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EX-32 - CERTIFICATIONS - VESTIN FUND III LLCexhibit32.htm
EX-31.1 - CERTIFICATION - VESTIN FUND III LLCexhibit31_1.htm
EX-31.2 - CERTIFICATION - VESTIN FUND III LLCexhibit31_2.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

Or

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number: 333-105017
LOGO
VESTIN FUND III, LLC
(Exact name of registrant as specified in its charter)


NEVADA
 
87-0693972
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)

8880 W SUNSET ROAD, SUITE 200, LAS VEGAS, NEVADA 89148
 (Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number: 702.227.0965

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  [X]    No   [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  [   ]   No   [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]
Accelerated filer [   ]
Non-accelerated filer [   ]
(Do not check if a smaller reporting company)
Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  [   ]    No   [X]

As of August 13, 2010, 2,024,424 membership units in the Company were outstanding.


 
 

 

TABLE OF CONTENTS

   
Page
     
 
     
     
 
     
 
     
 
     
 
     
 
     
     
     
     
     
 
     
     
     
     
     
     
     
 
     
   
     
   
     
   




PART I - FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

VESTIN FUND III, LLC
 
   
BALANCE SHEETS
 
   
ASSETS
 
   
   
June 30, 2010
   
December 31, 2009
 
   
(Unaudited)
       
Assets
           
Cash and cash equivalents
  $ 623,000     $ 1,880,000  
Cash - restricted
    700,000       700,000  
Marketable securities - related party
    154,000       246,000  
Interest and other receivables, net of allowance for doubtful accounts of $0 at June 30, 2010 and $12,000 at December 31, 2009
    241,000       4,000  
Notes receivable, net of allowance of $156,000 at June 30, 2010 and December 31, 2009
    --       --  
Real estate held for sale
    509,000       835,000  
Investment in real estate loans, net of allowance for loan loss of $1,100,000 at June 30, 2010 and $2,194,000 at December 31, 2009
    2,548,000       3,353,000  
Due from related parties
    273,000       248,000  
                 
Total assets
  $ 5,048,000     $ 7,266,000  
                 
                 
LIABILITIES AND MEMBERS' EQUITY
 
                 
Liabilities
               
Accounts payable and accrued liabilities
  $ 51,000     $ 55,000  
Deferred income
    985,000       985,000  
                 
Total liabilities
    1,036,000       1,040,000  
                 
Commitments and contingencies
               
                 
Members' equity
               
Members' units - authorized 10,000,000 units, 2,024,424 units issued and outstanding at June 30, 2010 and  December 31, 2009
    4,302,000       6,424,000  
Accumulated other comprehensive loss
    (290,000 )     (198,000 )
                 
Total members' equity
    4,012,000       6,226,000  
                 
Total liabilities and members' equity
  $ 5,048,000     $ 7,266,000  



The accompanying notes are an integral part of these statements.
 
- 1 -



VESTIN FUND III, LLC
 
   
STATEMENTS OF OPERATIONS
 
   
(UNAUDITED)
 
   
   
For The
Three Months Ended
   
For The
Six Months Ended
 
   
6/30/2010
   
6/30/2009
   
6/30/2010
   
6/30/2009
 
                         
Revenues
                       
Interest income from investment in real estate loans
  $ 24,000     $ 72,000     $ 59,000     $ 114,000  
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
    --       51,000       --       51,000  
Other income
    1,000       --       25,000       1,000  
Total revenues
    25,000       123,000       84,000       166,000  
                                 
Operating expenses
                               
Interest expense
    --       3,000       --       3,000  
Provision for loan loss
    70,000       474,000       70,000       628,000  
Professional fees
    65,000       64,000       116,000       122,000  
Professional fees - related party
    6,000       3,000       8,000       24,000  
Provision for doubtful accounts related to receivable
    --       1,000       --       2,000  
Other
    6,000       25,000       10,000       46,000  
Total operating expenses
    147,000       570,000       204,000       825,000  
                                 
Loss from operations
    (122,000 )     (447,000 )     (120,000 )     (659,000 )
                                 
Non-operating income
                               
Interest income from banking institutions
    1,000       6,000       1,000       13,000  
Total non-operating income
    1,000       6,000       1,000       13,000  
                                 
Income (loss) from real estate held for sale
                               
Revenue related to real estate held for sale
    --       --       --       6,000  
Net loss on sale of real estate held for sale
    --       (30,000 )     --       (30,000 )
Write-downs on real estate held for sale
    (120,000 )     (779,000 )     (120,000 )     (1,246,000 )
Expenses related to real estate held for sale
    (10,000 )     (31,000 )     (32,000 )     (73,000 )
Total loss from real estate held for sale
    (130,000 )     (840,000 )     (152,000 )     (1,343,000 )
                                 
NET LOSS
  $ (251,000 )   $ (1,281,000 )   $ (271,000 )   $ (1,989,000 )
                                 
Net loss allocated to members
  $ (251,000 )   $ (1,281,000 )   $ (271,000 )   $ (1,989,000 )
                                 
Net loss allocated to members per weighted average membership unit
  $ (0.12 )   $ (0.63 )   $ (0.13 )   $ (0.93 )
                                 
Weighted average membership units
    2,024,424       2,024,424       2,024,424       2,134,765  



The accompanying notes are an integral part of these statements.
 
- 2 -



VESTIN FUND III, LLC
 
   
STATEMENT OF MEMBERS' EQUITY AND OTHER COMPREHENSIVE LOSS
 
   
FOR THE SIX MONTHS ENDED JUNE 30, 2010
 
   
(UNAUDITED)
 
   
   
Units
   
Amount
 
Members' equity at December 31, 2009
    2,024,424     $ 6,226,000  
                 
Comprehensive loss:
               
                 
Net loss
            (271,000 )
                 
Unrealized loss on marketable securities
            (92,000 )
                 
Total comprehensive loss
            (363,000 )
                 
Liquidating distributions
            (1,851,000 )
                 
Members' equity at June 30, 2010 (unaudited)
    2,024,424     $ 4,012,000  



The accompanying notes are an integral part of these statements.
 
- 3 -




VESTIN FUND III, LLC
 
   
STATEMENTS OF CASH FLOWS
 
   
(UNAUDITED)
 
   
   
For The
Six Months Ended
 
   
06/30/10
   
06/30/09
 
Cash flows from operating activities:
           
Net loss
  $ (271,000 )   $ (1,989,000 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Provision for doubtful accounts related to receivable included in other expense
    (3,000 )     2,000  
Provision for loan loss
    70,000       628,000  
Write-downs on real estate held for sale
    120,000       1,246,000  
Gain on sale of real estate held for sale
    --       (24,000 )
Loss on real estate held for sale
    --       54,000  
Change in operating assets and liabilities:
               
Interest receivable
    2,000       (12,000 )
Accounts payable and accrued liabilities
    (4,000 )     (77,000 )
Due to related parties
    (25,000 )     (345,000 )
Other assets
    --       (8,000 )
Net cash used in operating activities
    (111,000 )     (525,000 )
                 
Cash flows from investing activities:
               
Purchase of investments in real estate loans from:
               
VRM II
    --       (500,000 )
Proceeds from loan payoff
    299,000       1,000  
Sale of investments in real estate loans to:
               
VRM II
    200,000       --  
Third parties
    --       197,000  
Proceeds related to real estate held for sale
    206,000       985,000  
Changes in restricted cash
    --       285,000  
Net cash provided by investing activities
    705,000       968,000  
                 
Cash flows from financing activities:
               
Proceeds from note payable
    --       45,000  
Members' redemptions
    --       (1,322,000 )
Liquidating distributions, net of reinvestments
    (1,584,000 )     --  
Liquidating distributions - related parties
    (267,000 )     --  
Net cash used in financing activities
    (1,851,000 )     (1,277,000 )
                 
NET CHANGE IN CASH
    (1,257,000 )     (834,000 )
                 
Cash, beginning of period
    1,880,000       1,484,000  
                 
Cash, end of period
  $ 623,000     $ 650,000  


The accompanying notes are an integral part of these statements.
 
- 4 -




VESTIN FUND III, LLC
 
   
STATEMENTS OF CASH FLOWS (CONTINUED)
 
   
(UNAUDITED)
 
   
   
For The
Six Months Ended
 
   
06/30/10
   
06/30/09
 
             
Supplemental disclosures of cash flows information:
           
Interest paid
  $ --     $ 3,000  
                 
Non-cash investing and financing activities:
               
Adjustment to allowance for loan losses related to sale and payment of investment in real estate loan
  $ --     $ 985,000  
Adjustment to interest receivable and related allowance associated with sale of investment in real estate loan
  $ (226,000 )   $ 5,000  
Impairment on restructured loan reclassified to allowance for loan loss
  $ --     $ 30,000  
Account receivable related to sale of loan collateral, held in escrow account
  $ 236,000     $ --  
Real estate held for sale acquired through foreclosure, net of prior allowance
  $ --     $ 2,134,000  
Write off of interest receivable and related allowance
  $ 10,000     $ 15,000  
Unrealized loss on marketable securities - related party
  $ 92,000     $ 56,000  




The accompanying notes are an integral part of these statements.
 
- 5 -


VESTIN FUND III, LLC

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2010

(UNAUDITED)

NOTE A — ORGANIZATION

Vestin Fund III, LLC was organized in April 2003 as a Nevada limited liability company for the purpose of investing in commercial real estate loans (hereafter referred to as “real estate loans”) and income-producing real property.  In this report, we refer to Vestin Fund III, LLC as “the Company,” “our Company,” the “Fund,” “we,” “us,” or “our”.

We commenced operations in February 2004.  Prior to March 2007, we invested in revenue-generating commercial real estate and loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our Operating Agreement as “Mortgage Assets”).  On March 5, 2007, a majority of our members approved the Third Amended and Restated Operating Agreement, which limited the Company’s investment objectives to investments in real estate loans.

At a special meeting of our members held on July 2, 2009, a majority of our members voted to approve the dissolution and winding up of the Fund, in accordance with the Plan of Complete Liquidation and Dissolution (the “Plan”) as set forth in Annex A of the Fund’s proxy statement filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009.  The Plan became effective upon its approval by the members on July 2, 2009.  As a result, we have commenced an orderly liquidation and we no longer invest in new real estate loans.  We anticipate that the liquidation will be substantially completed by the second half of 2014.  Pursuant to the Plan, we will make liquidating distributions to members on a quarterly basis as funds become available, subject to any reserve established by our manager.  Our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.

On January 26, 2010, we made an initial liquidating distribution to all Fund Members, in the aggregate amount of approximately $1.0 million, in accordance with the Plan.  In addition, on April 8, 2010, we made another liquidating distribution to all Fund Members, in the aggregate amount of approximately $0.9 million, in accordance with the Plan.  The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund.  See Note H – Members’ Equity of the Notes to the Financial Statements included in Part I, Item 1 Financial Statements of this Quarterly Report on Form 10-Q.

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.

Vestin Group, Inc. (“Vestin Group”), a Delaware corporation, owns a significant majority of our manager Vestin Mortgage, Inc. (the “manager” or “Vestin Mortgage”).  Michael Shustek, the CEO and director of our manager, wholly owns Vestin Group, which is engaged in asset management, real estate lending and other financial services through its subsidiaries.  Our manager, prior to June 30, 2006, also operated as a licensed Nevada mortgage broker and was generally engaged in the business of brokerage, placement and servicing of commercial loans secured by real property.  On July 1, 2006, a mortgage broker license was issued to an affiliated company, Vestin Originations, Inc. (“Vestin Originations”) that has continued the business of brokerage, placement and servicing of real estate loans.  In addition, Vestin Group owns a significant majority of Vestin Originations.  On September 1, 2007, the servicing of real estate loans was assumed by our manager, for us.




