building and improvements and
other intangible assets and associated liabilities as required
by SFAS No. 141 “Business Combinations”. The
allocation to land is based on an estimate of its fair value
based on all available information including appraisals. The
allocation to other intangible assets represents the value
associated with the in-place leases, including leasing
commission, legal and other related costs.
Real property is depreciated using the straight-line method over
the useful lives of the assets by class generally as follows:
| |
|
|
|
Land
|
|
Not depreciated |
|
Building
|
|
40 years |
|
Building improvements
|
|
10-25 years |
|
Land improvements
|
|
20-25 years |
|
Tenant improvements
|
|
Lease term |
|
Intangible lease assets
|
|
Lease term |
Our Manager continually monitors events and changes in
circumstances that could indicate carrying amounts of real
estate and related intangible assets may not be recoverable.
When indicators of potential impairment are present, our Manager
assess the recoverability of the assets by determining whether
the carrying value of the real estate and related intangible
assets will be recovered through the undiscounted future cash
flows expected from the use and eventual disposition of the
asset. In the event the expected undiscounted future cash flows
do not exceed the carrying value, we adjust the real estate and
intangible assets to their fair value and recognize an
impairment loss. Our Manager has determined there has been no
impairment in the carrying value of real property held by us
during the year ended December 31, 2004.
Secured Borrowings
Loans that have been participated to third party investors
through intercreditor agreements (“Agreements”) are
accounted for as secured borrowings in accordance with
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
(“SFAS No. 140”). The Agreements provide
us additional funding sources for mortgage loans whereby a third
party investor (the “Investor”) may participate in
certain mortgage loans with us and/or Vestin Fund I and/or
Vestin Fund II (collectively, the “Lead
Lenders”). In the event of borrower non-performance, the
intercreditor agreements provide that the Lead Lenders must
repay the Investor’s loan amount either by
(i) continuing to remit to the Investor the
25
interest due on the participated loan amount;
(ii) substituting an alternative loan acceptable to the
Investor; or (iii) repurchasing the participation from the
Investor for the outstanding balance plus accrued interest.
Additionally, an Investor may participate in certain loans with
the Lead Lenders through participation agreements. In the event
of borrower non-performance, the participation agreement allows
the Investor to be repaid up to the amount of the
Investor’s investment prior to the Lead Lender being
repaid. Mortgage loan financing under the participation
agreements are also accounted for as a secured borrowing in
accordance with SFAS No. 140.
Factors Affecting Our Operating Results
|
|
|
Risks of Investing in Real Property |
|
|
|
| |
• |
Changes in the general economic or local conditions could have
an adverse impact on the real estate market in general. |
| |
| |
• |
Changes in the supply of or demand for similar or competing
properties in an area. If we pay a higher price, our
profitability will be reduced. Additionally, if we are unable to
sell a property when we determine to do so, it could have a
significant adverse affect on our cash flow and operations. |
| |
| |
• |
Changes in interest rates and availability of permanent mortgage
funds that may render the sale of a property difficult or
unattractive. |
| |
| |
• |
Changes in tax, real estate, environmental and zoning laws may
require additional material expenditures by us in order to be in
compliance. |
| |
| |
• |
Periods of high interest rates and tight money supply may make
the sale of property more difficult. |
| |
| |
• |
Tenant turnover could cause us to lose revenue associated with
that lease and increase costs for tenant improvements. |
| |
| |
• |
General overbuilding or excess supply in the market area could
lead to vacancies. If vacancies occur for a long period of time,
we may suffer reduced revenues and could diminish the market
value of the property. |
|
|
|
Risks of Investing in Mortgage Loans |
|
|
|
| |
• |
Our Manager’s underwriting standards and procedures are
more lenient than conventional lenders in that we will invest in
loans to borrowers who will not be required to meet the credit
standards of conventional mortgage lenders. |
| |
| |
• |
Our Manager approves mortgage loans more quickly then other
mortgage lenders. Due to the nature of loan approvals, there is
a risk that the credit inquiry Vestin Mortgage performs will not
reveal all material facts pertaining to the borrower and the
security. |
| |
| |
• |
Appraisals may be performed on an “as-if developed”
basis which appraised values dramatically exceed immediate sales
values. Therefore there is a risk that the borrower will not
complete development of the project which may affect the
expected value of the property and the loan to value ratio.
Also, property may not have value above its as-is value which
itself may be difficult to realize. |
| |
| |
• |
Our results of operations will vary with changes in interest
rates and with the performance of the relevant real estate
markets. |
| |
| |
• |
If the economy is healthy, we expect that more people will be
borrowing money to acquire, develop or renovate real property.
However, if the economy grows too fast, interest rates may
increase too much and the cost of borrowing may become too
expensive. This could result in a slowdown in real estate
lending which may mean we will have fewer loans to acquire, thus
reducing our revenues and the distributions to our members. |
26
|
|
|
| |
• |
If, at a time of relatively low interest rates, a borrower
should prepay obligations that have a higher interest rate from
an earlier period, investors will likely not be able to reinvest
the funds in mortgage loans earning that higher rate of
interest. In the absence of a prepayment fee, the investors will
receive neither the anticipated revenue stream at the higher
rate nor any compensation for their loss. This in turn could
harm our reputation and make it more difficult for us to attract
investors willing to acquire interest in mortgage loans. |
Our performance will be directly impacted by any defaults on the
loans in our portfolio and by defaults by tenants in properties
that we own. As noted above, we may experience a higher rate of
defaults than conventional mortgage lenders. We seek to mitigate
the risk by estimating the rate of the underlying collateral and
insisting on low loan to value ratios. However, no assurance can
be given that these efforts will fully protect us against losses
on defaulted loans. Moreover, during the period of time when a
defaulted loan is the subject of foreclosure proceedings, it is
likely that we will earn less (if any) income from such loans,
thereby reducing our earnings. If we do foreclose on a property,
our Manager may determine that the best course of action is to
sell such property quickly in order to generate a return of
funds to us which may then be used in our lending operations. As
a result, we may not receive the best price for the foreclosed
property and, in some cases, we may receive less than the amount
due to us under the defaulted loan. Similarly, we will attempt
to mitigate against the risk of tenant defaults through security
deposits, guaranties, letters of credit and by selecting
properties which we believe are attractive and easy to rent.
However, our assessment in this regard may prove incorrect and
changes in local real estate markets may result in our
experiencing extended vacancies in our properties.
|
|
|
Risks of Interest Rate Changes |
Our results of operations will vary with changes in interest
rates and with the performance of the relevant real estate
markets.
If the economy is healthy, we expect that more people will be
borrowing money to acquire, develop or renovate real property.
However, if the economy grows too fast, interest rates may
increase too much and the cost of borrowing may become too
expensive. This could result in a slowdown in real estate
lending which may mean we will have fewer loans to acquire, thus
reducing its revenues and the distributions to members.
One of the results of interest rate fluctuations is that
borrowers may seek to extend their low-interest-rate mortgage
loans after market interest rates have increased. This creates
three risks for us:
|
|
| |
(i) There can be no assurance that this permitted rate
increase will be adequate if interest rates have increased
beyond the range contemplated by our loan documents. |
| |
| |
(ii) If interest rates rise, borrowers under loans with
monthly or quarterly principal payments may be compelled to
extend their loans to decrease the principal paid with each
payment because the interest component has increased. If this
happens, there is a higher risk that the borrower may default on
the extended loan, and the increase in the interest rate on the
loan may not be adequate compensation for the increased risk.
Distributions on mortgage loans we place may decline if lenders
are unable to reinvest at higher rates or if an increasing
number of borrowers default on their loans. |
| |
| |
(iii) If, at a time of relatively low interest rates, a
borrower prepays obligations that have a higher interest rate
from an earlier period, investors will likely not be able to
reinvest the funds in mortgage loans earning that higher rate of
interest. In the absence of a prepayment fee, the investors will
receive neither the anticipated revenue stream at the higher
rate nor compensation for their loss. This in turn could harm
our business reputation. |
|
|
|
Competition for Borrowers and Properties |
We consider our competitors for borrowers to be the providers of
non-conventional mortgage loans, that is, lenders who offer
short-term, equity-based loans on an expedited basis for higher
fees and rates than those
27
charged by conventional lenders and mortgage loans investors,
such as commercial banks, thrifts, conduit lenders, insurance
companies, mortgage brokers, pension funds and other financial
institutions that offer conventional mortgage loans. Many of the
companies against which we compete have substantially greater
financial, technical and other resources than we do. Competition
in our market niche depends upon a number of factors including
price and interest rates of the loan, speed of loan processing,
cost of capital, reliability, quality of service and support
services.
There are numerous investors in income producing real estate
including, REITs, insurance companies, pension funds, property
management companies and high net worth individuals. Many of
these investors have substantially more financial resources and
experience than we have, which may enable them to acquire the
most attractive properties on the market. We will attempt to
benefit from our Manager’s experience and contacts in
certain markets to assist us in acquiring attractive income
producing properties. However, there is substantial competition
for real estate investments in each of those markets and no
assurance can be given that our Manager’s contacts and
expertise will provide us with any competitive advantage.
|
|
|
Effect of Fluctuations in the Economy |
Our sole business, investing in income producing property and
making loans secured by real estate, is particularly vulnerable
to changes in macroeconomic conditions. Any significant decline
in economic activity, particularly in the geographical markets
in which we concentrate our investments and loans, could result
in a decline in real estate values, tenant vacancies and a
decline in the demand for real estate development loans.
Declines in real estate values after we have acquired our
properties could result in our holding properties longer than
intended. In addition, a general decline in the economy could
result in an increase in tenant defaults. We might also
encounter under these circumstances greater difficulty in
finding replacement tenants. In order to adjust to market
conditions, we might be forced to reduce the amount of rent we
collect and to offer various concessions to attract new tenants.
Any such measures could reduce our cash flow and the funds we
have available to distribute. In order to stay fully invested
during a period of declining demand for real estate loans, we
may be required to make loans on terms less favorable to us or
to make loans involving greater risk to us. Declines in economic
activity are often accompanied by a decline in prevailing
interest rates. Although our lending rates are not directly tied
to the Federal Reserve Board’s discount rate, a sustained
and widespread decline in interest rates will impact the
interest we are able to earn on our loans. Since our loans will
generally not have prepayment penalties, declining interest
rates may also cause our borrowers to prepay their loans and we
may not be able to reinvest the amounts prepaid in loans
generating a comparable yield. Moreover, any significant decline
in economic activity could adversely impact the ability of our
borrowers to complete their projects and obtain take-out
financing. This in turn could increase the level of defaults we
may experience.