Pursuant to our Operating Agreement and the Plan of Complete Liquidation and Dissolution approved by a majority of our members on July 2, 2009, our manager will continue to manage our operations during the liquidation process.  Consequently, the orderly liquidation of our assets and our operating results are dependent upon our manager’s ability and performance in managing our liquidation.

Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC (“Fund I”) and Vestin Realty Mortgage II, Inc. (“VRM II”), as the successor by merger to Vestin Fund II, LLC (“Fund II”).  These entities have been formed to invest in real estate loans.

During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services to us, VRM I and VRM II.  Our manager’s former Chief Financial Officer (“CFO”) and the Controller of our manager became employees of Strategix Solutions.  Strategix Solutions is managed by LL Bradford and Company, LLC (“LL Bradford”), a certified public accounting firm that has provided non-audit accounting services to us.  The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005.  Strategix Solutions is owned by certain partners of LL Bradford.  None of the owners of Strategix Solutions have served or are currently serving as officers of the Company or our manager. Our agreement with Strategix Solutions may be terminated with or without cause by our manager or our Board of Directors upon 30 days prior written notice.  Strategix Solutions may terminate the contract, with or without cause, upon 60 days prior written notice.

Our manager’s former CFO, Rocio. Revollo, was replaced, effective May 21, 2010, as part of the Company’s efforts to reduce general and administrative expenses.  Pursuant to the terms of our agreement with Strategix Solutions, they will designate, subject to the approval of our Board of Directors, a new CFO for the Company.  Strategix Solutions is currently looking for a new CFO; however, Ms. Revollo’s replacement has not yet been identified.  Our current CEO, Michael Shustek, is acting as interim CFO.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”).  Management has included all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented.  Interim results are not necessarily indicative of results for a full year.  The information included in this Form 10-Q should be read in conjunction with information included in the 2009 annual report filed on Form 10-K.

Management Estimates

The preparation of financial statements in conformity with GAAP 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.

Cash and Cash Equivalents

Cash and cash equivalents include interest-bearing and non-interest-bearing bank deposits, money market accounts, short-term certificates of deposit with original maturities of three months or less, and short-term instruments with a liquidation provision of one month or less.

Restricted Cash

We have restricted cash, which relates to a cash deposit held as collateral by a banking institution for an irrevocable stand by letter of credit to support rent payments on the property we sold during November 2006.  The requirement for the deposit expires at the end of the lease on August 31, 2014.  For a discussion of litigation between us, Vestin Group and the building owner, see Note M - Legal Matters Involving The Company.



Revenue Recognition

Interest is recognized as revenue on performing loans when earned according to the terms of the loans, using the effective interest method.  We do not accrue interest income on loans once they are determined to be non-performing.  A loan is non-performing 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.  Cash receipts will be allocated to interest income, except when such payments are specifically designated by the terms of the loan as principal reduction.  Interest is recognized on impaired loans on the cash basis method.

Deferred Revenue Recognition

Deferred revenue supports the amount of sales proceeds withheld on a sale of our property during November 2006, which we were required to establish an irrevocable stand by letter of credit, which expires August 31, 2014.  Revenue will be recognized at the expiration of the lease referred to above or when restricted cash is received or when amounts are received from our manager.  For discussion of litigation between us, Vestin Group and the building owner, see Note M – Legal Matters Involving The Company.

Investments in Real Estate Loans

Prior to July 2, 2009, we may have, from time to time, acquired or sold investments in real estate loans from or to our manager or other related parties pursuant to the terms of our Operating Agreement without a premium.  The primary purpose was to either free up capital to provide liquidity for various reasons, such as loan diversification, or place excess capital in investments to maximize the use of our capital.  Selling or buying loans allowed us to diversify our loan portfolio within these parameters.  Due to the short-term nature of the loans we made and the similarity of interest rates in loans we normally would invest in, the fair value of a loan typically approximated its carrying value.  Accordingly, discounts or premiums typically did not apply upon sales of loans and therefore, generally no gain or loss is recorded on these transactions, regardless of whether to a related or unrelated party.

Investments in real estate loans are secured by deeds of trust or mortgages.  Generally, our real estate loans require interest only payments with a balloon payment of the principal at maturity.  We have both the intent and ability to hold real estate loans until maturity and therefore, real estate 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 initially based on appraisals obtained at the time of loan origination and are updated, when new appraisals are received or when management’s assessment of the value has changed, to 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 Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The Company’s impaired loans include troubled debt restructuring, and performing and non-performing loans in which full payment of principal or interest is not expected.  The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of its collateral.

Loans that have been modified from their original terms are evaluated to determine if the loan meets the definition of a Troubled Debt Restructuring (“TDR”) as defined by ASC 310-40.  When the Company modifies the terms of an existing loan that is considered a TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement.  If the modification calls for deferred interest, it is recorded as interest income as cash is collected.




Allowance for Loan Losses

We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment.  Our 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.  Generally, subsequent recoveries of amounts previously charged off are added back to the allowance and included as income.

Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property.  As a commercial real estate lender who was willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the real estate lending industry.  We and our manager generally approved loans more quickly than other real estate lenders and, due to our expedited underwriting process; there is a risk that the credit inquiry we performed may have not reveal all material facts pertaining to a borrower and the security.

Additional facts and circumstances may be discovered as we continue our efforts in the collection and foreclosure processes.  This additional information often causes management to reassess its estimates.  In recent years, we have revised estimates of our allowance for loan losses.  Circumstances that have and may continue to cause significant changes in our estimated allowance include, but are not limited to:

 
·
Declines in real estate market conditions, which can cause a decrease in expected market value;

 
·
Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;

 
·
Lack of progress on real estate developments after we advance funds.  We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances.  After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;

 
·
Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed property; and

 
·
Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.

Real Estate Held for Sale

Real estate held for sale (“REO”) includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions.  While pursuing foreclosure actions, we seek to identify potential purchasers of such property.  It is not our intent to invest in or to own real estate as a long-term investment.  We generally seek to sell properties acquired through foreclosure as quickly as circumstances permit.  The carrying values of REO are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

Management classifies REO when the following criteria are met:




 
·
Management commits to a plan to sell the properties;

 
·
The property is available for immediate sale in its present condition subject only to terms that are usual and customary;

 
·
An active program to locate a buyer and other actions required to complete a sale have been initiated;

 
·
The sale of the property is probable;

 
·
The property is being actively marketed for sale at a reasonable price; and

 
·
Withdrawal or significant modification of the sale is not likely.

Classification of Operating Results from Real Estate Held for Sale

Generally, operating results and cash flows from long-lived assets held for sale are to be classified as discontinued operations as a separately stated component of net income.  Our operations related to REO are separately identified in the accompanying statements of operations.

Investment in Marketable Securities – Related Party

Investment in marketable securities – related party consists of stock in VRM II.  The securities are stated at fair value as determined by the closing market price as of June 30, 2010.  All securities are classified as available-for-sale.

We are required to evaluate our available-for-sale investment for other-than-temporary impairment charges.  We will determine when an investment is considered impaired (i.e., decline in fair value below its amortized cost), and evaluate whether the impairment is other than temporary (i.e., investment value will not be recovered over its remaining life).  If the impairment is considered other than temporary, we will recognize an impairment loss equal to the difference between the investment’s basis and its fair value.

According to the SEC Staff Accounting Bulletin, Topic 5: Miscellaneous Accounting, M - Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities, there are numerous factors to be considered in such an evaluation and their relative significance will vary from case to case.  The following are a few examples of the factors that individually or in combination, indicate that a decline is other than temporary and that a write-down of the carrying value is required:

 
·
The length of the time and the extent to which the market value has been less than cost;

 
·
The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; or

 
·
The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.


 
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Fair Value Disclosures

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. “the exit price”) in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows.  The established hierarchy for inputs used, in measuring fair value, maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources.  Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances.  The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

 
·
Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access.  Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 
·
Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 
·
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement, which utilize the Company’s estimates and assumptions.

If the volume and level of activity for an asset or liability have significantly decreased, we will still evaluate our fair value estimate as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  In addition, since we are a publicly traded company, we are required to make our fair value disclosures for interim reporting periods.

Net Income Allocated to Members Per Weighted Average Membership Unit

Net income allocated to members per weighted average membership unit is computed by dividing net income calculated in accordance with GAAP by the weighted average number of membership units outstanding for the period.

Segments

We operate as one business segment.

Income Taxes

Limited liability companies (“LLCs”) are not liable for federal or state income taxes and, therefore, no provision for income taxes is made in the accompanying financial statements.  Rather, a proportionate share of the LLC’s income, deductions, credits and tax preference items are reported to the individual members for inclusion in their tax returns.

NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

Financial instruments with concentration of credit and market risk include cash, marketable securities related party and loans secured by deeds of trust.

We maintain cash deposit accounts and certificates of deposit, which, at times, may exceed federally-insured limits.  To date, we have not experienced any losses.  As of June 30, 2010 and December 31, 2009, we had approximately $0.8 million and $2.3 million, respectively, in excess of the federally-insured limits.

 
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As of June 30, 2010, 47% and 42% of our loans were in Nevada and Oregon, respectively, compared to 40% and 27%, respectively, as of December 31, 2009.  As a result of this geographical concentration of our real estate loans, the downturn in the local real estate markets in these states has had a material adverse effect on us.

At June 30, 2010 and December 31, 2009, the loan to our largest borrower represented 42% and 27%, respectively, of our total investment in real estate loans.  When funded in December 2007, this loan constituted approximately 7.0% of our total investment in real estate loans.  The percentage of this loan increased due to the decrease in other loans through payments, sales, foreclosures and modifications.  This commercial property real estate loan is located in Oregon with a first lien position and has an outstanding balance due to us of approximately $1.5 million.  As of June 30, 2010, this loan was considered non-performing.  During the six months ended June 30, 2010, two of our performing loans totaling $13.5 million, of which our portion was approximately $0.6 million, accounted for approximately 76% of our interest income.  During June 2010, one of these loans was paid in full, totaling $11.1 million, of which our portion was approximately $0.3 million.  During the six months ended June 30, 2009, two of our performing loans totaling approximately $26.8 million, of which our portion was approximately $0.7 million, accounted for approximately 35% of our interest income.  Any additional defaults in our loan portfolio will have a material adverse effect on us.

A borrower’s ability to repay its real estate loan obligation in a large lump-sum payment may be dependent upon the borrower’s ability to refinance the obligation or otherwise raise a substantial amount of cash.  With the weakened economy, credit continues to be difficult to obtain and as such, many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have been otherwise adversely impacted.  In addition, an increase in interest rates over the loan rate applicable at origination of the loan may have an adverse effect on our borrower’s ability to refinance.

For additional information regarding the above non-performing loans, see “Non-Performing Loans” in Note D – Investments In Real Estate Loans.

Common Guarantors

As of June 30, 2010 and December 31, 2009, three loans totaling approximately $0.9 million, representing approximately 25.4% and 16.7%, respectively, of our portfolio’s total value, had a common guarantor.  One of the three loans, totaling approximately $0.1 million, was secured by a second lien position.  All three loans were considered performing as of June 30, 2010 and December 31, 2009.

NOTE D — INVESTMENTS IN REAL ESTATE LOANS

As of June 30, 2010 and December 31, 2009, all of our loans provided for interest only payments with a “balloon” payment of principal payable and any accrued interest payable in full at the end of the term.

In addition, we invested in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time.  At June 30, 2010 and December 31, 2009, we had no investments in real estate loans that had interest reserves.

Loan Portfolio

As of June 30, 2010, we had three remaining types of real estate loan products consisting of commercial, construction, and land.  The effective interest rates on all product categories range from 0% to 15% as a result of troubled debt restructuring whereby, the total interest on one performing loan is now being fully accrued as of June 30, 2010 and payable at maturity.  Revenue by product will fluctuate based upon relative balances during the period.