Capital and Liquidity
Liquidity is a measure of a company’s ability to meet
potential cash requirements, including ongoing commitments to
fund investing activities and for general operating purposes.
Subject to an approximate 3% reserve, we seek to use all of our
available funds to invest in mortgage loans or purchase income
producing property. Income generated from such investments is
paid out to our members unless they have elected to reinvest
their dividends. We do not anticipate the need for hiring any
employees, acquiring fixed assets such as office equipment or
furniture, or incurring material office expenses during the next
twelve months because Vestin Mortgage will manage our affairs.
We may pay Vestin Mortgage a monthly management fee of up to
0.25% of our aggregate capital contributions.
During the year ended December 31, 2004, cash flows
provided by our operating activities approximated
$1.4 million. Our investing activities for the year ended
December 31, 2004 consisted of cash used from the purchase
of new investments in loans secured by real estate in the amount
of $13.6 million (net of the sale or payoff of investments
in mortgage loans). Our financing activities primarily consisted
of proceeds from issuance of member units of approximately
$24.3 million, members’ distributions, net of
reinvestments, of $0.9 million, and proceeds from a note
payable of approximately $5.0 million.
28
Since we distribute most or all of our operating income, our
sources of liquidity include: repayments of outstanding loans,
distribution reinvestments by our members and arrangements with
third parties to participate in our loans. In the future, we may
also generate liquidity through the sale of our real property
investments. However, under our Operating Agreement, the
proceeds from any sale of real property occurring after November
2010 must be distributed to Members and will not be available
for reinvestment.
We rely primarily upon repayment of outstanding loans and
raising new capital to provide capital for investment in new
loans and real estate properties. Any significant level of
defaults on outstanding loans could reduce the funds we have
available for investment in new loans. Resulting foreclosure
proceedings may not generate full repayment of our loans and may
result in significant delays in the return of invested funds.
This would diminish our capital resources and would impair our
ability to invest in new loans. Additionally, if there is a
downturn in the economies in which we invest in real estate, the
level of rents we can charge to lease our properties can
diminish our capital resources and would diminish our ability to
invest in new properties or service any related debt.
Cash provided by the operating activities of our investments in
real estate segment is primarily dependent on the occupancy
level of our properties, the rental rates on our leases, the
collectibility of rents from our tenants, and the level of
operating and other expenses. Since we intend on leveraging our
capital for property acquisitions, we will depend on cash
provided by operating activities to service such debt. The
following table summarizes future minimum base rent to be
received from our Manager under a non-cancelable lease on our
sole real estate property at December 31, 2004:
| |
|
|
|
|
|
2005
|
|
$ |
871,203 |
|
|
2006
|
|
|
906,051 |
|
|
2007
|
|
|
942,293 |
|
|
2008
|
|
|
979,985 |
|
|
2009
|
|
|
1,019,185 |
|
|
Thereafter
|
|
|
5,316,833 |
|
| |
|
|
|
| |
|
$ |
10,035,550 |
|
| |
|
|
|
Any significant level of redemptions by our members would reduce
the amount of capital available for investment. In order to
comply with our Operating Agreement and the Internal Revenue
Code, we may redeem no more than 10% of the aggregate
members’ capital in any calendar year. Our Operating
Agreement also provides other conditions limiting redemptions.
Approximately 58% of our members currently reinvest their
distributions. The level of reinvested distributions is likely
to be affected by our operating performance. If our performance
does not meet the expectations of our members, the level of
reinvestment may decline.
Intercreditor agreements provide us additional funding sources
for mortgage loans whereby a third party investor (the
“Investor”) may participate in certain mortgage loans
with us, Vestin Mortgage, Vestin Fund I, and Vestin
Fund II (collectively, the “Lead Lenders”). In
the event of borrower non-performance, the Lead Lenders are
required to protect the Investor by (i) continuing to remit
to the Investor the interest due on the participation amount;
(ii) substituting an alternative loan acceptable to the
Investor; or (iii) repurchasing the participation from the
Investor for the outstanding balance of the participation plus
accrued interest.
Additionally, an Investor may participate in certain loans with
Lead Lenders through participation agreements. In the event of
borrower non-performance, the participation agreement allows the
Investor to be repaid up to the amount of the Investor’s
investment prior to the Lead Lenders being repaid.
As of December 31, 2004, funds being used under
intercreditor and participation agreements where we have
potential obligations as defined above totaled $2.6 million.
We may seek to expand our capital resources through borrowings
from institutional lenders or through securitization of our loan
portfolio or similar arrangements. We currently do not have in
place any
29
commitments to borrow any funds or securitize any of our assets.
No assurance can be given that, if we should seek to borrow
funds or to securitize our assets we would be able to do so on
commercially attractive terms. Our ability to expand our capital
resources in this manner is subject to many factors, some of
which are beyond our control, including the state of the
economy, the state of the capital markets and the perceived
quality of our loan portfolio.
We do not currently have any interest in any special purpose
entities which are not reflected on our balance sheet nor do we
have any commitments or obligations which are not reflected on
our balance sheet. We do not have any interest in derivative
contracts.
We maintain working capital reserves of approximately 3% of
aggregate members’ capital accounts in cash and cash
equivalents. This reserve is available to pay expenses in excess
of revenues, satisfy obligations of underlying secured
properties, expend money to satisfy our unforeseen obligations
and for other permitted uses of the working capital. At
December 31, 2004, we had $6.3 million in cash and
$33.4 million in total assets. It appears we have
sufficient working capital to meet our operating needs in the
near term.
Segment Information:
Operating segments are components of an enterprise about which
separate financial information is available that is regularly
reviewed by the chief operating decision makers in assessing
performance and deciding how to allocate resources. Reportable
segments consist of one or more operating segments with similar
economic characteristics, products and services, production
processes, type of customer, distribution system and regulatory
environment.
The information provided for Segment Reporting is based on
internal reports utilized by management. The presentation and
allocation of overhead and the net contribution for the
operating segments may not reflect the actual economic costs,
contribution or results of operations of the segments as stand
alone businesses. If a different basis of allocation were
utilized, the relative contributions of the segments might
differ but the relative trends in segments would, in
management’s view, likely not be impacted.
Our two reportable segments are investments in mortgage loans
and investments in real estate.
Financial information concerning our reportable segments is
presented as follows for the year ended December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Investment in | |
|
Investments in | |
|
|
| |
|
Mortgage Loans | |
|
Real Estate | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest income
|
|
$ |
1,955,911 |
|
|
$ |
— |
|
|
$ |
1,955,911 |
|
| |
Rental income
|
|
|
— |
|
|
|
316,625 |
|
|
|
316,625 |
|
| |
Other
|
|
|
87,250 |
|
|
|
— |
|
|
|
87,250 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,043,161 |
|
|
|
316,625 |
|
|
|
2,359,786 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Management fees
|
|
|
20,995 |
|
|
|
15,240 |
|
|
|
36,235 |
|
| |
Interest related to secured borrowings
|
|
|
630,087 |
|
|
|
— |
|
|
|
630,087 |
|
| |
Provision for loan losses
|
|
|
72,500 |
|
|
|
— |
|
|
|
72,500 |
|
| |
Professional fees
|
|
|
36,114 |
|
|
|
26,214 |
|
|
|
62,328 |
|
| |
Other
|
|
|
5,026 |
|
|
|
22,961 |
|
|
|
27,987 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
764,722 |
|
|
|
64,415 |
|
|
|
829,137 |
|
|
EBITDA*
|
|
|
1,278,439 |
|
|
|
252,210 |
|
|
|
1,530,649 |
|
| |
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Depreciation and amortization
|
|
|
— |
|
|
|
80,740 |
|
|
|
80,740 |
|
| |
Interest expense
|
|
|
— |
|
|
|
79,976 |
|
|
|
79,976 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,278,439 |
|
|
$ |
91,494 |
|
|
$ |
1,369,933 |
|
| |
|
|
|
|
|
|
|
|
|
30
|
|
| * |
EBITDA represents net earnings before interest expense, income
taxes, depreciation and amortization. We present EBITDA because
we consider it an important supplemental measure of our
performance but it does not represent cash flows. |
EBITDA is a measure of our performance that is not required by,
or presented in accordance with, GAAP. EBITDA is not a
measurement of our financial performance under GAAP and should
not be considered as an alternative to net earnings, operating
income or any other performance measures derived in accordance
with GAAP or as an alternative to cash flow from operating
activities as a measure of our liquidity. We compensate for
these limitations by relying primarily on our GAAP results and
using EBITDA only supplementally.
Although depreciation and amortization are non-cash charges, the
assets being depreciated or amortized often will have to be
replaced in the future, and EBITDA does not reflect any cash
requirements for such replacements. Other companies in our
industry may calculate EBITDA differently than we do, limiting
its usefulness as a comparative measure. In addition, EBITDA
does not reflect the impact of earnings or charges resulting
from matters we consider not to be indicative of our ongoing
operations.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
We are exposed to market risk, primarily from changes in
interest rates. We do not deal in any foreign currencies and do
not own any options, futures or other derivative instruments.
As of December 31, 2004, approximately 41% of our assets
consist of investments in mortgage loans, including those that
are financed under intercreditor agreements. At
December 31, 2004, our aggregate investment in mortgage
loans was approximately $13,592,498 with a weighted average
effective interest rate of 11.71%. Loans financed under
intercreditor agreements totaled $2,590,491 at December 31,
2004 and are classified as assets under secured borrowings. Such
financing is at a weighted average interest rate of 10.80%.
These mortgage loans mature within the next 12 months. Most
of the mortgage loans have a term of 12 months; the
weighted average term of outstanding loans at December 31,
2004 was 18 months. All of the outstanding mortgage loans
at December 31, 2004 were fixed rate loans. All of the
mortgage loans are held for investment purposes; none are held
for sale. We intend to hold such mortgage loans to maturity.
None of the mortgage loans have prepayment penalties.