 
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During the three months ended June 30, 2010, the Trustee in a Bankruptcy case, regarding one of our non-performing commercial loans in California, sold the assets of the Borrower to an unrelated third party for an aggregate amount of $4.1 million.  The proceeds, net of all court costs, closing costs, trustee’s fees, real estate taxes and security guard services, total approximately $3.4 million.  The amount due to us from this Borrower was $1.4 million; however, another lender is claiming an interest in the proceeds of the bankruptcy sale, purportedly based on loans of approximately $0.9 million, secured by some of the equipment located at the property.  A motion to determine secured interest has been filed with the Bankruptcy Court on our behalf, the Court has not yet ruled on our motion.  Management believes the amount we will recover from the proceeds of the bankruptcy sale will be approximately $0.2 million and an account receivable in such amount has been recorded on our balance sheet.

Investments in real estate loans as of June 30, 2010, were as follows:

Loan Type
 
Number of Loans
   
Balance *
   
Weighted Average Interest Rate
   
Portfolio Percentage
   
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
 
                               
Commercial
    5     $ 2,389,000       10.58%       65.49%       96.81%  
Construction
    2       808,000       3.00%       22.15%       100.00%  
Land
    1       451,000       8.00%       12.36%       78.54%  
Total
    8     $ 3,648,000       8.58%       100.00%       94.27%  

Investments in real estate loans as of December 31, 2009, were as follows:

Loan Type
 
Number of Loans
   
Balance *
   
Weighted Average Interest Rate
   
Portfolio Percentage
   
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
 
                               
Commercial
    7     $ 4,288,000       11.28%       77.30%       78.10%  
Construction
    2       808,000       3.00%       14.57%       100.00%  
Land
    1       451,000       8.00%       8.13%       78.54%  
Total
    10     $ 5,547,000       9.81%       100.00%       81.78%  

 
*Please see Balance Sheet Reconciliation below.

The “Weighted Average Interest Rate” as shown above is based on the contractual terms of the loans for the entire portfolio including non-performing loans.  The weighted average interest rate on performing loans only, as of June 30, 2010 and December 31, 2009, was 4.38% and 7.87%, respectively.  Please see “Non-Performing Loans” and “Asset Quality and Loan Reserves” below for further information regarding performing and non-performing loans.

Loan-to-value ratios are generally based on the most recent appraisals and may not reflect subsequent changes in value and include allowances for loan losses.  Recognition of allowance for loan losses will result in a maximum loan-to-value ratio of 100% per loan.


 
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The following is a schedule of priority of real estate loans as of June 30, 2010 and December 31, 2009:

Loan Type
 
Number of Loans
   
June 30, 2010 Balance *
   
Portfolio
Percentage
   
Number of Loans
   
December 31, 2009 Balance *
   
Portfolio
Percentage
 
                                     
First deeds of trust
    4     $ 2,779,000       76.18%       6     $ 4,678,000       84.33%  
Second deeds of trust
    4       869,000       23.82%       4       869,000       15.67%  
Total
    8     $ 3,648,000       100.00%       10     $ 5,547,000       100.00%  

 
*Please see Balance Sheet Reconciliation below.

The following is a schedule of contractual maturities of investments in real estate loans as of June 30, 2010:

Non-performing and past due loans (a)
  $ 2,522,000  
July 2010 – September 2010
    --  
October 2010 – December 2010
    118,000  
January 2011 – March 2011
    808,000  
April 2011 – June 2011
    --  
July 2011 – September 2011
    --  
October 2011 – December 2011
    200,000  
Thereafter
    --  
         
Total
  $ 3,648,000  

 
(a)
Amounts include the balance of non-performing loans and loans that have been extended subsequent to June 30, 2010.

The following is a schedule by geographic location of investments in real estate loans as of June 30, 2010 and December 31, 2009:

   
June 30, 2010
Balance *
   
Portfolio Percentage
   
December 31, 2009
Balance *
   
Portfolio Percentage
 
                         
Arizona
  $ 200,000       5.48%     $ 200,000       3.60%  
California
    --       0.00%       1,400,000       25.24%  
Nevada
    1,728,000       47.37%       2,227,000       40.15%  
Oregon
    1,520,000       41.67%       1,520,000       27.40%  
Texas
    200,000       5.48%       200,000       3.61%  
Total
  $ 3,648,000       100.00%     $ 5,547,000       100.00%  

 
*Please see Balance Sheet Reconciliation below.

 
Balance Sheet Reconciliation

The following table reconciles the balance of the loan portfolio to the amount shown on the accompanying Balance Sheets.

 
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June 30, 2010 Balance
   
December 31, 2009 Balance
 
Balance per loan portfolio
  $ 3,648,000     $ 5,547,000  
Less:
               
Allowance for loan losses (a)
    (1,100,000 )     (2,194,000 )
Balance per balance sheet
  $ 2,548,000     $ 3,353,000  

 
(a)
Please refer to Specific Reserve Allowance below.

Non-Performing Loans

As of June 30, 2010, we had three loans considered non-performing (i.e., 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).  These loans are currently carried on our books at a value of approximately $1.7 million, net of allowance for loan losses of approximately $0.5 million, which does not include the allowances of approximately $0.6 million relating to performing loans as of June 30, 2010.  Except as otherwise provided below, these loans have been placed on non-accrual of interest status and may be the subject of pending foreclosure proceedings.  At June 30, 2010, the following loan types were non-performing:

Loan Type
 
Number Of Non-Performing Loans
   
Balance at
June 30, 2010
   
Allowance for Loan Losses
   
Net Balance at
June 30, 2010
 
                         
                         
Commercial
    2     $ 1,720,000     $ (457,000 )   $ 1,263,000  
Land
    1       451,000       --       451,000  
Total
    3     $ 2,171,000     $ (457,000 )   $ 1,714,000  

 
·
Commercial – As of June 30, 2010, two of our five commercial loans were considered non-performing.  The outstanding balance on the two non-performing loans was $20.0 million, of which our portion is approximately $1.7 million.  As of June 30, 2010, these loans have been non-performing from 16 to 25 months.  Our manager has commenced foreclosure proceedings on these loans, and has proceeded with legal action to enforce the personal guarantees as our manager deems appropriate.  As of June 30, 2010, based on our manager’s evaluations and updated appraisals, our manager has provided a specific allowance to these commercial loans of approximately $15.0 million, of which our portion is approximately $0.5 million.  In addition, one of our two non-performing loans totaling approximately $0.2 million has been fully impaired and is secured by a second deed of trust.  As of August 10, 2010, the loan balance has not been charged off.

 
·
Land – As of June 30, 2010, our only land loan was considered non-performing.  The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower.  The outstanding balance on the loan is $3.2 million, of which our portion is approximately $0.5 million.  During April 2010, this non-performing loan complied with the terms of its loan agreement and was considered a performing loan; however, in May 2010 this loan became non-performing again due to failure to comply with its loan agreement.  Our manager has commenced foreclosure proceedings on this loan.  As of June 30, 2010, based on current estimates with respect to the value of the underlying collateral, our manager believes that such collateral is sufficient to protect us against further losses of principal.

Asset Quality and Loan Reserves

Losses may occur from investing in real estate loans.  The amount of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.


 
- 15 -



The conclusion that a real estate loan is uncollectible or that collectability is doubtful is a matter of judgment.  On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment.  The fact that a loan is temporarily past due does not necessarily mean that the loan is non-performing.  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 collectability 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;

 
·
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 on an individual loan basis; we do not have a general allowance for loan losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  Our ratio of total allowance for loan losses to total loans with an allowance for loan loss is 34%.  The following is a breakdown of allowance for loan losses related to performing loans and non-performing loans as of June 30, 2010 and December 31, 2009:

   
As of June 30, 2010
 
   
Balance
   
Allowance for loan losses
   
Balance, net of allowance
 
                   
Non-performing loans – no related allowance
  $ 451,000     $ --     $ 451,000  
Non-performing loans – related allowance
    1,720,000       (457,000 )     1,263,000  
Subtotal non-performing loans
    2,171,000       (457,000 )     1,714,000  
                         
Performing loans – no related allowance
    --       --       --  
Performing loans – related allowance
    1,477,000       (643,000 )     834,000  
Subtotal performing loans
    1,477,000       (643,000 )     834,000  
                         
Total
  $ 3,648,000     $ (1,100,000 )   $ 2,548,000  


   
As of December 31, 2009
 
   
Balance
   
Allowance for loan losses *
   
Balance, net of allowance
 
                   
Non-performing loans – no related allowance
  $ 451,000     $ --     $ 451,000  
Non-performing loans – related allowance
    3,120,000       (1,551,000 )     1,569,000  
Subtotal non-performing loans
    3,571,000       (1,551,000 )     2,020,000  
 
                       
Performing loans – no related allowance
    499,000       --       499,000  
Performing loans – related allowance
    1,477,000       (643,000 )     834,000  
Subtotal performing loans
    1,976,000       (643,000 )     1,333,000  
                         
Total
  $ 5,547,000     $ (2,194,000 )   $ 3,353,000  


 
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*Please refer to Specific Reserve Allowances below.

Our manager evaluated our loans and, based on current estimates with respect to the value of the underlying collateral, believes that such collateral is sufficient to protect us against further losses of principal.  However, such estimates could change or the value of the underlying real estate could decline.  Our manager will continue to evaluate our loans in order to determine if any other allowance for loan losses should be recorded.

 
Specific Reserve Allowances

As of June 30, 2010, we have provided a specific reserve allowance for two non-performing loans and five performing loans based on updated appraisals of the underlying collateral and/or our evaluation of the borrower.  The following table is a roll-forward of the allowance for loan losses for the six months ended June 30, 2010, and 2009 by loan type.

Loan Type
 
Balance at
12/31/09
   
Specific Reserve Allocation
   
Sales
   
Loan Pay Downs
   
Transfers to REO
   
Balance at
06/30/10
 
                                     
Commercial
  $ 1,941,000     $ 70,000     $ (1,164,000 )   $ --     $ --     $ 847,000  
Construction
    253,000       --       --       --       --       253,000  
Land
    --       --       --       --       --       --  
Total
  $ 2,194,000     $ 70,000     $ (1,164,000 )   $ --     $ --     $ 1,100,000  


Loan Type
 
Balance at
12/31/08
   
Specific Reserve Allocation *
   
Sales
   
Loan Pay Downs
   
Transfers to REO
   
Balance at
06/30/09
 
                                     
Commercial
  $ 3,284,000     $ 272,000     $ (1,000,000 )   $ --     $ (601,000 )   $ 1,955,000  
Construction
    222,000       344,000       --       --       --       566,000  
Land
    1,940,000       42,000       (985,000 )     --       (955,000 )     42,000  
Total
  $ 5,446,000     $ 658,000     $ (1,985,000 )   $ --     $ (1,556,000 )   $ 2,563,000  

 
* The difference between the specific reserve allocation of $658,000 shown above and the $628,000 on the statement of operations is $30,000.  As of December 31, 2008, a commercial loan included an impairment reserve, applied to the loan balance, of $30,000.  During March 2009, the impairment reserve for this loan was reclassified to its existing allowance for loan loss.

 
·
Commercial – As of June 30, 2010, all five of our commercial loans had a specific reserve allowance totaling approximately $19.4 million, of which our portion is approximately $0.8 million.  The outstanding balance on these five loans was approximately $36.1 million, of which our portion was $2.4 million.  As of June 30, 2010, two commercial loans had a specific reserve allowance for the full amount of the loan.  Our total on these loans was approximately $0.6 million, as of June 30, 2010, and are secured by second deeds of trust.  Of the two fully impaired loans, one of them was non-performing and totaled approximately $0.2 million.  As of June 30, 2010, neither of the two fully impaired non-performing loans had been charged off.  We will continue to evaluate our position in these loans.

 
·
Construction – As of June 30, 2010, both of our construction loans had a specific reserve allowance totaling approximately $4.3 million, of which our portion was approximately $0.3 million.  The outstanding balance on these two loans was approximately $14.4 million, of which our portion is $0.8 million.

 
·
Land – As of June 30, 2010, our land loan did not have a specific reserve allowance.


 
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Troubled Debt Restructuring

As of June 30, 2010 and December 31, 2009, we had four loans, respectively, totaling approximately $1.1 million, respectively, that met the definition of TDR.  When the Company modifies the terms of an existing loan that is considered a TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement.  If the modification calls for deferred interest, it is recorded as interest income as cash is collected.  Impairment on these loans is generally determined by the less of the value of the underlying collateral or the present value of expected future cash flows.  The following is a breakdown of our TDR loans that were considered performing and non-performing loans as of June 30, 2010 and December 31, 2009:

As of June 30, 2010
                                   
   
Total
   
Performing
   
Non-Performing
 
Loan Type
 
Number of Loans
   
Fund Balance
   
Number of Loans
   
Fund Balance
   
Number of Loans
   
Fund Balance
 
                                     
Commercial
    2     $ 318,000       2     $ 318,000       --     $ --  
Construction
    2       808,000       2       808,000       --       --  
Land
    --       --       --       --       --       --  
Total
    4     $ 1,126,000       4     $ 1,126,000       --     $ --  


As of December 31, 2009
                                   
   
Total
   
Performing
   
Non-Performing
 
Loan Type
 
Number of Loans
   
Fund Balance
   
Number of Loans
   
Fund Balance
   
Number of Loans
   
Fund Balance
 
                                     
Commercial
    2     $ 318,000       2     $ 318,000       --     $ --  
Construction
    2       808,000       2       808,000       --       --  
Land
    --       --       --       --       --       --  
Total
    4     $ 1,126,000       4     $ 1,126,000             $ --  


 
·
Commercial –As of June 30, 2010 and December 31, 2009 we had 5 and 7 Commercial loans, respectively, two of which, at each date, were modified pursuant to TDR.  These loans were second deeds of trust and were considered performing prior to their restructuring, whereby they had their interest rates reduced.  One loan’s interest rate was reduced from 15% payable monthly to 8% accrued and payable at maturity, which was extended from April 30, 2010 to December 31, 2011.  As a result of this reduction in interest rate, we recorded an impairment of $33,000, as an allowance for loan loss, based on the reduction of the present value of future cash flows.  The other loan’s interest rate was reduced from 10.5% payable monthly to 8% of which 3% is payable monthly and 5% is accrued and payable at maturity.  As of August 10, 2010, these two loans continue to perform as required by the loan modification.

 
·
Construction – As of June 30, 2010 and December 31, 2009, both of our Construction loans were modified pursuant to TDR.  During July 2009, our manager negotiated with a guarantor of four of our performing loans.  As part of the negotiations, two of the loans were paid off for approximately the loan amount net of allowance for loan losses plus accrued interest and two 60-month promissory notes were executed by the borrower and guaranteed by the main principal, totaling approximately $2.7 million, of which our portion was approximately $0.2 million.  In addition, our manager modified the remaining loans whereby interest payments are payable monthly at 3.0%, beginning July 2009, and accrue at 5.0% payable at the maturity of the loan.  Interest on these loans will be recorded as interest income when cash is collected.  The two remaining loans continue to perform as required by the loan modification.

 
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·
Land – As of June 30, 2010 and December 31, 2009, none of our two Land loans were modified pursuant to TDR.

As of June 30, 2010, our manager had granted extensions on four loans, totaling approximately $28.6 million, of which our portion was approximately $1.4 million, 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.  Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan.  In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal.

NOTE E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY

As of June 30, 2010 and December 31, 2010, we owned 114,117 shares of VRM II’s common stock, representing approximately 0.84%, respectively, of their total outstanding common stock.  The closing price of VRM II’s common stock on June 30, 2010, was $1.35 per share.

We evaluated our investment in VRM II’s common stock and determined there was an other-than-temporary impairment as of September 30, 2008.  Based on this evaluation we impaired our investment to its fair value, as of September 30, 2008, to $3.89 per share.

As of June 30, 2010, our manager evaluated the near-term prospects of VRM II in relation to the severity and duration of the unrealized loss since September 30, 2008.  Based on that evaluation and our ability and intent to hold this investment for a reasonable period of time sufficient for a forecasted recovery of fair value, we do not consider our investment in VRM II to be other-than-temporarily impaired at June 30, 2010.  Since September 30, 2008, the trading price for VRM II’s common stock ranged from $1.35 to $5.05 per share.  We will continue to evaluate our investment in marketable securities on a quarterly basis.

NOTE F — REAL ESTATE HELD FOR SALE

At June 30, 2010, we held five properties with a total carrying value of approximately $0.5 million, which were acquired through foreclosure and recorded as investments in REO.  Expenses incurred during the six months ended June 30, 2010, related to our REO totaled $32,000 and write-downs on our REOs totaled approximately $0.1 million.  Our REO properties are accounted for at the lower of cost or fair value less costs to sell with fair value based on appraisals and knowledge of local market conditions.  It is not our intent to invest in or to own real estate as a long-term investment.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.  Set forth below is a roll-forward of REO during the six months ended June 30, 2010:

Description
 
Balance at
12/31/09
   
Acquisitions Through Foreclosure
   
Write Downs
   
Cash Reductions
   
Seller Financed Loan
   
Net Cash Proceeds on Sales
   
Net Loss on Sale of Real Estate
   
Balance at
06/30/2010
 
                                                 
Land
  $ 716,000     $ --     $ (120,000 )   $ --     $ --     $ (198,000 )   $ --     $ 398,000  
                                                                 
Residential Building(s)
    119,000       --       --       --       --       (8,000 )     --       111,000  
                                                                 
Total
  $ 835,000     $ --     $ (120,000 )   $ --     $ --     $ (206,000 )   $ --     $ 509,000  


 
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Land

As of June 30, 2010, we held four REO properties, classified as Land, totaling approximately $0.4 million.  These properties were acquired between December 2006 and December 2009 and consist of commercial land and residential land.  During the six months ended June 30, 2010, our manager continually evaluated the carrying value of these properties and based on its estimates and updated appraisals these properties were written down approximately $0.1 million.  Our manager is currently working with prospective buyers to sell these properties; however, no assurance can be given that these sales will take place.

 
·
Commercial Land – On April 27, 2010, we, VRM I and VRM II, sold our commercial land REO property located in Texas to an unrelated third party for approximately $0.6 million, of which our portion was $91,000.  No gain or loss was associated with this transaction.  During the six months ended June 30, 2010, our manager continually evaluated the carrying value of our commercial land REO and based on its estimates and updated appraisals three of these properties were written down a total of $58,000.  As of June 30, 2010, we held one property located in Nevada totaling approximately $0.1 million.

 
·
Residential Land – On January 15, 2010, one property located in Nevada was sold to an unrelated third party for its approximate book value of $1.3 million, of which our portion was approximately $0.1 million.  No gain or loss was associated with this property.  During the six months ended June 30, 2010, our manager continually evaluated the carrying value of our residential land REO and based on its estimates and updated appraisals three of these properties were written down a total of $62,000.  As of June 30, 2010, we held three properties located in Arizona and California totaling approximately $0.3 million.

Residential Building(s)

As of June 30, 2010, we held one REO property, classified as a Residential Building, totaling approximately $0.1 million.  This property was acquired during August 2009 and is classified as residential apartment/condos.  During the six months ended June 30, 2010, our manager continually evaluated the carrying value of our Residential Building REO property, and based on its estimates and updated appraisals, no write-downs were deemed necessary.  Our manager is currently working with prospective buyers to sell this property; however, no assurance can be given that these sales will take place.

 
·
Single Family Residence Properties – During April and May 2010, we, VRM I and VRM II sold the two remaining units on our REO property located in California to an unrelated third party for a total of $325,000, of which our portion was $6,000.  These transactions resulted in approximately no gain or loss for us.  As of June 30, 2010, we had no single-family residence properties.

 
·
Residential Apartment/Condo – On April 23, 2010, we, VRM I and VRM II sold the remaining unit on one REO property located in Nevada to an unrelated third party for its approximate book value of $81,000, of which our portion was $2,000.  There was approximately no gain or loss associated with this transaction.  As of June 30, 2010, we held one property located in Nevada totaling approximately $0.1 million.

NOTE G — RELATED PARTY TRANSACTIONS

Prior to July 2, 2009, we may have acquired or sold investments in real estate loans from/to our manager or other related parties.  Pursuant to the terms of our Operating Agreement, such acquisitions and sales were made without any mark up or mark down.  No gain or loss was recorded on these transactions, as it was not our intent to make a profit on the purchase or sale of such investments.  The purpose was generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans.  From time to time, we may continue to sell performing investments in real estate loans to our manager or other related parties, without any mark up or mark down.  No gain or loss will be recorded on these transactions.


 
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Transactions with the Manager

Our manager is entitled to receive from us a management (acquisition and advisory) fee up to 2.5% of the gross offering proceeds and up to 3% of our rental income.  No management fees were recorded during the three and six months ended June 30, 2010 and 2009.

On March 6, 2009, we, VRM I, and VRM II completed the sale of 105 of the 106 units in a residential apartment /condo property in Nevada, to an unrelated third party; the remaining unit was sold on April 23, 2010 for no gain or loss.  In accordance with our Operating Agreement, during the six months ended June 30, 2009, we, VRM I, and VRM II paid our manager an administrative fee of $282,000, shared pro-rata among us, VRM I, and VRM II.  There were no similar transactions during the six months ended June 30, 2010.

As of June 30, 2010 and December 31, 2009, our manager owned 54,863 of our units.  During the three and six months ended June 30, 2010, we made a liquidating distribution to our manager totaling $23,000 and $50,000, respectively, in accordance with the Plan.  There were no similar distributions during the three and six months ended June 30, 2009.

In connection with the sale of an office building located in Las Vegas, Nevada, we arranged for a $985,000 letter of credit in favor of the purchaser of the building (the “Purchaser”), which may be drawn upon by the Purchaser should Vestin Group default on its lease obligations and is supported by our restricted cash.  Vestin Group is currently engaged in litigation with the Purchaser and has not paid certain amounts allegedly due under its lease.  Vestin Group has provided us with a written agreement to fully indemnify and hold us harmless in the event that the Purchaser draws upon the letter of credit and we incur an obligation to reimburse the bank that issued the letter of credit.  During June 2009, the Purchaser drew $285,000 from the letter of credit; our manager is required to reimburse us for the $285,000 before August 2014.  For a discussion of litigation between us, Vestin Group and the building owner, see Note M - Legal Matters Involving The Company.

As of June 30, 2010 and December 31, 2009, we had receivables from our manager totaling approximately $0.3 million, primarily related to the withdrawal of the letter of credit referred to above.

Transactions with Other Related Parties

As of June 30, 2010 and December 31, 2009, we owned 114,117 common shares of VRM II, representing approximately 0.84%, at each date, of their total outstanding common stock.

As of June 30, 2010, we owed VRM II $5,000.  As of December 31, 2009, we owed VRM II $33,000.

As of June 30, 2010, we did not owe VRM I or have any receivables from VRM I.  As of December 31, 2009, we owed VRM I $1,000.

As of June 30, 2010 and December 31, 2009, inVestin Nevada Inc., a company wholly owned by our manager’s CEO, (“inVestin”), owned 34,856 of our membership units representing approximately 1.72%, respectively, of our total membership units.  During the three and six months ended June 30, 2010, we made a liquidating distribution to inVestin totaling $15,000 and $32,000, respectively, in accordance with the Plan.  There were no similar distributions during the three and six months ended June 30, 2009.