As of December 31, 2004, approximately $9.8 million or
29% of our assets consist of an investment in income producing
real property. This property is located in Las Vegas, Nevada and
is leased entirely by our Manager at $71,645 per month.
Market fluctuations in interest rates generally do not affect
the carrying value of our investment in mortgage loans. However,
significant and sustained changes in interest rates could affect
our operating results. If interest rates decline significantly,
some of the borrowers could prepay their loans with the proceeds
of a refinancing at lower interest rates. This would reduce our
earnings and funds available for distribution to Members. On the
other hand, a significant increase in interest rates could
result in a slowdown in real estate development activity which
would reduce the demand for commercial mortgage loans. As a
result, we might encounter greater difficulty in identifying
appropriate borrowers. We are not in a position to quantify the
potential impact on our operating results from a material change
in interest rates. Additionally, these market fluctuations could
impact the business of our Manager which could in turn affect
our Manager’s ability to pay rents due to us.
|
|
| Item 8. |
Financial Statements and Supplementary Data |
The financial statements and supplementary data are indexed in
Item 15 of this report.
|
|
| Item 9. |
Changes in and Disagreements with Independent Auditors on
Accounting and Financial Disclosure |
None
31
PART III
|
|
| Item 9A. |
Control and Procedures |
The Company’s management has evaluated the effectiveness of
the design and operation of its disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of the end of the period
covered by this report. Such evaluation was conducted under the
supervision and with the participation of the Chief Executive
Officer (“CEO”) and the Chief Financial Officer
(“CFO”) of Vestin Mortgage, Inc., the Company’s
Manager, who function as the equivalent of the CEO and CFO of
the Company. Based upon such evaluation, the CEO and CFO have
concluded that, as of the end of the period, the Company’s
disclosure controls and procedures were effective. There have
been no changes in the Company’s internal control over
financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the Company’s most recent fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, the Company’s internal controls over
financial reporting.
|
|
| Item 9B. |
Other Information |
None.
|
|
| Item 10. |
Directors and Executive Officers of Registrant |
We do not have any directors or officers. We are managed by
Vestin Mortgage. Vestin Mortgage is a wholly-owned subsidiary of
Vestin Group, Inc. who is engaged in asset management, real
estate lending and other financial services.
The following sets forth certain information regarding the
directors and executive officers of Vestin Group as of
March 25, 2005:
| |
|
|
|
|
|
|
| Name |
|
Age | |
|
Title |
| |
|
| |
|
|
|
Michael V. Shustek
|
|
|
46 |
|
|
Chairman of the Board, Chief Executive Officer, President and
Director |
|
John Alderfer
|
|
|
60 |
|
|
Chief Financial Officer and Director |
|
Ira S. Levine
|
|
|
44 |
|
|
Secretary |
|
Michael J. Whiteaker
|
|
|
55 |
|
|
Vice President of Regulatory Affairs |
|
Peggy S. Shustek
|
|
|
35 |
|
|
Vice President of Vestin Mortgage, a subsidiary of Vestin Group |
|
Daniel B. Stubbs
|
|
|
43 |
|
|
Senior Vice President, Underwriting of Vestin Mortgage, a
subsidiary of Vestin Group |
|
Robert J. Aalberts
|
|
|
54 |
|
|
Director |
|
Fredrick J. Zaffarese Leavitt
|
|
|
33 |
|
|
Director |
|
Roland M. Sansone
|
|
|
50 |
|
|
Director |
All the directors of Vestin Group hold office until the next
annual meeting of stockholders. The last annual meeting of
Vestin Group stockholders was July 6, 2004. Michael Shustek
can cause a change in the Board of Directors of Vestin Group by
virtue of his controlling ownership interest in Vestin Group.
The By-laws of Vestin Group provide for up to ten directors and
permit the Board of Directors to fill any vacancy on the Board
of Directors. Officers of the company serve at the discretion of
the Board of Directors. The Board of Directors is currently set
at five members.
The principal occupation and business experience for each of our
officers and directors and key employees, for at least the last
five years, are as follows:
Robert J. Aalberts has been a director of Vestin Group
since April 1999. Since 1991, Professor Aalberts has held the
Ernst Lied Professor of Legal Studies professorship in the
College of Business at the University of
32
Nevada, Las Vegas. From 1984 to 1991, Professor Aalberts was an
Associate Professor of Business Law at Louisiana State
University in Shreveport, Louisiana. From 1982 through 1984, he
served as an attorney for Gulf Oil Company. Professor Aalberts
has co-authored a book relating to the regulatory environment,
law and business of real estate; including Real Estate Law
6th
Ed. (2006) published by the Thomson/ West Company. He is
also the author of numerous legal articles, dealing with various
aspects of real estate, business and the practice of law. Since
1992 Professor Aalberts has been the Editor-in-chief of the Real
Estate Law Journal. Professor Aalberts received his Juris Doctor
degree from Loyola University, in New Orleans, Louisiana, a
Masters of Arts from the University of Missouri, Columbia, and
received a Bachelor of Arts degree in Social Sciences, Geography
from the Bemidji State University in Bemidji, Minnesota. He was
admitted to the State Bar of Louisiana in 1982 (currently
inactive status).
John W. Alderfer was appointed the Chief Financial
Officer of Vestin Group effective January 2005.
Mr. Alderfer previously served as Chief Financial Officer
of Vestin Group from September 2002 to February 2004. From
February 2004 to December 2004, Mr. Alderfer served as a
consultant to Vestin Group. From October 1998 to September 2002,
Mr. Alderfer was retired. From September 1996 to October
1998, Mr. Alderfer was a Director, Vice President,
Treasurer, and Chief Financial Officer of Interactive Flight
Technologies, Inc. From September 1990 to June 1996,
Mr. Alderfer was Senior Vice President, Treasurer, and
Chief Financial Officer of Alliance Gaming Corporation.
Mr. Alderfer is the former Senior Vice President, Corporate
Controller and Chief Accounting Officer of Summa Corporation and
The Hughes Corporation, 100% owned by the Estate of Howard R.
Hughes. Mr. Alderfer received his BBA degree in accounting
from Texas Tech University. He is a Certified Public Accountant.
Ira S. Levine has been the Corporate Secretary of Vestin
Group since January 2001. Mr. Levine also served as the
Executive Vice President of Legal and Corporate Affairs from
September 2000 to December 2003. Mr. Levine received his
Bachelor of Science in Business Administration specializing in
Accounting from the University of Nevada in 1982, his Juris
Doctor from Pepperdine University School of Law in 1985 and his
Masters of Legal Letters in Taxation from New York University in
1986. Mr. Levine is a member of the state bars of both
Nevada and California. Since July 2003, Mr. Levine has been
a partner of Levine, Garfinkel & Katz, LLP. From 1997
to 2003, Mr. Levine was a partner in the law firm of
Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP.
Prior to that he was a shareholder in the law firm of Levine,
McBride & Garfinkel, LLP. From 1995 to 1997,
Mr. Levine was a shareholder in the law firm of
Quartes & Brady LLP, formerly known as Streich Lang.
Prior to that, Mr. Levine was senior vice president,
secretary and general counsel of United Gaming, Inc. now known
as Alliance Gaming, Inc. Mr. Levine started his legal
career with the law firm of McKenna Long & Aldridge LLP
formerly known as McKenna, Conner & Cuneo in Los
Angeles, California.
Peggy S. Shustek has been with Vestin Group since
September 1995, and is currently Vice President of Vestin
Mortgage. Ms. Shustek was the President of Vestin Mortgage
from January 2001 to February 2004. From 1997 to 2000,
Ms. Shustek was the Senior Vice President of Vestin
Mortgage. Ms. Shustek is responsible for all new and
existing clients, loan packages and manages investor
relationships and serves as the administrator of the corporate
offices. Ms. Shustek has over ten years of experience in
title, escrow and private lending. Ms. Shustek is the
former wife of Michael V. Shustek, the Company’s Chief
Executive Officer, President and Chairman.
Roland M. Sansone has served as President of Sansone
Development, Inc. since 2002. Sansone Development, Inc. is a
real estate development company. Mr. Sansone has been
self-employed as a Manager and developer of real estate since
1980. Mr. Sansone is currently the president of several
companies that develop, own and manage commercial and
residential property. Mr. Sansone attended Mt.
San Antonio College.
Michael V. Shustek has been a director of Vestin
Mortgage, a subsidiary of Vestin Group, and Chairman of the
Board of Directors, Chief Executive Officer and a director of
Vestin Group since April 1999. In February 2004,
Mr. Shustek became the President of Vestin Group.
Mr. Shustek also serves on the Company’s loan
committee. In 2003, Mr. Shustek became the Chief Executive
Officer of Vestin Mortgage. In 1995, Mr. Shustek founded
Del Mar Mortgage, and has been involved in various aspects of
the real estate
33
industry in Nevada since 1990. In 1993, he founded Foreclosures
of Nevada, Inc., a company specializing in non-judicial
foreclosures. In 1993, Mr. Shustek also started Shustek
Investments, a company that originally specialized in property
valuations for third-party lenders or investors and which
continues today as the primary vehicle for his private
investment portfolio. In 1997, Mr. Shustek was involved in
the initial founding of Nevada First Bank, with the largest
initial capital base of any new state charter in Nevada’s
history. Mr. Shustek has co-authored two books, entitled
“Trust Deed Investments”, on the topic of private
mortgage lending, and “If I Can Do It, So Can You”.
Mr. Shustek is a guest lecturer at the University of
Nevada, Las Vegas, where he also has taught a course in Real
Estate Law and Ethics. Mr. Shustek received a Bachelor of
Science degree in Finance at the University of Nevada, Las
Vegas. Mr. Shustek is the former husband of
Ms. Shustek, the Vice President of Vestin Mortgage.
Daniel B. Stubbs has been the Executive Vice President,
Underwriting of Vestin Mortgage since January 2000.
Mr. Stubbs is responsible for analyzing the risks of each
loan as well as prescribing Title Insurance coverage for
each individual transaction. In addition, Mr. Stubbs serves
on the loan committee and acts as a liaison between Vestin
Mortgage and the various banks that carry its lines of credit.
Mr. Stubbs has over 13 years experience in the
Title Insurance industry. Mr. Stubbs received his
Bachelor of Arts in Communications Studies from the University
of Nevada, in Las Vegas, Nevada.