As of June 30, 2010 and December 31, 2009, Shustek Investments, a company wholly owned by our manager’s CEO, owned 200,000 of our membership units representing approximately 9.88% of our total membership units.  During the three and six months ended June 30, 2010, we made a liquidating distribution to Shustek Investments totaling $84,000 and $183,000, respectively, in accordance with the Plan.  There were no similar distributions during the three and six months ended June 30, 2009.


 
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As of June 30, 2010 and December 31, 2009, Mr. Shustek’s spouse owned 2,963 of our membership units representing less than 1.0% of our total membership units.  During the three and six months ended June 30, 2010, we made a liquidating distribution to Mr. Shustek’s spouse totaling $1,000 and $2,000, respectively, in accordance with the Plan.  There were no similar distributions during the three and six months ended June 30, 2009.

During the three and six months ended June 30, 2010, we incurred $6,000 and $8,000, respectively, for legal fees to the law firm of Levine, Garfinkel & Katz in which the Secretary of Vestin Group has an equity ownership interest in the law firm.  During the three and six months ended June 30, 2009, we incurred $3,000 and $24,000, respectively, for legal fees to the law firm of Levine, Garfinkel & Katz.

NOTE H — MEMBERS’ EQUITY

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.

Distributions were paid monthly to members; however, on August 27, 2008, we suspended payment of distributions as a result of our current losses.

Contingency Reserve

In accordance with the Plan, we established a contingency reserve of $300,000 for the payment of ongoing expenses, any contingent liabilities or to account for loan or other investment losses.  Our manager will have the discretion to increase or decrease the amount of the reserve, but will ensure that the reserve is adequate to pay our outstanding obligations.  The amount of the contingency reserve is based upon estimates and opinions of our manager or through consultation with an outside expert, if our manager determines that it is advisable to retain such expert.  In determining the size of the reserve, our manager reviewed among other things, the value of our non-performing assets and the likelihood of repayment, our estimated contingent liabilities and our estimated expenses, including without limitation, estimated professional, legal and accounting fees, rent, payroll and other taxes, miscellaneous office expenses, facilities costs and expenses accrued in our financial statements.

Value of Members’ Capital Accounts

In accordance with Section 7.8 of our Operating Agreement, our manager reviewed the value of our assets during the three months ended June 30, 2010.  Based on this review the value of members’ capital accounts was adjusted from $3.03 per unit to $2.47 per unit, as of July 1, 2010.  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.

Liquidating Distributions

On January 26, 2010, we made an initial liquidating distribution to all Fund Members, in the aggregate amount of approximately $1.0 million, in accordance with the Plan.  In addition, on April 8, 2010, we made another liquidating distribution to all Fund Members, in the aggregate amount of approximately $0.9 million, in accordance with the Plan.  The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund.

Redemption Limitation

In accordance with the Plan, our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.


 
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NOTE I — NOTES RECEIVABLE

During July 2009, we, VRM I, and VRM II entered into a promissory note, totaling approximately $1.4 million, of which our portion is $82,000, with the borrowers on a construction loan, as part of the repayment terms of the loan.  In addition, we received a principal pay off on the loan of approximately $0.3 million, which reflected our book value of the loan, net of allowance for loan loss of approximately $0.2 million.  The promissory note accrues interest over a 60-month period with an interest rate of 7%, with the first monthly payment due on the 37th month.  The remaining note balance and accrued interest will be due at maturity.  Payments will be recognized as income when received.  The balance of $82,000 was fully reserved as of June 30, 2010.

During July 2009, we, VRM I, and VRM II entered into a promissory note, totaling approximately $1.3 million, of which our portion is $74,000, with the borrowers on a construction loan, as part of the repayment terms of the loan.  In addition, we received a principal pay off on the loan of approximately $0.2 million, which reflected our book value of the loan, net of allowance for loan loss of approximately $0.2 million.  The promissory note accrues interest over a 60-month period with an interest rate of 7%, with the first monthly payment due on the 37th month.  The remaining note balance and accrued interest will be due at maturity.  Payments will be recognized as income when received.  The balance of $74,000 was fully reserved as of June 30, 2010.

NOTE J — FAIR VALUE

As of June 30, 2010, financial assets and liabilities, utilizing Level 1 inputs included investment in marketable securities - related party.  We had no assets or liabilities utilizing Level 2 inputs, and assets and liabilities utilizing Level 3 inputs included investments in real estate loans.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Accordingly, our degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, an asset or liability will be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.  Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date.  We use prices and inputs that are current as of the measurement date, including during periods of market dislocation, such as the recent illiquidity in the auction rate securities market.  In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments.  This condition may cause our financial instruments to be reclassified from Level 1 to Level 2 or Level 3 and/or vice versa.

Our valuation techniques will be consistent with at least one of the three possible approaches: the market approach, income approach and/or cost approach.  Our Level 1 inputs are based on the market approach and consist primarily of quoted prices for identical items on active securities exchanges.  Our Level 2 inputs are primarily based on the market approach of quoted prices in active markets or current transactions in inactive markets for the same or similar collateral that do not require significant adjustment based on unobservable inputs.  Our Level 3 inputs are primarily based on the income and cost approaches, specifically, discounted cash flow analyses, which utilize significant inputs based on our estimates and assumptions.


 
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The following table presents the valuation of our financial assets as of June 30, 2010, measured at fair value on a recurring basis by input levels:

   
Fair Value Measurements at Reporting Date Using
       
   
Quoted Prices in Active Markets For Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
   
Balance at 06/30/2010
   
Carrying Value on Balance Sheet at 06/30/2010
 
Assets
                             
Investment in marketable securities - related party
  $ 154,000     $ --     $ --     $ 154,000     $ 154,000  
Investment in real estate loans
  $ --     $ --     $ 2,489,000     $ 2,489,000     $ 2,548,000  

The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from December 31, 2009 to June 30, 2010.  There were no liabilities measured at fair value on a recurring basis using significant unobservable inputs as of December 31, 2009 to June 30, 2010.
 
   
Investment in real estate loans
 
       
Balance on December 31, 2009
  $ 3,291,000  
Change in temporary valuation adjustment included in net loss
       
Increase in allowance for loan losses
    (70,000 )
Sales, pay downs and reduction of assets
       
Collections of principal and sales of investment in real estate loans
    (1,899,000 )
Reduction of allowance for loan losses related to sales an d payments of investment in real estate loans
    1,164,000  
Temporary change in estimated fair value based on future cash flows
    3,000  
Transfer to Level 1
    --  
Transfer to Level 2
    --  
         
Balance on June 30, 2010, net of temporary valuation adjustment
  $ 2,489,000  
 
 
NOTE K — RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued ASU No. 2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements.  This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers.  Further, this ASU requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements.  This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  We are currently evaluating the impact of this ASU; however, we do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.


 
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In April 2010, the FASB issued ASU No. 2010-18 regarding improving comparability by eliminating diversity in practice about the treatment of modifications of loans accounted for within pools under Subtopic 310-30 – Receivable – Loans and Debt Securities Acquired with Deteriorated Credit Quality (“Subtopic 310-30”).  Furthermore, the amendments clarify guidance about maintaining the integrity of a pool as the unit of accounting for acquired loans with credit deterioration.  Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors.  The amendments in this Update are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010.  The amendments are to be applied prospectively.  Early adoption is permitted.  We are currently evaluating the impact of this ASU; however, we do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310):  Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  The ASU amends FASB Accounting Standards Codification Topic 310, Receivables, to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses.  As a result of these amendments, an entity is required to disaggregate, by portfolio segment or class of financing receivables, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses.  This ASU is effective for interim and annual reporting periods ending on or after December 15, 2010.  The adoption of this standard may require additional disclosures, but we do not expect the adoption to have a material effect on our consolidated financial statements.

NOTE L— LEGAL MATTERS INVOLVING THE MANAGER

The United States Securities and Exchange Commission (the “Commission”), conducted an investigation of certain matters related to us, our manager, Vestin Capital, VRM I, and VRM II.  We fully cooperated during the course of the investigation.  On September 27, 2006, the investigation was resolved through the entry of an Administrative Order by the Commission (the “Order”).  Our manager, Vestin Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin Capital (collectively, the “Respondents”), consented to the entry of the Order without admitting or denying the findings therein.

In the Order, the Commission found that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 through the use of certain slide presentations in connection with the sale of our units and units in Fund II, the predecessor to VRM II.  The Respondents consented to the entry of a cease and desist order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from association with any broker or dealer for a period of six months, which expired in March 2007.  In addition, the Respondents agreed to implement certain undertakings with respect to future sales of securities.  We are not a party to the Order.

On November 21, 2005, Desert Land filed a complaint in the state District Court of Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which complaint is substantially similar to a complaint previously filed by Desert Land in the United States District Court, which complaint was dismissed by the United States Court of Appeals for the Ninth Circuit, which dismissal was upheld when the United States Supreme Court denied Desert Land’s Writ of Certiorari.  The action was based upon allegations that Del Mar Mortgage, Inc. and/or Vestin Mortgage charged unlawful fees on various loans arranged by them in 1999, prior to the formation of Fund II.  On March 6, 2006, Desert Land amended the state court complaint to name VRM I.  Desert Land alleged that one or more of the defendants had transferred assets to other entities without receiving reasonable value therefore; alleged plaintiffs are informed and believe that defendants have made such transfers with the actual intent to hinder, delay or defraud Desert Land; that such transfers made the transferor insolvent and that sometime between February 27 and April 1, 2003, Vestin Group transferred $1.6 million to VRM I for that purpose.

The state court complaint further alleged that Desert Land was entitled to void such transfers and that pursuant to NRS 112.20, Desert Land is entitled to an injunction to enjoin defendants from further disposition of assets.  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.  In December 2008, this lawsuit was settled.  The settlement had no effect on us.

 
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In April 2006, the lenders of the loans made to RightStar, Inc. (“RightStar”) filed suit against the State of Hawaii listing 26 causes of action, including allegations that the State of Hawaii has illegally blocked the lender’s right to foreclose and take title to its collateral by inappropriately attaching conditions to the granting of licenses needed to operate the business, the pre-need trust funds and the perpetual care trust funds and that the State of Hawaii has attempted to force the lenders to accept liability for any statutory trust fund deficits while no such lender liability exists under the laws of the State of Hawaii.  The State of Hawaii responded by filing allegations against Vestin Mortgage and VRM II alleging that these Vestin entities improperly influenced the former RightStar trustees to transfer trust funds to VRM II.

On May 9, 2007, VRM I, VRM II, Vestin Mortgage, the State of Hawaii and Comerica Incorporated (“Comerica”) announced that an arrangement had been reached to auction the RightStar assets.  The auction was not successful.  On June 12, 2007, the court approved the resolution agreement, which provides that the proceeds of the foreclosure sale would be allocated in part to VRM I, VRM II and Vestin Mortgage and in part to fund the trust’s statutory minimum balances.  VRM I, VRM II, Vestin Mortgage, the State of Hawaii and Comerica have pledged to cooperate to recover additional amounts owed to the trusts and the creditors from others, while mutually releasing each other and RightStar from all claims.  The Vestin entities and the State of Hawaii signed a new agreement that would permit the foreclosure to proceed.  On October 12, 2009, the State Court approved the agreement permitting the foreclosure to proceed.  On January 25, 2010, the Circuit Court of the First Circuit for the State of Hawaii confirmed the right of VRM I, VRM II and Vestin Mortgage, to acquire through foreclosure the RightStar assets.  On June 29, 2010, the First Circuit for the State of Hawaii issued its final order allowing the foreclosure.  On July 13, 2010 VRM I and VRM II completed the foreclosure of these properties and classified them as REO.