Michael J. Whiteaker has been Vice President of
Regulatory Affairs of Vestin Group since May 1999 and is
experienced in the banking and finance regulatory fields, having
most recently served with the State of Nevada, Financial
Institution Division from 1982 to 1999 as its Supervisory
Examiner, responsible for the financial and regulatory
compliance audits of all financial institutions in Nevada.
Mr. Whiteaker has worked extensively on matters pertaining
to both state and federal statutes, examination procedures,
policy determination and credit administration for commercial
and real estate loans. From 1973 to 1982 Mr. Whiteaker was
Assistant Vice President of Nevada National Bank, responsible
for a variety of matters including loan review.
Fredrick J. Zaffarese Leavitt has been a director for
Vestin Group since November 2004. Since August of 1993
Mr. Zaffarese has been an accountant for the United States
Department of the Interior where his responsibilities include
the review and audit of various states, local and municipality
governments for compliance with federal laws and regulations as
well as preparation of financial statements for Executive Branch
and Congressional review. Additionally, Mr. Zaffarese sits
on various audit committees involving the utility industries.
Mr. Zaffarese is a CPA and a graduate of University of
Nevada Las Vegas.
|
|
| Item 11. |
Executive Compensation |
Not Applicable.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management |
The following table indicates the beneficial ownership of our
voting securities by each person known by us to be the
beneficial owner of more than 5% of such securities, as of
March 10, 2005. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange
Commission. Unless otherwise indicated, the unit holders listed
possess sole voting and investment power with respect to the
units shown.
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Percentage of | |
| |
|
Units | |
|
Units | |
| |
|
Beneficially | |
|
Beneficially | |
| Name |
|
Owned | |
|
Owned | |
| |
|
| |
|
| |
|
Dr. Bernard Greenblatt
|
|
|
200,000 |
|
|
|
8.10 |
% |
|
880 Buffwood Avenue, Las Vegas,
|
|
|
|
|
|
|
|
|
|
Nevada 89123
|
|
|
|
|
|
|
|
|
34
|
|
| Item 13. |
Certain Relationships and Related Transactions |
Transactions with Management and Others
For the year ended December 31, 2004, we recorded
management fees to our Manager of approximately $36,000.
Additionally, for the year ended December 31, 2004, we
recorded pro rata distributions owed to our Manager of
approximately $82,000.
As of December 31, 2004, amounts due to the Manager and
Vestin Group of approximately $1.1 million are primarily
related to deferred offering costs paid on our behalf as well as
unpaid management fees and distributions.
During the year ended December 31, 2004, we acquired an
office building located in Las Vegas, Nevada (the
“Property”) for approximately $9.8 million, which
is inclusive of $200,000 paid to the Manager for advisory and
diligence fees. As of December 31, 2004, the Property was
fully leased earning rental revenues of $71,645 per month.
The lease terms were reviewed by an independent third party to
evaluate their conformance with market rates. We provided
$4,850,000 of the purchase price from our capital and borrowed
$4,950,000 for the remainder of the purchase price. We
subsequently transferred the Property to our wholly-owned
subsidiary, VFIII HQ, LLC.
The property underlying the building was originally purchased by
an unrelated party from a company wholly owned by the principal
stockholder and Chief Executive Officer of our Manager who has
advised our Manager that he earned a profit of approximately
$1.0 million in connection with the sale.
During the fiscal year ended December 31, 2004, we sold
$5,000,000 in mortgage loans to Vestin Fund II, LLC.
During the fiscal year ended December 31, 2004, we
purchased $10,000,000 in mortgage loans from Vestin
Fund II, LLC.
|
|
| Item 14. |
Principal Accounting Fees and Services |
During the fiscal year ended December 31, 2004 and 2003,
Moore Stephens Wurth Frazer and Torbet, LLP (“Moore
Stephens”) provided various audit, audit related and
non-audit services to us as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
|
Audit Fees
|
|
$ |
59,191 |
|
|
$ |
16,328 |
|
|
Audit Related Fees
|
|
$ |
— |
|
|
$ |
— |
|
|
Tax Fees
|
|
$ |
— |
|
|
$ |
— |
|
|
All Other Fees
|
|
$ |
8,029 |
|
|
$ |
— |
|
The Audit Committee of Vestin Group (the “Audit
Committee”) has considered whether provision of the
services described regarding audit related fees, tax fees and
all other fees above were compatible with maintaining the
independent accountant’s independence and has determined
that such services did not adversely affect Moore Stephens’
independence.
The Audit Committee has direct responsibility to review and
approve the engagement of the independent auditors to perform
audit services or any permissible non-audit services. All audit
and non-audit services to be provided by the independent
auditors must be approved in advance by the Audit Committee. The
Audit Committee may not engage the independent auditors to
perform specific non-audit services proscribed by law or
regulation. All services performed by independent auditors under
engagements entered into on or after January 21, 2005, were
approved by the Audit Committee pursuant to its pre-approval
policy, and none was approved pursuant to the de minimus
exception to the rules and regulations of the Securities and
Exchange Commission on pre-approval.
35
PART IV
|
|
| Item 15. |
Exhibits, Financial Statement Schedules |
(a) The financial statement are contained on Pages F-2
through F-18 on this Annual Report on Form 10-K, and the
list of the financial statement contained herein is set forth on
page F-1, which is hereby incorporated by reference.
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit |
|
|
| No. |
|
Description of Exhibits |
| |
|
|
| |
3 |
.1(1) |
|
Articles of Organization |
| |
3 |
.2(2) |
|
Certificate of Amendment to Articles of Organization |
| |
3 |
.3(3) |
|
Amended and Restated Operating Agreement (included as
Exhibit A to the prospectus) |
| |
4 |
(4) |
|
Distribution Reinvestment Plan |
| |
10 |
.7(5) |
|
Purchase and Sale Agreement, dated August 1, 2004, by and
between Luke Properties, LLC and Vestin Fund III, LLC |
| |
10 |
.8(5) |
|
Assignment and Assumption Agreement dated August 16, 2004
by and between Vestin Fund III, LLC and VFIII HQ, LLC |
| |
10 |
.9 |
|
Office lease agreement dated March 31, 2003 by and between
Luke Properties, LLC and Vestin Fund III, LLC |
| |
31 |
.1 |
|
Section 302 Certification of Michael V. Shustek |
| |
31 |
.2 |
|
Section 302 Certification of John Alderfer |
| |
32 |
|
|
Certification Pursuant to U.S.C. 18 Section 1350 |
|
|
| (1) |
Incorporated herein by reference to our Pre-Effective Amendment
No. 3 to Form S-11 Registration Statement filed on
September 2, 2003, File No. 333-105017. |
| |
| (2) |
Incorporated herein by reference to our Form 10-Q filed on
August 16, 2004, File No. 333-105017. |
| |
| (3) |
Incorporated herein by reference to our Post-Effective Amendment
No. 1 to Form S-11 Registration Statement filed on
April 29, 2004, File No. 333-105017. |
| |
| (4) |
Incorporated herein by reference to Exhibit 4.4 of our
Pre-Effective Amendment No. 3 to Form S-11
Registration Statement filed on September 2, 2003, File
No. 333-105017. |
| |
| (5) |
Incorporated herein by reference to our Form 10-Q filed on
November 15, 2004, File No. 333-105017. |
36
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
thereunto duly authorized.
|
|
| |
Vestin Fund III, LLC |
| |
| |
By: Vestin Mortgage, Inc., its sole Manager |
|
|
|
| |
By: |
/s/ Michael V. Shustek |
|
|
| |
|
| |
Michael V. Shustek |
| |
Chief Executive Officer and Director of the Manager |
| |
(Principal Officer of Manager) |
|
|
| |
|
| |
John Alderfer |
| |
(Chief Financial Officer of the Manager) |
Dated: March 30, 2005
37
CONTENTS
| |
|
|
|
|
|
| |
|
Page | |
| |
|
| |
|
|
|
|
F-2 |
|
| |
|
FINANCIAL STATEMENTS |
| |
|
|
|
F-3 |
|
| |
|
|
|
F-4 |
|
| |
|
|
|
F-5 |
|
| |
|
|
|
F-6 |
|
| |
|
|
|
F-7 |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Vestin
Fund III, LLC
We have audited the accompanying consolidated balance sheets of
Vestin Fund III, LLC (formerly RE Investments III,
LLC) and subsidiary (the “Company”) as of
December 31, 2004 and 2003, and the related consolidated
statements of operations, members’ equity, and cash flows
for the year ended December 31, 2004 and for the period
from April 16, 2003 (Inception) to December 31, 2003.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these balance sheets 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit 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 the Company’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, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Vestin Fund III, LLC (formerly RE Investments III,
LLC) and subsidiary as of December 31, 2004 and 2003, and
the consolidated results of their operations and their
consolidated cash flows for the year then ended
December 31, 2004 and for the period from April 16,
2003 (Inception) to December 31, 2003 in conformity with
U.S. generally accepted accounting principles.
As discussed in Note F of the consolidated financial
statements, the Company has engaged in significant related party
transactions.
|
|
| |
/s/ Moore Stephens Wurth Frazer and Torbet, LLP |
Orange, California
March 24, 2005
F-2
VESTIN FUND III, LLC
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
|
ASSETS |
|
Cash
|
|
$ |
6,285,989 |
|
|
$ |
4,952 |
|
|
Interest receivable
|
|
|
127,263 |
|
|
|
— |
|
|
Investment in mortgage loans, net of allowance for loan losses
of $72,500 as of December 31, 2004
|
|
|
13,519,998 |
|
|
|
— |
|
|
Investment in real property, net of accumulated depreciation of
$76,504
|
|
|
9,813,977 |
|
|
|
— |
|
|
Capitalized loan fees, net of amortization of $4,236
|
|
|
110,566 |
|
|
|
|
|
|
Assets under secured borrowings
|
|
|
2,590,491 |
|
|
|
— |
|
|
Deferred offering costs
|
|
|
926,054 |
|
|
|
667,437 |
|
| |
|
|
|
|
|
|
| |
|
$ |
33,374,338 |
|
|
$ |
672,389 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND MEMBERS’ EQUITY |
|
Liabilities
|
|
|
|
|
|
|
|
|
| |
Due to Manager
|
|
$ |
1,093,628 |
|
|
$ |
673,088 |
|
| |
Secured borrowings
|
|
|
2,590,491 |
|
|
|
— |
|
| |
Note payable
|
|
|
4,927,885 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
8,612,004 |
|
|
|
673,088 |
|
| |
|
Members’ equity — Minimum 1,000,000 units,
maximum 12,000,000 units issued at $10 per unit,
2,471,658 units outstanding at December 31, 2004
|
|
|
24,762,334 |
|
|
|
(699 |
) |
| |
|
|
|
|
|
|
| |
|
Total members’ equity
|
|
|
24,762,334 |
|
|
|
(699 |
) |
| |
|
|
|
|
|
|
| |
|
Total liabilities and members’ equity
|
|
$ |
33,374,338 |
|
|
$ |
672,389 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-3
VESTIN FUND III, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
For the Period from | |
| |
|
For the Year Ended | |
|
April 16, 2003 (Inception) | |
| |
|
December 31, 2004 | |
|
to December 31, 2003 | |
| |
|
| |
|
| |
|
Revenues
|
|
|
|
|
|
|
|
|
| |
Interest income from investments in mortgage loans
|
|
$ |
1,955,911 |
|
|
$ |
— |
|
| |
Rental income
|
|
|
316,625 |
|
|
|
— |
|
| |
Other
|
|
|
87,250 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total revenues
|
|
|
2,359,786 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
| |
Management fees
|
|
|
36,235 |
|
|
|
— |
|
| |
Interest expense related to secured borrowings
|
|
|
630,087 |
|
|
|
|
|
| |
Interest expense
|
|
|
79,976 |
|
|
|
— |
|
| |
Provision for loan losses
|
|
|
72,500 |
|
|
|
— |
|
| |
Depreciation and amortization
|
|
|
80,740 |
|
|
|
— |
|
| |
Professional fees
|
|
|
62,328 |
|
|
|
— |
|
| |
Other
|
|
|
27,987 |
|
|
|
699 |
|
| |
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
989,853 |
|
|
|
699 |
|
| |
|
|
|
|
|
|
| |
|
NET INCOME (LOSS)
|
|
$ |
1,369,933 |
|
|
$ |
(699 |
) |
| |
|
|
|
|
|
|
|
Net income (loss) allocated to members
|
|
$ |
1,369,933 |
|
|
$ |
(699 |
) |
| |
|
|
|
|
|
|
|
Net income (loss) allocated to members per weighted average
membership units
|
|
$ |
0.78 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Weighted average membership units
|
|
|
1,751,700 |
|
|
|
— |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-4
VESTIN FUND III, LLC
CONSOLIDATED STATEMENT OF MEMBERS’ EQUITY
For the Year Ended December 31, 2004
| |
|
|
|
|
|
|
|
|
| |
|
Units | |
|
Amount | |
| |
|
| |
|
| |
|
Members’ equity at December 31, 2003
|
|
|
— |
|
|
$ |
(699 |
) |
|
Issuance of units
|
|
|
2,425,244 |
|
|
|
24,277,898 |
|
|
Distributions
|
|
|
— |
|
|
|
(1,349,851 |
) |
|
Reinvestments of distributions
|
|
|
47,462 |
|
|
|
475,574 |
|
|
Members’ redemptions
|
|
|
(1,048 |
) |
|
|
(10,521 |
) |
|
Net income
|
|
|
— |
|
|
|
1,369,933 |
|
| |
|
|
|
|
|
|
|
Members’ equity at December 31, 2004
|
|
|
2,471,658 |
|
|
$ |
24,762,334 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-5
VESTIN FUND III, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
For the Period from | |
| |
|
For the Year Ended | |
|
April 16, 2003 (Inception) to | |
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
1,369,933 |
|
|
$ |
(699 |
) |
| |
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
| |
|
Depreciation
|
|
|
76,504 |
|
|
|
— |
|
| |
|
Amortization of capitalized loan fees
|
|
|
4,236 |
|
|
|
— |
|
| |
|
Provision for loan losses
|
|
|
72,500 |
|
|
|
— |
|
| |
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
| |
|
|
Interest receivable
|
|
|
(127,263 |
) |
|
|
— |
|
| |
|
|
Capitalized loan fees
|
|
|
(114,802 |
) |
|
|
— |
|
| |
|
|
Due to Manager
|
|
|
161,923 |
|
|
|
5,651 |
|
| |
|
|
|
|
|
|
| |
|
|
|
Net cash provided by operating activities
|
|
|
1,443,031 |
|
|
|
4,952 |
|
| |
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
| |
Investments in mortgage loans on real estate
|
|
|
(20,442,020 |
) |
|
|
— |
|
| |
Purchase of investments in mortgage loans from Vestin
Fund II, LLC
|
|
|
(10,000,000 |
) |
|
|
— |
|
| |
Proceeds received from sale of mortgage loans to Vestin
Fund II, LLC
|
|
|
5,000,000 |
|
|
|
— |
|
| |
Sale of mortgage loans
|
|
|
2,113,791 |
|
|
|
— |
|
| |
Proceeds from loan payoff
|
|
|
9,735,731 |
|
|
|
— |
|
| |
Purchase of investment in real property
|
|
|
(4,940,481 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
|
Net cash used by investing activities
|
|
|
(18,532,979 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
| |
Proceeds from issuance of member units
|
|
|
24,277,898 |
|
|
|
— |
|
| |
Payments on notes payable
|
|
|
(22,115 |
) |
|
|
— |
|
| |
Members’ redemptions
|
|
|
(10,521 |
) |
|
|
— |
|
| |
Distributions, net of reinvestments
|
|
|
(874,277 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
|
Net cash provided by financing activities
|
|
|
23,370,985 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
|
NET CHANGE IN CASH
|
|
|
6,281,037 |
|
|
|
4,952 |
|
|
Cash, beginning
|
|
|
4,952 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Cash, ending
|
|
$ |
6,285,989 |
|
|
$ |
4,952 |
|
| |
|
|
|
|
|
|
|
Interest paid during the period
|
|
$ |
79,976 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
| |
Offering costs paid by Vestin Mortgage, Inc. recorded as
deferred offering costs and due to manager on the accompanying
balance sheet
|
|
$ |
258,617 |
|
|
$ |
667,437 |
|
| |
|
|
|
|
|
|
| |
Change in loans funded through secured borrowing
|
|
$ |
2,590,491 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
| |
Note payable related to acquisition of investment in real estate
|
|
$ |
4,950,000 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-6
VESTIN FUND III, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Note A — Organization
We were organized in April 16, 2003 as a Nevada limited
liability company. Under our Operating Agreement, our existence
ends on December 31, 2023, unless the members vote to
extend our duration. In this prospectus we refer to Vestin
Fund III, LLC as “the Company,”, “the
Fund”, “we,” “us,” or “our.”
We are not a mutual fund or an investment company within the
meaning of the Investment Company Act of 1940 nor are we subject
to any regulation thereunder. We are engaged in the business of
investing in mortgage loans where the collateral is real
property. We also invest in income-producing real property such
as office properties, and intend to invest in other
income-producing real property, such as industrial and retail
properties, multifamily residential units, and assisted living
facilities. As a company investing in mortgage loans and raising
funds through a public offering, we are subject to the North
American Securities Administration Act Mortgage Program
Guidelines and Real Estate Guidelines (collectively, the
“NASAA Guidelines”) promulgated by the state
securities administrators.
Our Manager is Vestin Mortgage, Inc. (the “Manager”),
a Nevada corporation engaged in the business of brokerage,
placement and servicing of commercial loans secured by real
property. Our Manager is a wholly owned subsidiary of Vestin
Group, Inc., a Delaware corporation (“Vestin Group”).
Vestin Group’s common stock currently trades in the pink
sheets published by the National Quotation Bureau. On
March 25, 2005, the Board of Directors of Vestin Group
announced that Vestin Group had received from its majority
shareholder, Michael V. Shustek, a proposal to acquire any and
all shares of Vestin Group common stock not currently owned by
him. As a result, Vestin Group may become a privately held
company in the near future. Through its subsidiaries, Vestin
Group is engaged in asset management, real estate lending and
other financial services and has originated over
$1.8 billion in real estate loans. Our Operating Agreement
provides that the Manager controls the daily operating
activities of the Company; including the power to assign duties,
to determine how to invest our assets, to sign bills of sale,
title documents, leases, notes, security agreements, mortgage
investments and contracts, and to assume direction of the
business operations. As a result, our operating results are
dependent on the Manager’s ability and intent to continue
to service the Company’s assets. The operating agreement
also provides that the members have certain rights, including
the right to terminate the Manager subject to a majority vote of
the members.
Vestin Mortgage, Inc. is also the Manager of Vestin Fund I,
LLC (“Fund I”), Vestin Fund II, LLC
(“Fund II”) and in Vestin Nevada, Inc., a company
wholly owned by our Manager’s Chief Executive Officer.
These entities also invest in commercial mortgage loans.
VF III HQ, LLC, a wholly owned subsidiary, is a single
asset limited liability company created for the purpose of
owning real estate.
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All significant
inter-company transactions and balances have been eliminated in
consolidation.