VRM I, VRM II and Vestin Mortgage, Inc. (“Defendants”) were defendants in a breach of contract class action filed in San Diego Superior Court by certain plaintiffs who alleged, among other things, that they were wrongfully denied roll-up rights in connection with the merger of Fund I into VRM I. and Fund II into VRM II.  The court certified a class of all former Fund I unit holders and Fund II unit holders who voted against the merger of Fund I into VRM I and Fund II into VRM II.  The trial began in December 2009 and concluded in January 2010.  On February 11, 2010, the Defendants were notified of a Tentative Statement of Decision, in their favor issued by the Superior Court for the State of California in San Diego following a trial.  In the Tentative Statement, the Court found that there was no roll-up and therefore no breach of contract.  The Court entered final judgment for the Defendants on March 18, 2010.  Defendants and Plaintiffs have agreed to a post-judgment settlement by which Plaintiffs agreed not appeal the pending judgment in consideration of a waiver by the Defendants of any claim to recover actual court costs from the Plaintiffs.  The Court has granted final approval of this settlement of post-judgment rights on July 9, 2010.

VRM I, Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a civil action filed by approximately 25 separate plaintiffs (“Plaintiffs”) in District Court for Clark County, Nevada (the “Nevada lawsuit”).  The Plaintiffs allege, among other things, that Defendants: breached certain alleged contractual obligations owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented or omitted material facts regarding the conversion of Fund I into VRM I.  The action seeks monetary and punitive damages.  The trial is currently scheduled to begin on September 7, 2010.  The Defendants believe that the allegations are without merit and that they have adequate defenses.  The Defendants intend to undertake a vigorous defense.  The terms of VRM I’s management agreement and Fund I’s operating agreement contain indemnity provisions whereby Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by VRM I with respect to the above actions.


 
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VRM II, Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a civil action filed by 88 sets of plaintiffs representing approximately 138 individuals (“Plaintiffs”), in District Court for Clark County, Nevada (the “Nevada lawsuit”).  The Plaintiffs allege, among other things, that Defendants: breached certain alleged contractual obligations owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented or omitted material facts regarding the conversion of Fund II into VRM II.  The action seeks monetary and punitive damages.  The trial is currently scheduled to begin on September 7, 2010.  The Defendants believe that the allegations are without merit and that they have adequate defenses.  The Defendants intend to undertake a vigorous defense.  The terms of VRM II’s management agreement and Fund II’s operating agreement contain indemnity provisions whereby Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by VRM II with respect to the above actions.  VRM II, Vestin Mortgage, Inc. and Michael Shustek have entered into confidential settlement agreements with individual plaintiffs.  In addition, individual plaintiffs have voluntarily withdrawn their claims against VRM II, Vestin Mortgage, Inc. and Michael Shustek with prejudice.  Of the approximately 138 plaintiffs that initially filed this lawsuit, approximately 121 still remain plaintiffs to this action.

In addition to the matters described above, our manager is involved in a number of other 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 other 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 the manager’s net income in any particular period.

NOTE M — LEGAL MATTERS INVOLVING THE COMPANY

The Company is a defendant in a civil action filed by Birkeland Family, LLC III and Birkeland Family, LLC V (“Plaintiffs”) in District Court for Clark County, Nevada.  The Plaintiffs allege as causes of against the Company:  Breach of Contract and Breach of the Implied Covenant of Good Faith and Fair Dealing regarding the sale of the office building commonly described as 8379 W. Sunset Road, Las Vegas, Nevada.  The action seeks monetary, punitive and exemplary damages.  The trial is currently not scheduled.  The Company believes that it performed all obligations it undertook related to the transaction, that the allegations against it are without merit and that it has adequate defenses.  The Company intends to undertake a vigorous defense.

From time to time, we may become involved in litigation in the ordinary course of business.  We do not believe that any pending legal proceedings are likely to have a material adverse effect on our financial condition or results of operations or cash flows.  It is not possible to predict the outcome of any such proceedings.

NOTE N — SUBSEQUENT EVENTS

There have been no material subsequent events to evaluate through the date of this filing with the SEC.
 



 
- 27 -


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a financial review and analysis of our financial condition and results of operations for the three and six months ended June 30, 2010 and 2009.  This discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this report on Form 10-Q and our report on Form 10-K, Part II, Item 7 Management’s Discussion and Analysis of Financial Conditions and Results of Operations for the year ended December 31, 2009 and our quarterly report filed on Form 10-Q for the three months ended March 31, 2010.

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including, without limitation, matters discussed under this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” should be read in conjunction with the financial statements, related notes, and other detailed information included elsewhere in this report on Form 10-Q.  We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Statements that are not historical fact are forward-looking statements.  Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” or other similar expressions.  Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements.  These forward-looking statements are based on our current beliefs, intentions and expectations.  These statements are not guarantees or indicative of future performance.  Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described in Part II Item 1A Risk Factors of this Quarterly Report on Form 10-Q and in our other securities filings with the Securities and Exchange Commission (“SEC”).  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties.  Our estimates of the value of collateral securing our loans may change, or the value of the underlying property could decline subsequent to the date of our evaluation.  As a result, such estimates are not guarantees of the future value of the collateral.  The forward-looking statements contained in this report are made only as of the date hereof.  We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS

OVERVIEW

At a special meeting of our members held on July 2, 2009, a majority of the members voted to approve the dissolution and winding up of the Fund, in accordance with the Plan of Complete Liquidation and Dissolution  (the “Plan”) as set forth in Annex A of the Fund’s proxy statement filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009.  The Plan became effective upon its approval by the members on July 2, 2009.  As a result, we have commenced an orderly liquidation and we no longer invest in new real estate loans.  We currently anticipate that the liquidation will be substantially completed by the second half of 2014.  During January and April 2010, we made liquidating distributions to all Fund Members in accordance with the Plan.  The amount distributed to each Member of the Fund was calculated based upon the percentage ownership interest of such Member in the Fund.  See Note H – Members’ Equity of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.


 
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Under the terms of the Plan adopted by a majority of our members, our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.
Prior to the approval of the Plan, our primary business objective was to generate income while preserving principal by investing in loans secured by real estate.  The loan underwriting standards utilized by our manager and Vestin Originations were less strict than those used by many institutional real estate lenders.  In addition, one of our competitive advantages was our ability to approve loan applications more quickly than many institutional lenders.  As a result, in certain cases, we made real estate loans that were riskier than real estate loans made by many institutional lenders such as commercial banks.  However, in return, we sought a higher interest rate and our manager took steps to mitigate the lending risks such as imposing a lower loan-to-value ratio.  While we may have assumed more risk than many institutional real estate lenders, in return, we sought to generate higher yields from our real estate loans.

Our historical operating results were affected primarily by: (i) the amount of capital we invested in real estate loans, (ii) the level of real estate lending activity in the markets we serviced, (iii) the interest rates we were able to charge on our loans and (v) the level of non-performing assets, foreclosures and related loan losses that we experienced.

Our recent operating results have been adversely affected by increases in allowances for loan losses and increases in non-performing assets.  This negative trend accelerated sharply during the year ended December 31, 2008 and continues to affect our operations.  As of June 30, 2010, we had three loans considered non-performing (i.e., 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).  These loans are currently carried on our books at a value of approximately $1.7 million, net of allowance for loan losses of approximately $0.5 million.  These loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings.

Non-performing assets, net of allowance for loan losses, totaled approximately $2.2 million or 44% of our total assets as of June 30, 2010, as compared to approximately $2.8 million or 39% of our total assets as of December 31, 2009.  At June 30, 2010, non-performing assets consisted of approximately $0.5 million of REO and approximately $1.7 million of non-performing loans, net of allowance for loan losses.  See Note F – Real Estate Held for Sale and Note D – Investments In Real Estate Loans of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

We believe that the significant increase in the level of our non-performing assets is a direct result of the deterioration of the economy and credit markets.  As the economy weakened and credit became more difficult to obtain, many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have been otherwise adversely impacted.  Our exposure to the negative developments in the credit markets and general economy has likely been increased by our business strategy, which, until the approval of the Plan entailed more lenient underwriting standards and expedited loan approval procedures.  Moreover, real estate values in the principal markets in which we operate declined dramatically, which in many cases eroded the current value of the security underlying our loans.

We expect that the weakness in the credit markets and the weakness in lending will continue to have an adverse impact upon our markets for the foreseeable future.  This may result in a further increase in defaults on our loans and we might be required to record additional reserves based on decreases in market values or we may be required to restructure loans.  This increase in loan defaults has materially affected our operating results.  For additional information regarding our non-performing loans see “Non-Performing Loans” in Note D – Investments In Real Estate Loans of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

As of June 30, 2010, our loan-to-value ratio was 94.27%, net of allowances for loan losses, on a weighted average basis, generally using updated appraisals.  Additional significant increases in loan defaults accompanied by additional declines in real estate values, as evidenced by updated appraisals generally prepared on an “as-is-basis,” will continue to have a material adverse effect on our financial condition and operating results.  The current loan-to-value ratio has been affected by declining real estate values, which have eroded the market value of our collateral.

 
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As of June 30, 2010, we have provided a specific reserve allowance for two non-performing loans and five performing loans based on updated appraisals of the underlying collateral and our evaluation of the borrower for these loans, obtained by our manager.  For further information regarding allowance for loan losses, refer to Note D – Investments in Real Estate Loans of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

As of June 30, 2010, our loans were in the following states: Arizona, Nevada, Oregon and Texas.

SUMMARY OF FINANCIAL RESULTS

   
For the Three Months
Ended June 30,
   
For the Six Months
Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Total revenues
  $ 25,000     $ 123,000     $ 84,000     $ 166,000  
Total operating expenses
    147,000       570,000       204,000       825,000  
Non-operating income
    1,000       6,000       1,000       13,000  
Loss from real estate held for sale
    (130,000 )     (840,000 )     (152,000 )     (1,343,000 )
                                 
NET LOSS
  $ (251,000 )   $ (1,281,000 )   $ (271,000 )   $ (1,989,000 )
                                 
Net loss allocated to members per weighted average membership units
  $ (0.12 )   $ (0.63 )   $ (0.13 )   $ (0.93 )
                                 
Weighted average membership units
    2,024,424       2,024,424       2,024,424       2,134,765  
                                 
Annualized rate of return to members (a)
    -4.93 %     -25.16 %     -2.68 %     -18.63 %
                                 
Liquidating distributions (b)
  $ 849,000     $ --     $ 1,851,000     $ --  
                                 
Liquidating distributions per weighted average membership units
  $ 0.42     $ --     $ 0.91     $ --  
                                 
Weighted average term of outstanding loans
 
22 months
   
26 months
   
22 months
   
26 months
 

(a)
The annualized rate of return to members is calculated based upon the net GAAP income allocated to members per weighted average unit as of June 30, 2010 and 2009, divided by the number of days during the period (91 and 181 days for the three and six months ended June 30, 2010 and 2009, respectively) and multiplied by 365 days, then divided by the weighted average cost per unit ($10.09 for each period, respectively).

(b)
In accordance with the Plan.

Comparison of Operating Results for the three months ended June 30, 2010, to the three months ended June 30, 2009.