Note B — Summary of Significant Accounting
Policies
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-7
VESTIN FUND III, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Interest income on loans is accrued by the effective interest
method. We do not recognize interest income from loans once they
are determined to be impaired. A loan is impaired when, based on
current information and events, it is probable that we will be
unable to collect all amounts due according to the contractual
terms of the loan agreement or when the payment of interest is
90 days past due.
|
|
|
Investments in Mortgage Loans |
Investments in mortgage loans are secured by trust deeds and
mortgages. Generally, all of our mortgage loans require interest
only payments with a balloon payment of the principal at
maturity. We have both the intent and ability to hold mortgage
loans until maturity and therefore, mortgage loans are
classified and accounted for as held for investment and are
carried at amortized cost. Loans sold to or purchased from
affiliates are accounted for at the principal balance and no
gain or loss is recognized by us or any affiliate. Loan to value
ratios are based on appraisals obtained at the time of loan
origination and may not reflect subsequent changes in value
estimates. Such appraisals are generally dated within
12 months of the date of loan origination and may be
commissioned by the borrower. The appraisals may be for the
current estimate of the “as-if developed” value of the
property, which approximates the post-construction value of the
collateralized property assuming that such property is
developed. “As-if developed” values on raw land loans
or acquisition and development loans often dramatically exceed
the immediate sales value and may include anticipated zoning
changes and timely successful development by the purchaser. As
most of the appraisals will be prepared on an “as-if
developed” basis, if a loan goes into default prior to any
development of a project, the market value of the property may
be substantially less than the appraised value. As a result,
there may be less security than anticipated at the time the loan
was originally made. If there is less security and a default
occurs, we may not recover the full amount of the loan.
|
|
|
Allowance for Loan Losses |
We maintain an allowance for loan losses on our investments in
mortgage loans for estimated credit impairment. The
Manager’s estimate of losses is based on a number of
factors including the types and dollar amounts of loans in the
portfolio, adverse situations that may affect the
borrower’s ability to repay, prevailing economic conditions
and the underlying collateral securing the loan. Additions to
the allowance are provided through a charge to earnings and are
based on an assessment of certain factors, which may indicate
estimated losses on the loans. Actual losses on loans are
recorded as a charge-off or a reduction to the allowance for
loan losses. Subsequent recoveries of amounts previously charged
off are added back to the allowance or included as income. Our
Manager believes that the allowance for loan losses totaling
$72,500 as of December 31, 2004, included in the
accompanying balance sheet is adequate to address estimated and
expected credit impairment.
|
|
|
Investments in Real Property |
Real property is stated at cost, less accumulated depreciation.
Amounts capitalized as investments in real property consist of
the cost of acquisition or construction and any tenant
improvements or major improvements that extend the useful life
of the related asset. All repairs and maintenance are expensed
as incurred. Upon acquisition, the purchase price of the
property is allocated to land, building and improvements and
other intangible assets and associated liabilities as required
by SFAS No. 141 “Business Combinations”. The
allocation to land is based on an estimate of its fair value
based on all available information including appraisals. The
allocation to other intangible assets represents the value
associated with the in-place leases, including leasing
commission, legal and other related costs.
F-8
VESTIN FUND III, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Real property is depreciated using the straight-line method over
the useful lives of the assets by class generally as follows:
| |
|
|
|
Land
|
|
Not depreciated |
|
Building
|
|
40 years |
|
Building improvements
|
|
10-25 years |
|
Land improvements
|
|
20-25 years |
|
Tenant improvements
|
|
Lease term |
|
Intangible lease assets
|
|
Lease term |
Our Manager continually monitors events and changes in
circumstances that could indicate carrying amounts of real
estate and related intangible assets may not be recoverable.
When indicators of potential impairment are present, our Manager
assess the recoverability of the assets by determining whether
the carrying value of the real estate and related intangible
assets will be recovered through the undiscounted future cash
flows expected from the use and eventual disposition of the
asset. In the event the expected undiscounted future cash flows
do not exceed the carrying value, we adjust the real estate and
intangible assets to their fair value and recognize an
impairment loss. Our Manager has determined there has been no
impairment in the carrying value of real property held by us
during the year ended December 31, 2004.
Vestin Mortgage will be reimbursed for out of pocket offering
expenses in an amount not to exceed 2% of the gross proceeds of
the offering of our units. As of December 31, 2004,
approximately $926,000 of offering costs were incurred by us and
paid by our Manager on our behalf, which was recorded as
deferred offering costs. These deferred offering costs, which
are primarily legal, accounting and registration fees, will be
converted to membership units at a price of $10 per unit
once we raise enough capital to ensure the deferred offering
costs do not exceed 2% of the gross proceeds of the offering.
Any additional offering costs paid by our Manager will be
converted to membership units of up to 2% of the gross proceeds
of the offering. Any additional costs above 2% of the gross
proceeds of the offering will be absorbed by Vestin Mortgage.
Loans that have been participated to third party investors
through intercreditor agreements (“Agreements”) are
accounted for as secured borrowings in accordance with
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
(“SFAS No. 140”). The Agreements provide
us additional funding sources for mortgage loans whereby a third
party investor (the “Investor”) may participate in
certain mortgage loans with us and/or Vestin Fund I and/or
Vestin Fund II (collectively, the “Lead
Lenders”). In the event of borrower non-performance, the
intercreditor agreements provide that the Lead Lenders must
repay the Investor’s loan amount either by
(i) continuing to remit to the Investor the interest due on
the participated loan amount; (ii) substituting an
alternative loan acceptable to the Investor; or
(iii) repurchasing the participation from the Investor for
the outstanding balance plus accrued interest.
Additionally, an Investor may participate in certain loans with
the Lead Lenders through participation agreements. In the event
of borrower non-performance, the participation agreement allows
the Investor to be repaid up to the amount of the
Investor’s investment prior to the Lead Lender being
repaid. Mortgage loan financing under the participation
agreements are also accounted for as a secured borrowing in
accordance with SFAS No. 140.
F-9
VESTIN FUND III, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note C — Investments in Mortgage Loans
Investments in mortgage loans as of December 31, 2004 are
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number | |
|
|
|
Weighted | |
|
|
|
|
| |
|
of | |
|
|
|
Average | |
|
Portfolio | |
|
Loan to | |
| Loan Type |
|
Loans | |
|
Balance** | |
|
Interest Rate | |
|
Percentage | |
|
Value* | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Acquisition and development
|
|
|
3 |
|
|
$ |
6,319,351 |
|
|
|
10.90 |
% |
|
|
46.49 |
% |
|
|
56.74 |
% |
|
Bridge
|
|
|
1 |
|
|
|
1,500,000 |
|
|
|
10.00 |
% |
|
|
11.04 |
% |
|
|
50.62 |
% |
|
Commercial
|
|
|
2 |
|
|
|
3,348,152 |
|
|
|
13.27 |
% |
|
|
24.63 |
% |
|
|
73.28 |
% |
|
Construction
|
|
|
1 |
|
|
|
265,451 |
|
|
|
12.00 |
% |
|
|
1.95 |
% |
|
|
66.53 |
% |
|
Land
|
|
|
3 |
|
|
|
2,159,544 |
|
|
|
12.81 |
% |
|
|
15.89 |
% |
|
|
71.82 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
10 |
|
|
$ |
13,592,498 |
|
|
|
11.71 |
% |
|
|
100.00 |
% |
|
|
62.73 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
Loan to value ratios are based on appraisals obtained at the
time of loan origination and may not reflect subsequent changes
in value estimates. Such appraisals, which may be commissioned
by the borrower, are generally dated no greater than
12 months prior to the date of loan origination. The
appraisals may be for the current estimate of the “as-if
developed” value of the property, which approximates the
post-construction value of the collateralized property assuming
that such property is developed. “As-if developed”
values on raw land loans or acquisition and development loans
often dramatically exceed the immediate sales value and may
include anticipated zoning changes, selection by a purchaser
against multiple alternatives, and successful development by the
purchaser; upon which development is dependent on availability
of financing. As most of the appraisals will be prepared on an
“as-if developed” basis, if a loan goes into default
prior to any development of a project, the market value of the
property may be substantially less than the appraised value. As
a result, there may be less security than anticipated at the
time the loan was originally made. If there is less security and
a default occurs, the Company may not recover the full amount of
the loan. |
The following is a schedule of investments in mortgage loans by
lien position. Up to 10% of our loans may be secured by second
deeds of trust based upon the total offering of
$100 million. From time to time, until the offering is
complete, the percentage of second mortgages we invest in may
exceed 10%.
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
|
| |
|
2004 | |
|
Portfolio | |
| Loan Type |
|
Balance** | |
|
Percentage | |
| |
|
| |
|
| |
|
First mortgages
|
|
$ |
11,014,604 |
|
|
|
81.03 |
% |
|
Second mortgages
|
|
|
2,577,894 |
|
|
|
18.97 |
% |
| |
|
|
|
|
|
|
| |
|
$ |
13,592,498 |
|
|
|
100.00 |
% |
| |
|
|
|
|
|
|
The following is a schedule of contractual maturities of
investments in mortgage loans as of December 31, 2004:
| |
|
|
|
|
|
2005
|
|
$ |
6,109,620 |
|
|
2006
|
|
|
7,482,878 |
|
| |
|
|
|
| |
|
$ |
13,592,498 |
|
| |
|
|
|
F-10
VESTIN FUND III, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a schedule by geographic location of
investments in mortgage loans as of:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
|
| |
|
2004 | |
|
Portfolio | |
| |
|
Balance** | |
|
Percentage | |
| |
|
| |
|
| |
|
Arizona
|
|
$ |
6,864,538 |
|
|
|
50.50 |
% |
|
California
|
|
|
1,648,152 |
|
|
|
12.12 |
% |
|
Nevada
|
|
|
4,079,808 |
|
|
|
30.02 |
% |
|
Oklahoma
|
|
|
1,000,000 |
|
|
|
7.36 |
% |
| |
|
|
|
|
|
|
| |
|
$ |
13,592,498 |
|
|
|
100.00 |
% |
| |
|
|
|
|
|
|
|
|
| ** |
The following table reconciles the balance of the loan portfolio
to the amount shown on the accompanying Balance Sheet. |
| |
|
|
|
|
| |
|
December 31, | |
| |
|
2004 | |
| |
|
| |
|
Balance per Loan Portfolio
|
|
$ |
13,592,498 |
|
|
Less:
|
|
|
|
|
|
Allowance for Loan Losses
|
|
|
(72,500 |
) |
| |
|
|
|
|
Balance per Balance Sheet
|
|
$ |
13,519,998 |
|
| |
|
|
|
We have six mortgage loan products consisting of bridge,
commercial, construction, acquisition and development, land, and
residential loans. The effective interest rates on all product
categories range from 10% to 15%. Revenue by product will
fluctuate based upon relative balances during the period.
Our Manager has evaluated the collectibility of the loans in our
portfolio in light of the types and dollar amounts of loans in
the portfolio, adverse situations that may affect the
borrower’s ability to repay, prevailing economic conditions
and the underlying collateral securing the loan. Our Manager
believes a general allowance for loan losses totaling $72,500
included in the accompanying balance sheet as of
December 31, 2004 is adequate to address estimated credit
losses in our investment in mortgage loan portfolio as of that
date. No specific allowances were deemed necessary.