Total Revenues:  For the three months ended June 30, 2010, total revenues were $25,000 compared to $123,000 during the three months ended June 30, 2009, a decrease of $98,000 or 80%.  Revenues were primarily affected by the following factors:

 
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·
Interest income from investments in real estate loans decreased $48,000 during the three months ended June 30, 2010, from $72,000 in 2009 to $24,000 in 2010.  This decrease in interest income is mainly due to the decrease in our portfolio of performing real estate loans, which went from nine loans totaling approximately $3.4 million as of June 30, 2009, to five loans totaling approximately $1.5 million as of June 30, 2010.  Our revenue is dependent upon the balance of our performing loans and the interest earned on these loans.  In addition, the weighted average interest rate on our performing loans has decreased from 9.81% as of June 30, 2009 to 4.38% as of June 30, 2010.  This decline is a result of current market conditions in the lending industry, the level of non-performing assets in our portfolio, the reduction of interest rates through TDR and the liquidation of our assets pursuant to the Plan.  Once a performing loan is paid in full or sold, the proceeds will not be used to invest in new loans.  For additional information see Note D – Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

 
·
During the three months ended June 30, 2009, we recognized a gain related to the pay off of an investment in real estate loan of approximately $51,000.  No similar transaction occurred during the three months ended June 30, 2010.
 

Total Operating Expenses:  For the three months ended June 30, 2010, total operating expenses were $147,000 compared to approximately $570,000 during the three months ended June 10, 2009, a decrease of approximately $423,000 or 74%.  Expenses were primarily affected by the following factor:

 
·
During the three months ended June 30, 2010, we recognized a provision for loan loss totaling $70,000, compared to provision for loan losses during the three months ended June 30, 2009 totaling $474,000.  This decrease is in part due to the fact we have less loans in our loan portfolio as of June 30, 2010 compared to June 30, 2009.  As of June 30, 2009, the ratio of total allowance for loan loss to total loans was 30%.  As of June 30, 2010, the ratio of total allowance for loan loss to total loans was 30%.  As of June 30, 2009, none of our loans were fully impaired and not charged off, compared to two loans totaling approximately $0.5 million as of June 30, 2010.  Even though our provision for loan losses for the three months ended June 30, 2010 has gone down compared to the same period in 2009, the ratio of total allowance for loan losses to total loans has remained the same.  As we liquidate our assets in the future, we expect our provisions for loan losses to decrease due to the fact we will have less loans.  See “Specific Loan Allowance” in Note D – Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Total Non-Operating Income:  For the three months ended June 30, 2010, total non-operating income was $1,000 compared to income of $6,000 during the three months ended June 30, 2009, a decrease of $5,000 or 83%.  The decrease is related to the reduction of bank interest income of $5,000 for the three months ended June 30, 2010 compared to the same period in 2009, as a direct result of the bank reducing our interest rate earned on our restricted cash and a reduction of the average cash balance.

Total Loss from Real Estate Held for Sale:  For the three months ended June 30, 2010, total losses from REO was $130,000 compared to $840,000 during the three months ended June 30, 2009, a decrease of approximately $710,000 or 85%.  The loss from real estate held for sale is mainly due to the write-down on five of our REO properties totaling approximately $0.8 million, during the three months ended June 30, 2009 and write-downs of approximately $0.1 million on three REO properties during the three months ended June 30, 2010.  For additional information see Note F–Real Estate Held For Sale of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Comparison of Operating Results for the six months ended June 30, 2010, to the six months ended June 30, 2009.


 
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Total Revenues:  For the six months ended June 30, 2010, total revenues were $84,000 compared to $166,000 during the six months ended June 30, 2009, a decrease of $82,000 or 49%.  Revenues were primarily affected by the following factor:

 
·
Interest income from investments in real estate loans decreased to approximately $59,000 during the six months ended June 30, 2010, compared to approximately $114,000 during the same period in 2009, primarily due to the same factors discussed above in Total Revenues for the three months ended June 30, 2010.  For additional information see Note D – Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q.

Total Operating Expenses:  For the six months ended June 30, 2010, total operating expenses were $204,000 compared to approximately $825,000 during the six months ended June 30, 2009, a decrease of approximately $621,000 or 75%.  Expenses were primarily affected by the following factor in addition to the factors discussed above in Total Operating Expenses for the three months ended June 30, 2010:

 
·
During the six months ended June 30, 2010, we recognized a provision for loan loss totaling $70,000, compared to $628,000 for the same period in 2009.  See “Specific Loan Allowance” in Note D – Investments in Real Estate Loans of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Total Non-Operating Income:  For the six months ended June 30, 2010, total non-operating income was $1,000 compared to income of $13,000 during the six months ended June 30, 2009, a decrease of $12,000 or 92%.  This change is mainly due to the factors discussed above in Total Non-Operating Income for the three months ended June 30, 2010.

Total Loss from Real Estate Held for Sale:  For the six months ended June 30, 2010, total losses from real estate held for sale were $152,000 compared to $1,343,000 during the six months ended June 30, 2009, a decrease of $1,191,000 or 89%.  The loss from real estate held for sale is mainly due to the write-down on seven of our REO properties totaling approximately $1.2 million, during the six months ended June 30, 2009, and write-downs of $120,000 on three REO properties during the six months ended June 30, 2010.  In addition, during the six months ended June 30, 2009, we recorded a net loss on sale of our REO properties of $30,000 compared to no gain or loss during the six months ended June 30, 2010.  For additional information see Note F–Real Estate Held For Sale of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Stated Unit Value Adjustment:  In accordance with Section 7.8 of our Operating Agreement, our manager reviewed the value of our assets during the three months ended June 30, 2010.  Based on this review the value of members’ capital accounts was adjusted from $3.03 per unit to $2.47 per unit, as of July 1, 2010.  The periodic review of the estimated net unit value includes an analysis of unrealized gains that our manager reasonably believes exist at the time of the review, but that cannot be added to net asset value under GAAP.

Liquidating Distributions:  At a special meeting of our members held on July 2, 2009, a majority of the members voted to approve the dissolution and winding up of the Fund, in accordance with the Plan as set forth in Annex A of the Fund’s proxy statement filed with the SEC pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009.  The Plan became effective upon its approval by the members on July 2, 2009.  Our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.  On January 26, 2010 and April 8, 2010, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million and $0.9 million, respectively, in accordance with the Plan.  The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund.  See Note H – Members’ Equity of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.


 
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CAPITAL AND LIQUIDITY

Liquidity is a measure of a company’s ability to meet potential cash requirements, including ongoing commitments to fund lending activities and general operating purposes.  As a result of the decision to liquidate the Company, we no longer invest in new loans.  Hence, subject to retaining sufficient funds to meet our obligations and conduct wind down operations, all available funds will be paid out to our members.  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 our manager will manage our affairs.

During the six months ended June 30, 2010, net cash flows used in operating activities totaled $111,000.  Operating cash flows were adversely impacted by the decrease in our investments in real estate loan activity.  Cash flows related to investing activities consisted of cash provided by loan payoffs, sales of real estate loans and proceeds for sales of REO of approximately $0.7 million.  Cash flows used for financing activities consisted of cash used for members’ liquidating distributions of approximately $1.9 million.

At June 30, 2010, we had approximately $0.6 million in unrestricted cash, $0.2 million in marketable securities – related party and approximately $5.0 million in total assets.  We believe we have sufficient working capital to meet our operating needs during the next 12 months.

During the three months ended June 30, 2010, the Trustee in a Bankruptcy case, regarding one of our non-performing commercial loans in California, sold the assets of the Borrower to an unrelated third party for an aggregate amount of $4.1 million.  The proceeds, net of all court costs, closing costs, trustee’s fees, real estate taxes and security guard services, total approximately $3.4 million.  The amount due to us from this Borrower was $1.4 million; however, another lender is claiming an interest in the proceeds of the bankruptcy sale, purportedly based on loans of approximately $0.9 million, secured by some of the equipment located at the property.  A motion to determine secured interest has been filed with the Bankruptcy Court on our behalf, the Court has not yet ruled on our motion.  Management believes the amount we will recover from the proceeds of the bankruptcy sale will be approximately $0.2 million and an account receivable in such amount has been recorded on our balance sheet.

In addition to the foregoing assets, as of June 30, 2010, we had $0.7 million in restricted cash, which relates to a cash deposit held as collateral by a banking institution to support rent payments on the property we sold during November 2006.  The requirement for the deposit expires at the end of the lease on August 31, 2014.  Vestin Group, the parent of our manager, was previously our tenant in the building we owned in Las Vegas, Nevada.  In connection with the sale of such building, we arranged for a $985,000 letter of credit in favor of the purchaser of the building (the “Purchaser”), which may be drawn upon by the Purchaser should Vestin Group default on its lease obligations and is supported by our restricted cash.  Vestin Group is currently engaged in litigation with the Purchaser and has not paid certain amounts allegedly due under its lease.  Vestin Group has provided us with a written agreement to fully indemnify and hold us harmless in the event that the Purchaser draws upon the letter of credit and we incur an obligation to reimburse the bank, which issued the letter of credit.  During June 2009, the Purchaser drew $285,000 from the letter of credit; our manager is required to reimburse us for the full $285,000, before August 2014.

For a discussion of litigation between us, Vestin Group and the building owner, see Note M - Legal Matters Involving The Company of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

On January 26, 2010 and April 8, 2010, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million and $0.9 million, respectively, in accordance with the Plan.  The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund.  See Note H – Members’ Equity of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.


 
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Investments in Real Estate Loans Secured by Real Estate Portfolio

As of June 30, 2010 and December 31, 2009, we had investments in eight and 10 real estate loans with a balance of approximately $3.6 million and $5.5 million, respectively.  In accordance with the Plan, we will no longer invest in new loans.

As of June 30, 2010, we had three loans considered non-performing (i.e., 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).  These loans are currently carried on our books at a value of approximately $1.7 million, net of allowance for loan losses of approximately $0.5 million, which does not include the allowances of approximately $0.6 million relating to the decrease in the property value for performing loans as of June 30, 2010.  These loans have been placed on non-accrual of interest status and may be the subject of pending foreclosure proceedings.  Our manager has evaluated these loans and, based on current estimates, believes that the value of the underlying collateral is sufficient to protect us from loss of principal.  However, such estimates may change, or the value of the underlying collateral may deteriorate, in which case further losses may be incurred.

Our manager periodically reviews and makes a determination 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 loss.  Recoveries of previously charged off amounts are credited to the allowance for loan losses or included as income when the asset is disposed.  As of June 30, 2010, we have provided a specific reserve related to two non-performing loans and five performing loans, based on updated appraisals and evaluation of the borrower obtained by our manager, totaling approximately $1.1 million.  Our manager evaluated these loans and concluded that the remaining underlying collateral was sufficient to protect us against further losses of principal or interest.  Our manager will continue to evaluate these loans in order to determine if any other allowance for loan losses should be recorded.  As of August 10, 2010, we believe continuing declines in real estate values will adversely affect the value of the collateral securing our real estate loans as well as the market value of our REO.

For additional information on our investments in real estate loans, refer to Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Asset Quality and Loan Reserves

Losses may occur from investing in real estate 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 real estate loan is uncollectible or that collectability is doubtful is a matter of judgment.  On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment.  The fact that a loan is temporarily past due does not necessarily mean that the loan is non-performing.  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 collectability 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;

 
·
Evaluation of industry trends; and

 
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·
Estimated net realizable value of any underlying collateral in relation to the real estate loan amount.

Non-performing assets included loans in non-accrual status, net of allowance for loan losses, and REO totaling approximately $1.7 million and $0.5 million, respectively, as of June 30, 2010, compared to approximately $2.0 million and $0.8 million, respectively, as of December 31, 2009.  It is possible that no earnings will be recognized from these assets until they are disposed of, or that no earnings will be recognized at all, and the time it will take to dispose of these assets cannot be predicted.  Our manager believes that these non-performing assets have increased in significant part as a result of conditions in the real estate and credit markets.  We believe that the continued weakness in real estate markets may result in additional losses on our REO.