Decisions regarding an allowance for loan losses require
management’s judgment. As a result, there is an inherent
risk that such judgment will prove incorrect. In such event,
actual losses may exceed (or be less than) the amount of any
allowance. To the extent that we experience losses greater than
the amount of the allowance, we may incur a charge to earnings
that will adversely affect our operating results and the amount
of any cash available for distribution.
The following is a rollforward of the allowance for loan losses
for the year ended December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
|
Balance at | |
| |
|
December 31, |
|
|
|
December 31, | |
| Description |
|
2003 |
|
Provisions | |
|
2004 | |
| |
|
|
|
| |
|
| |
|
General Valuation Allowance
|
|
$ |
— |
|
|
$ |
72,500 |
|
|
$ |
72,500 |
|
| |
|
|
|
|
|
|
|
|
|
Our Manager often grants extensions on loans pursuant to the
terms of the original loan agreements, which permit extensions
by mutual consent. Such extensions are generally provided on
loans where the original term was 12 months or less and
where a borrower requires additional time to complete a
construction project or negotiate take out financing. However,
our Manager only grants extensions when a borrower is in full
compliance with the terms of the loan, including, but not
limited to the borrower’s obligation to make interest
payments on the loan. As of December 31, 2004, we did not
have any investments in loans which have been extended.
F-11
VESTIN FUND III, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note D — Investment in Real Property
During the year ended December 31, 2004, we acquired an
approximately 42,000 square foot office building located at
8379 West Sunset Blvd in Las Vegas, Nevada. The purchase price
and related closing costs was approximately $9.8 million.
As of December 31, 2004, the building was fully leased
earning rental revenues of $71,645 per month. We provided
$4,850,000 of the purchase price from our capital and borrowed
$4,950,000 for the remainder of the purchase price. We
subsequently conveyed the real property to our wholly-owned
subsidiary, VF III HQ LLC.
Subsequent to the purchase of this property we invested an
additional $90,481 in tenant improvements. As of
December 31, 2004 the carrying value of this property was
$9,813,977 which is net of accumulated depreciation of $76,504.
See Note F for further discussion.
Note E — Leasing Activity
Future minimum base rental income due from our Manager under a
non-cancelable lease in effect as of December 31, 2004 is
as follows:
| |
|
|
|
|
|
2005
|
|
$ |
871,203 |
|
|
2006
|
|
|
906,051 |
|
|
2007
|
|
|
942,293 |
|
|
2008
|
|
|
979,985 |
|
|
2009
|
|
|
1,019,185 |
|
|
Thereafter
|
|
|
5,316,833 |
|
| |
|
|
|
| |
|
$ |
10,035,550 |
|
| |
|
|
|
Note F — Related Party Transactions
For the year ended December 31, 2004, we recorded
management fees to our Manager of approximately $36,000.
Additionally, for the year ended December 31, 2004, we
recorded pro rata distributions owed to our Manager of
approximately $82,000.
As of December 31, 2004, amounts due to the Manager and
Vestin Group of approximately $1.1 million are primarily
related to deferred offering costs paid on our behalf as well as
unpaid management fees and distributions.
During the year ended December 31, 2004, we acquired an
office building located in Las Vegas, Nevada (the
“Property”) for approximately $9.8 million, which
is inclusive of $200,000 paid to the Manager for advisory and
diligence fees. As of December 31, 2004, the Property was
fully leased earning rental revenues of $71,645 per month.
The lease terms were reviewed by an independent third party to
evaluate their conformance with market rates. We provided
$4,850,000 of the purchase price from our capital and borrowed
$4,950,000 for the remainder of the purchase price. We
subsequently transferred the Property to our wholly-owned
subsidiary, VFIII HQ, LLC.
The property underlying the building was originally purchased by
an unrelated party from a company wholly owned by the principal
stockholder and Chief Executive Officer of our Manager who has
advised our Manager that he earned a profit of approximately
$1.0 million in connection with the sale.
During the fiscal year ended December 31, 2004, we sold
$5,000,000 in mortgage loans to Vestin Fund II, LLC.
F-12
VESTIN FUND III, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During the fiscal year ended December 31, 2004, we
purchased $10,000,000 in mortgage loans from Vestin
Fund II, LLC.
Note G — Secured Borrowings
Intercreditor agreements provide us additional funding sources
for mortgage loans whereby a third party investor (the
“Investor”) may participate in certain mortgage loans
with us, Vestin Mortgage, Vestin Fund I, and Vestin
Fund II (collectively, the “Lead Lenders”). In
the event of borrower non-performance, the Lead Lenders are
required to protect the Investor by (i) continuing to remit
to the Investor the interest due on the participation amount;
(ii) substituting an alternative loan acceptable to the
Investor; or (iii) repurchasing the participation from the
Investor for the outstanding balance of the participation plus
accrued interest.
Additionally, an Investor may participate in certain loans with
Lead Lenders through participation agreements. In the event of
borrower non-performance, the participation agreement allows the
Investor to be repaid up to the amount of the Investor’s
investment prior to the Lead Lenders being repaid.
As of December 31, 2004, funds being used under
intercreditor and participation agreements where we have
potential obligations as defined above totaled $2.6 million.
Note H — Note Payable
Note payable consists of the following:
| |
|
|
|
|
| |
|
Balance at | |
| |
|
December 31, | |
| |
|
2004 | |
| |
|
| |
|
10-year note payable to banking institution secured by real
property, bearing interest at 5.6% per annum, payable in
monthly principal and interest installments of $30,694
|
|
$ |
4,927,885 |
|
| |
|
|
|
As of December 31, 2004, the scheduled maturity of the note
payable is as follows:
| |
|
|
|
|
|
2005
|
|
$ |
94,815 |
|
|
2006
|
|
|
100,263 |
|
|
2007
|
|
|
106,024 |
|
|
2008
|
|
|
112,116 |
|
|
2009
|
|
|
118,563 |
|
|
Thereafter
|
|
|
4,396,104 |
|
| |
|
|
|
| |
|
$ |
4,927,885 |
|
| |
|
|
|
Note I — Members’ Equity
For the year ended December 31, 2004, we sold
2,425,244 units for proceeds totaling $24,277,898.
Additionally, members’ received 47,462 units as a
result of reinvestments of distributions.
Our Manager will be reimbursed for out of pocket offering
expenses in an amount not to exceed 2% of the gross proceeds of
the offering of our units. As of December 31, 2004,
approximately $926,000 of offering costs were incurred by us and
paid by our Manager on our behalf, which was recorded as
deferred offering costs. These deferred offering costs, which
are primarily legal, accounting and registration fees, will be
converted to membership units at a price of $10 per unit
once we raise enough capital to ensure the deferred offering
costs do not exceed 2% of the gross proceeds of the offering.
Any additional offering costs paid by our Manager will
F-13
VESTIN FUND III, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
be converted to membership units of up to 2% of the gross
proceeds of the offering. Any additional costs above 2% of the
gross proceeds of the offering will be absorbed by our Manager.
|
|
|
Allocations and Distributions |
In accordance with our operating agreement, profits, gains and
losses are to be credited to and charged against each
member’s capital account in proportion to their respective
capital accounts as of the close of business on the last day of
each calendar month.
Interest received on mortgage loans net of expenses, is
distributed monthly to members, members may elect to reinvest
their distributions.
Distributions of proceeds from the repayment of principal on a
mortgage loan will be made to the members pro rata based on
their capital accounts.
For the year ended December 31, 2004, members received
distributions totaling $1,349,851.
We are required by our operating agreement to maintain working
capital reserves of approximately 3% of the aggregate capital
accounts of the members. This reserve is available to pay any
future expenses in excess of revenues, satisfy obligations of
underlying secured properties, expend money to satisfy our
unforeseen obligations and for other permitted uses of our
working capital. Working capital reserves up to 3% in cash or
cash equivalents are excluded from the funds committed to
investments in determining what proportion of the offering
proceeds and reinvested distributions have been invested in
mortgage loans or real property.
|
|
|
Value of Members’ Capital Accounts |
In accordance with Section 7.8 of the our operating
agreement, our Manager has completed its annual review of the
value of our assets and has determined that, as a result of an
increase in the value of our assets, the value of members
capital accounts must be adjusted from $10 per unit to
$10.30 per unit. As a result, new units sold by the Company
on or after November 10, 2004 have been sold at
$10.30 per unit. The change in valuation is primarily for
tax and capital account purposes and does not reflect the change
in the value of the units calculated in accordance with GAAP.
Accordingly, unit prices calculated under GAAP may be different
than the adjusted price per unit.
Note J — Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs an amendment of ARB No. 43,
Chapter 4” (SFAS No. 151).
SFAS No. 151 amends the guidance in ARB No. 43,
Chapter 4, “Inventory Pricing,” to clarify the
accounting for abnormal amounts of idle facility expense,
handling costs and wasted material (spoilage). Among other
provisions, the new rule requires that such items be recognized
as current-period charges, regardless of whether they meet the
criterion of “so abnormal” as stated in ARB
No. 43. SFAS No. 151 is effective for fiscal
years beginning after June 15, 2005. We do not expect that
adoption of SFAS No. 151 will have a material effect
on our consolidated financial position, consolidated results of
operations, or liquidity.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets, an amendment of APB
Opinion No. 29, Accounting for Nonmonetary
Transactions” (SFAS No. 153).
SFAS No. 153 eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive
assets in paragraph 21 (b) of APB Opinion No. 29,
“Accounting for Nonmonetary Transactions,” and
replaces it with an exception for exchanges that do not have
commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash
flows of the entity are
F-14
VESTIN FUND III, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
expected to change significantly as a result of the exchange.
SFAS No. 153 is effective for periods beginning after
June 15, 2005. We do not expect that adoption of
SFAS No. 153 will have a material effect on our
consolidated financial position, consolidated results of
operations, or liquidity.
In December 2004, the FASB issued Staff Position
No. FAS 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004”
(“FAS 109-2”). The American Jobs Creation Act of
2004 introduces a special one-time dividends received deduction
on the repatriation of certain foreign earnings to a
U.S. taxpayer, provided certain criteria are met.
FAS 109-2 provides accounting and disclosure guidance for
the repatriation provision, and was effective immediately upon
issuance. We do not believe that the adoption of FAS 109-2
will have a significant effect on our financial statements.
Note K — Legal Matters Involving the Manager
Vestin Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a
company wholly owned by Michael Shustek, the largest shareholder
and CEO of Vestin Group are defendants in a civil action
entitled Desert Land, L.L.C. et al. v. Owens Financial
Group, Inc. et al (the “Action”). The Action was
initiated by Desert Land, L.L.C. (“Desert Land”) on
various loans arranged by Del Mar Mortgage, Inc. and/or Vestin
Mortgage. On April 10, 2003, the United States District
Court for the District of Nevada (the “Court”) entered
judgment jointly and severally in favor of Desert Land against
Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc.
Judgment was predicated upon the Court’s finding that Del
Mar Mortgage, Inc. received an unlawful penalty fee from the
plaintiffs.
Defendants subsequently filed a motion for reconsideration. The
Court denied the motion and, on August 13, 2003, held that
Vestin Group, Vestin Mortgage, and Del Mar Mortgage, Inc. are
jointly and severally liable for the judgment in the amount of
$5,683,312 (which amount includes prejudgment interest and
attorney’s fees). On August 27, 2003, the Court stayed
execution of the judgment against Vestin Group and Vestin
Mortgage based upon the posting of a bond in the amount of
$5,830,000. Mr. Shustek personally posted a cash bond
without any cost or obligation to Vestin Group and Vestin
Mortgage. Additionally, Del Mar Mortgage, Inc. has indemnified
Vestin Group and Vestin Mortgage for any losses and expenses in
connection with the Action, and Mr. Shustek has guaranteed
the indemnification with his cash bond. On September 12,
2003, all of the defendants held liable to Desert Land appealed
the judgment to the Ninth Circuit United States Court of
Appeals. We are not a party to the Action.
Our Manager is involved in a number of legal proceedings
concerning matters arising in connection with the conduct of its
business activities. Our Manager believes it has meritorious
defenses to each of these actions and intends to defend them
vigorously. Our Manager believes that it is not a party to any
pending legal or arbitration proceedings that would have a
material adverse effect on its financial condition or results of
operations or cash flows, although it is possible that the
outcome of any such proceedings could have a material impact on
our Manager’s net income in any particular period.
Note L — Legal Matters Involving the Company
The staff of the Pacific Regional Office of the Securities and
Exchange Commission (“SEC”) has been conducting an
informal inquiry into certain matters related to us, Vestin
Group, Fund I and Fund II. We have fully cooperated
during the course of the informal inquiry. On January 6,
2005, we received from the SEC an “Order Directing Private
Investigation and Designating Officers to Take Testimony”
which appears to focus on the financial reporting of us,
Fund I and Fund II. We intend to continue to cooperate
fully in this matter and believe that we have complied with SEC
disclosure requirements. We cannot at this time predict the
outcome of this matter.
F-15
VESTIN FUND III, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We may become involved in a number of legal proceedings
concerning matters arising in connection with the conduct of our
business activities. The outcome of any such proceedings could
have a material impact on our net income in any particular
period.
Note M — Selected Quarterly Financial Data
(unaudited)
The following schedule is a selected quarterly financial date
for fiscal year ended December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
| |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
$ |
304,338 |
|
|
$ |
647,907 |
|
|
$ |
686,239 |
|
|
$ |
721,302 |
|
|
$ |
2,359,786 |
|
|
Expenses
|
|
|
122,451 |
|
|
|
360,914 |
|
|
|
252,987 |
|
|
|
253,501 |
|
|
|
989,853 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
181,887 |
|
|
$ |
286,993 |
|
|
$ |
433,252 |
|
|
$ |
467,801 |
|
|
$ |
1,369,933 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to members per weighted average membership
units
|
|
$ |
0.17 |
|
|
$ |
0.22 |
|
|
$ |
0.25 |
|
|
$ |
0.20 |
|
|
$ |
0.78 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
$ |
52,217 |
|
|
$ |
351,617 |
|
|
$ |
420,056 |
|
|
$ |
525,961 |
|
|
$ |
1,349,851 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions allocated to members per weighted average
membership unit
|
|
$ |
0.05 |
|
|
$ |
0.27 |
|
|
$ |
0.25 |
|
|
$ |
0.23 |
|
|
$ |
0.77 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average membership units
|
|
|
1,093,043 |
|
|
|
1,317,948 |
|
|
|
1,712,296 |
|
|
|
2,338,011 |
|
|
|
1,751,700 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note N — Segment Information
Operating segments are components of an enterprise about which
separate financial information is available that is regularly
reviewed by the chief operating decision makers in assessing
performance and deciding how to allocate resources. Reportable
segments consist of one or more operating segments with similar
economic characteristics, products and services, production
processes, type of customer, distribution system and regulatory
environment.
The information provided for Segment Reporting is based on
internal reports utilized by management. The presentation and
allocation of overhead and the net contribution for the
operating segments may not reflect the actual economic costs,
contribution or results of operations of the segments as stand
alone businesses. If a different basis of allocation were
utilized, the relative contributions of the segments might
differ but the relative trends in segments would, in
management’s view, likely not be impacted.
Our two reportable segments are investments in mortgage loans
and investments in real estate.
F-16
VESTIN FUND III, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Financial information concerning our reportable segments is
presented as follows for the year ended December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Investment in | |
|
Investments in | |
|
|
| |
|
Mortgage Loans | |
|
Real Estate | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest income
|
|
$ |
1,955,911 |
|
|
$ |
— |
|
|
$ |
1,955,911 |
|
| |
Rental income
|
|
|
— |
|
|
|
316,625 |
|
|
|
316,625 |
|
| |
Other
|
|
|
87,250 |
|
|
|
— |
|
|
|
87,250 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,043,161 |
|
|
|
316,625 |
|
|
|
2,359,786 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Management fees
|
|
|
20,995 |
|
|
|
15,240 |
|
|
|
36,235 |
|
| |
Interest related to secured borrowings
|
|
|
630,087 |
|
|
|
— |
|
|
|
630,087 |
|
| |
Provision for loan losses
|
|
|
72,500 |
|
|
|
— |
|
|
|
72,500 |
|
| |
Professional fees
|
|
|
36,114 |
|
|
|
26,214 |
|
|
|
62,328 |
|
| |
Other
|
|
|
5,026 |
|
|
|
22,961 |
|
|
|
27,987 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
764,722 |
|
|
|
64,415 |
|
|
|
829,137 |
|
|
EBITDA*
|
|
|
1,278,439 |
|
|
|
252,210 |
|
|
|
1,530,649 |
|
| |
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Depreciation and amortization
|
|
|
— |
|
|
|
80,740 |
|
|
|
80,740 |
|
| |
Interest expense
|
|
|
— |
|
|
|
79,976 |
|
|
|
79,976 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,278,439 |
|
|
$ |
91,494 |
|
|
$ |
1,369,933 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| * |
EBITDA represents net earnings before interest expense, income
taxes, depreciation and amortization. We present EBITDA because
we consider it an important supplemental measure of our
performance but it does not represent cash flows. |
EBITDA is a measure of our performance that is not required by,
or presented in accordance with, GAAP. EBITDA is not a
measurement of our financial performance under GAAP and should
not be considered as an alternative to net earnings, operating
income or any other performance measures derived in accordance
with GAAP or as an alternative to cash flow from operating
activities as a measure of our liquidity. We compensate for
these limitations by relying primarily on our GAAP results and
using EBITDA only supplementally.
Although depreciation and amortization are non-cash charges, the
assets being depreciated or amortized often will have to be
replaced in the future, and EBITDA does not reflect any cash
requirements for such replacements. Other companies in our
industry may calculate EBITDA differently than we do, limiting
its usefulness as a comparative measure. In addition, EBITDA
does not reflect the impact of earnings or charges resulting
from matters we consider not to be indicative of our ongoing
operations.
Note O — Subsequent Events
Vestin Group’s common stock was delisted from the Nasdaq
SmallCap Market in early February 2005. The common stock
currently trades in the pink sheets published by the National
Quotation Bureau.
On March 25, 2005, the Board of Directors of Vestin Group
announced that Vestin Group had received a proposal from its
controlling shareholder, Michael V. Shustek, to acquire any and
all of the shares of Vestin
F-17
VESTIN FUND III, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Group common stock which he does not currently own. As a result,
Vestin Group may become a privately held company in the near
future.
F-18
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit | |
|
|
| No. | |
|
Description of Exhibits |
| | |
|
|
| |
3 |
.1(1) |
|
Articles of Organization |
| |
3 |
.2(2) |
|
Certificate of Amendment to Articles of Organization |
| |
3 |
.3(3) |
|
Amended and Restated Operating Agreement (included as
Exhibit A to the prospectus) |
| |
4 |
(4) |
|
Distribution Reinvestment Plan |
| |
10 |
.7(5) |
|
Purchase and Sale Agreement, dated August 1, 2004, by and
between Luke Properties, LLC and Vestin Fund III, LLC |
| |
10 |
.8(5) |
|
Assignment and Assumption Agreement dated August 16, 2004
by and between Vestin Fund III, LLC and VFIII HQ, LLC |
| |
10 |
.9 |
|
Office lease agreement dated March 31, 2003 by and between
Luke Properties, LLC and Vestin Fund III, LLC |
| |
31 |
.1 |
|
Section 302 Certification of Michael V. Shustek |
| |
31 |
.2 |
|
Section 302 Certification of John Alderfer |
| |
32 |
|
|
Certification Pursuant to U.S.C. 18 Section 1350 |
|
|
| (1) |
Incorporated herein by reference to our Pre-Effective Amendment
No. 3 to Form S-11 Registration Statement filed on
September 2, 2003, File No. 333-105017. |
| |
| (2) |
Incorporated herein by reference to our Form 10-Q filed on
August 16, 2004, File No. 333-105017. |
| |
| (3) |
Incorporated herein by reference to our Post-Effective Amendment
No. 1 to Form S-11 Registration Statement filed on
April 29, 2004, File No. 333-105017. |
| |
| (4) |
Incorporated herein by reference to Exhibit 4.4 of our
Pre-Effective Amendment No. 3 to Form S-11
Registration Statement filed on September 2, 2003, File
No. 333-105017. |
| |
| (5) |
Incorporated herein by reference to our Form 10-Q filed on
November 15, 2004, File No. 333-105017. |