As a commercial real estate lender who was willing to invest in riskier loans, rates of delinquencies, foreclosures and losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry during this period of economic slowdown and recession.  Problems in the sub-prime residential mortgage market have adversely affected the general economy and the availability of funds for commercial real estate developers.  We believe this lack of available funds has led to an increase in defaults on our loans.  Furthermore, problems experienced in U.S. credit markets since the summer of 2007 have reduced the availability of credit for many prospective borrowers.  These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to pay back our loans.  Thus, we have had to work with some of our borrowers to either modify, restructure and/or extend their loans in order to keep or restore the loans to performing status.

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 loss.  Recoveries of previously charged off amounts are credited to the allowance for loan losses.  For additional information regarding the roll-forward of the allowance for loan losses for the six months ended June 30, 2010, refer to Note D – Investments In Real Estate Loans of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Real Estate Held for Sale

At June 30, 2010, we held five properties with a total carrying value of approximately $0.5 million, which were acquired through foreclosure and recorded as investments in REO.  Our investments in REO are accounted for at the lower of cost or fair value less costs to sell with fair value based on appraisals and knowledge of local market conditions.  It is not our intent to invest in or to own real estate as a long-term investment.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.  For additional information on our investments in REO, refer to Note F – Real Estate Held for Sale of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2010, 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

As of June 30, 2010, we had no contractual obligations.


 
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RELATED PARTY TRANSACTIONS

Prior to July 2, 2009, we may have acquired or sold investments in real estate loans from/to our manager or other related parties.  Pursuant to the terms of our Operating Agreement, such acquisitions and sales were made without any mark up or mark down.  No gain or loss was recorded on these transactions, as it was not our intent to make a profit on the purchase or sale of such investments.  The purpose was generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans.  From time to time, we may continue to sell performing investments in real estate loans to our manager or other related parties, without any mark up or mark down.  No gain or loss will be recorded on these transactions.  For further information regarding related party transactions, refer to Note G – Related Party Transactions of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING ESTIMATES

Revenue Recognition

Interest income on loans is accrued by the effective interest method.  We do not accrue interest income from loans once they are determined to be non-performing.  A loan is considered non-performing 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.

The following table presents a sensitivity analysis, averaging the balance of our loan portfolio at the end of the last six quarters, to show the impact on our financial condition at June 30, 2010, from fluctuations in weighted average interest rate charged on loans as a percentage of the loan portfolio:

Changed Assumption
 
Increase (Decrease) in Interest Income
 
Weighted average interest rate assumption increased by 1.0% or 100 basis points
  $ 67,000  
Weighted average interest rate assumption increased by 5.0% or 500 basis points
  $ 334,000  
Weighted average interest rate assumption increased by 10.0% or 1,000 basis points
  $ 669,000  
Weighted average interest rate assumption decreased by 1.0% or 100 basis points
  $ (67,000 )
Weighted average interest rate assumption decreased by 5.0% or 500 basis points
  $ (334,000 )
Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points
  $ (669,000 )

The purpose of this analysis is to provide an indication of the impact that the weighted average interest rate fluctuations would have on our financial results.  It is not intended to imply our expectation of future revenues or to estimate earnings.  We believe that the assumptions used above are appropriate to illustrate the possible material impact on the financial statements.

Allowance for Loan Losses

We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment in our investment in real estate loans portfolio.  Our 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.

The following table presents a sensitivity analysis to show the impact on our financial condition at June 30, 2010, from increases and decreases to our allowance for loan losses as a percentage of the loan portfolio:

 
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Changed Assumption
 
Increase (Decrease) in Allowance for Loan Losses
 
Allowance for loan losses assumption increased by 1.0% of loan portfolio
  $ 36,000  
Allowance for loan losses assumption increased by 5.0% of loan portfolio
  $ 182,000  
Allowance for loan losses assumption increased by 10.0% of loan portfolio
  $ 365,000  
Allowance for loan losses assumption decreased by 1.0% of loan portfolio
  $ (36,000 )
Allowance for loan losses assumption decreased by 5.0% of loan portfolio
  $ (182,000 )
Allowance for loan losses assumption decreased by 10.0% of loan portfolio
  $ (365,000 )

Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property.  As a commercial real estate lender, which had invested in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the mortgage lending industry.  We, our manager, and Vestin Originations generally approved loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiries we performed did not reveal all material facts pertaining to a borrower and the security.

We may discover additional facts and circumstances as we continue our efforts in the collection and foreclosure processes.  This additional information often causes management to reassess its estimates.  In recent years, we have revised estimates of our allowance for loan losses.  Circumstances that may cause significant changes in our estimated allowance include, but are not limited to:

 
·
Declines in real estate market conditions that can cause a decrease in expected market value;

 
·
Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;

 
·
Lack of progress on real estate developments after we advance funds.  We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances.  After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;

 
·
Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed upon property; and

 
·
Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued ASU No. 2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements.  This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers.  Further, this ASU requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements.  This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  We are currently evaluating the impact of this ASU; however, we do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

 
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In April 2010, the FASB issued ASU No. 2010-18 regarding improving comparability by eliminating diversity in practice about the treatment of modifications of loans accounted for within pools under Subtopic 310-30 – Receivable – Loans and Debt Securities Acquired with Deteriorated Credit Quality (“Subtopic 310-30”).  Furthermore, the amendments clarify guidance about maintaining the integrity of a pool as the unit of accounting for acquired loans with credit deterioration.  Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors.  The amendments in this Update are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010.  The amendments are to be applied prospectively.  Early adoption is permitted.  We are currently evaluating the impact of this ASU; however, we do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
 
In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310):  Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  The ASU amends FASB Accounting Standards Codification Topic 310, Receivables, to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses.  As a result of these amendments, an entity is required to disaggregate, by portfolio segment or class of financing receivables, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses.  This ASU is effective for interim and annual reporting periods ending on or after December 15, 2010.  The adoption of this standard may require additional disclosures, but we do not expect the adoption to have a material effect on our consolidated financial statements.

 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information
required by this Item because it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).


ITEM 4.
CONTROLS AND PROCEDURES

See Item 4T below.
 

ITEM 4T.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our manager, including our manager’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure.  In connection with the preparation of this Report on Form 10-Q, our manager carried out an evaluation, under the supervision and with the participation of our manager’s CEO and CFO, as of June 30, 2010, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Exchange Act.  Based upon our manager’s evaluation, our manager’s CEO and CFO concluded that, as of June 30, 2010, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our manager’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within our company have been or will be detected.  Even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation.  Furthermore, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.  Our manager, including our manager’s CEO and CFO, does not expect that our controls and procedures will prevent all errors.

The certifications of the our manager’s CEO and CFO required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.


 
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Changes in Internal Control Over Financial Reporting

As required by Rule 13a-15(d) under the Exchange Act, our manager, including their CEO and their CFO, has evaluated our internal control over financial reporting to determine whether any changes occurred during the second fiscal quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, management has identified changes to improve its control environment that are reasonable likely to materially affect our internal controls over financial reporting. In particular, the Company has made personnel changes in the accounting, finance and administrative areas.  As part of an effort to reduce general and administrative expenses, Rocio Revollo was replaced as the Chief Financial Officer of our manager on May 21, 2010. At that time, Michael V. Shustek became the Interim Chief Financial Officer and Strategix Solutions, LLC immediately identified two additional personnel to complete many of Ms. Revollo’s responsibilities. With the availability of additional personnel, internal controls over financial reporting have been further enhanced by the segregation of duties.  Management plans to continue to review and make changes to the overall design of its control environment, including the roles and responsibilities within the organization and reporting structure, as well as policies and procedures to enhance the overall internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

Please refer to Note L – Legal Matters Involving the Manager and Note M – Legal Matters Involving the Company in the notes to the financial statement under Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q, for information regarding our legal proceedings, which are incorporated herein by reference.

ITEM 1A.
RISK FACTORS
 
Smaller reporting companies are not required to provide the information required by this Item.

ITEM 2.
UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

Market Information

There is no established public trading market for the trading of units.

Holders

As of August 13, 2010, approximately 505 unit holders held 2,024,424 units in the Company.

Liquidation Distribution Policy

On January 26, 2010, we made an initial liquidating distribution to all Fund Members, in the aggregate amount of approximately $1.0 million, in accordance with the Plan.  In addition, on April 8, 2010, we made another liquidating distribution to all Fund Members, in the aggregate amount of approximately $0.9 million, in accordance with the Plan.  The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund.  See Note H – Members’ Equity of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

We intend to make Liquidating Distributions on a quarterly basis in accordance with the Plan as set forth in Annex A of the Fund’s proxy statement filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009.  We will distribute to our members the net proceeds we receive from the payoff of our outstanding real estate loans and the net proceeds we receive from the sale of our REO, in each case, less a reasonable Reserve established to provide for payment of the Company’s ongoing expenses and contingent liabilities.  A final Liquidating Distribution will be made after we have completed the winding up of our business operations and made appropriate provision for any remaining obligations.

 
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We anticipate that the liquidation of our real estate loans may take two or more years and the sale of foreclosed properties may take five or more years, with the Dissolution process being substantially completed by the second half of 2014.  There are a number of factors that could delay our anticipated timetable, including the following:

 
Delays in the sale of real estate held by us through foreclosures, which may take many years to complete due to the time required to resolve pending litigation and bankruptcy matters involving foreclosed properties and to identify suitable buyers and consummate the sale of such properties;

 
Delays in distributions resulting from defaults in the payment of interest or principal when due on our real estate loans;

 
Lawsuits or other claims asserted by or against us;

 
Unanticipated legal, regulatory or administrative requirements; and

 
Delays in settling our remaining obligations.

Recent Sales of Unregistered Securities

None.

Equity Compensation Plan Information

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5.

 
None.



 
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ITEM 6.

EXHIBIT INDEX



Exhibit No.
 
Description of Exhibits
2.1(1)
 
Plan of Complete Liquidation and Dissolution
3.1(2)
 
Articles of Organization
3.2(3)
 
Certificate of Amendment to Articles of Organization
3.3(4)
 
Amended and Restated Operating Agreement (included as Exhibit A to the prospectus)
4.4(5)
 
Distribution Reinvestment Plan
10.9(6)
 
Office lease agreement dated March 31, 2003 by and between Luke Properties, LLC and Vestin Group, Inc.
10.10(7)
 
Indemnification agreement dated March 25, 2009 by and between Vestin Group, Inc. and Vestin Fund III, LLC
10.11 (8)
 
Agreement between Strategix Solutions, LLC and Vestin Fund III, LLC for accounting services.
10.12 (9)
 
Plan of Complete Liquidation and Dissolution
 
 
 

(1)
 
Incorporated herein by reference to our Schedule 14A Definitive Proxy Statement filed on May 11, 2009 (File No. 000-51301)
(2)
 
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)
(3)
 
Incorporated herein by reference to our Form 10-Q filed on August 16, 2004 (File No. 333-105017)
(4)
 
Incorporated herein by reference to our Schedule 14A Definitive Proxy Statement filed on January 29, 2007 (File No. 000-51301)
(5)
 
Incorporated herein by reference to Exhibit 4.4 of our Post-Effective Amendment No. 5 to Form S-11 Registration Statement filed on April 28, 2006 (File No. 333-105017)
(6)
 
Incorporated herein by reference to our Form 10-KSB filed on March 30, 2005 (File No. 333-105017)
(7)
 
Incorporated herein by reference to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 27, 2009 (File No. 000-51301)
(8)
 
Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on May 14, 2009 (File No. 000-51301)
(9)
 
Incorporated herein by reference to the Proxy Statement dated May 11, 2009 (File No. 000-51301)



 
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Pursuant to the requirements 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 Sole Director of the Manager
     
(Principal Executive Officer of Manager)
       
 
By:
 
/s/ Michael V. Shustek
     
Michael V. Shustek
     
Interim Chief Financial Officer of the Manager
     
(Principal Financial and Accounting Officer of the Manager)

Date:  August 13, 2010



 
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