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EX-32.1 - EXHIBIT 32.1 - LEAF Equipment Finance Fund 4, L.P.ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - LEAF Equipment Finance Fund 4, L.P.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - LEAF Equipment Finance Fund 4, L.P.ex31_1.htm
EX-32.2 - EXHIBIT 32.2 - LEAF Equipment Finance Fund 4, L.P.ex32_2.htm


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


FORM 10-K

(Mark One)

R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2010

£
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 000-53667
 
LEAF EQUIPMENT FINANCE FUND 4, L.P.
(Exact Name of Registrant as Specified in Its Charter)

Delaware                                            
 
61-1552209                                                 
(State or other jurisdiction of incorporation or organization)     (I.R.S. Employer Identification No.)

110 South Poplar Street, Suite 101, Wilmington Delaware 19801
(Address of principal executive offices)

(800) 819-5556
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:
 
Title of Each Class                                                     
 
Name of Each Exchange on Which Registered 
None
 
Not applicable
 
Securities registered pursuant to Section 12 (g) of the Act:
Limited Partner Units

Title of Class

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. £ Yes   R No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. £ Yes   R No

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. R Yes £ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R

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. (Check one):

Large accelerated filer £
Accelerated filer £
Non-accelerated filer £
Smaller Reporting Company R
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). £ Yes   R No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

There is no public market for the Registrant’s securities.

DOCUMENTS INCORPORATED BY REFERENCE
None



 
 

 
 
LEAF EQUIPMENT FINANCE FUND 4, L.P.
INDEX TO ANNUAL REPORT
ON FORM 10-K

   
Page
PART I
   
ITEM 1:
  3
ITEM 1A:
  5
ITEM 1B:
  5
ITEM 2:
  5
ITEM 3:
  5
ITEM 4:
  5
PART II
   
                ITEM 5: Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer  of Purchases of Equity Securities   6
ITEM 6:
  6
ITEM 7:
  7
ITEM 7A:
  17
ITEM 8:
  18
ITEM 9:
  34
ITEM 9A:
  34
ITEM 9B:
  34
     
PART  III
   
ITEM 10:
  34
ITEM 11:
  36
ITEM 12:
  36
ITEM 13:
  37
ITEM 14:
  38
     
PART  IV
   
ITEM 15
  38
     
   



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
The information contained in this Annual Report on Form 10-K (this “Report”) includes “forward-looking statements.” Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.
 
Forward-looking statements contained in this Report are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Forward-looking statements we make in this Report are subject to various risks and uncertainties that could cause actual results to vary from our forward-looking statements, including:
 
 
·
changes in our industry, interest rates or the general economy;
 
 
·
increased rates of default and/or decreased recovery rates on our investment in leases and loans;
 
 
·
availability, terms and deployment of debt funding;
 
 
·
general volatility of the debt markets;
 
 
·
the timing of cash flows, if any, from our investments in leases and loans and payments for debt service;
 
 
·
the degree and nature of our competition; and
 
 
·
availability and retention of qualified personnel.
 
We caution you not to place undue reliance on these forward-looking statements which speak only as of the date of this Report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events.
 
As used herein, the terms “we,” “us,” or “our” refer to LEAF Equipment Finance Fund 4, L.P. and subsidiaries.
 
PART I
 
ITEM 1 – BUSINESS
 
General
 
We are a Delaware limited partnership formed on January 25, 2008 by our general partner, LEAF Asset Management, LLC (the “General Partner”), which manages us. Our General Partner is a Delaware limited liability company and a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Our offering period began on August 12, 2008. Through our offering termination date of October 30, 2009 we raised $125.7 million by selling 1.2 million of our limited partner units. We commenced operations in September 2008.
 
 
We are expected to have a nine-year life, consisting of an offering period of up to two years, a five year reinvestment period and a subsequent maturity period of two years, during which our leases and secured loans will either mature or be sold. In the event we are unable to sell our leases and loans during the maturity period, we expect to continue to return capital to our partners as those leases and loans mature. Substantially all of our leases and loans mature by the end of 2015. We expect to enter our liquidation period beginning in October 2014. We will terminate on December 31, 2032, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.
 
We acquire a diversified portfolio of new, used or reconditioned equipment that we lease to third parties. We also acquire portfolios of equipment subject to existing leases from other equipment lessors. Our financings are typically acquired from LEAF Financial Corporation (“LEAF Financial”), an affiliate of our General Partner and a subsidiary of RAI. In addition, we may make secured loans to end users to finance their purchase of equipment. We attempt to structure our secured loans so that, in an economic sense, there is no difference to us between a secured loan and a full payout equipment lease. We also invest in equipment, leases and secured loans through joint venture arrangements with our General Partner’s affiliated investment programs. We finance business-essential equipment including, but not limited to, computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on the small to mid-size business market, which generally includes businesses with:
 
 
·
500 or fewer employees;
 
 
·
$1.0 billion or less in total assets; or
 
 
·
$100.0 million or less in total annual sales.
 
Our principal objective is to generate regular cash distributions to our limited partners.
 
Our leases consist of direct financing and operating leases as defined by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Under the direct financing method of accounting, interest income (the excess of the aggregate future rentals and estimated unguaranteed residuals upon expiration of the lease over the related equipment cost) is recognized over the life of the lease using the interest method. Under the operating method, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over its estimated useful life. Rental income on operating leases consists primarily of monthly periodic rentals due under the terms of the leases. Generally, during the lease terms of existing operating leases, we will not recover all of the cost and related expenses of rental equipment and, therefore, we are prepared to remarket the equipment in future years. We discontinue the recognition of revenue for leases and loans for which payments are more than 90 days past due, or in case of future payment card receivables, when no payments have been received in 60 days. These assets are classified as non-accrual.
 
As discussed further in ITEM 7, the recent economic recession in the United States has adversely affected our operations as a result of higher delinquencies and may continue to do so as the economy recovers.
 
Debt Facilities
 
We have augmented the proceeds of our original offering with debt, and intend to finance a significant portion of the cost of the equipment we acquire. We are not limited in the amount of debt, including financings through securitizations, we may incur. Our ability to obtain financing will, however, depend upon our General Partner’s assessment of whether funds are available at rates and upon terms that are economically advantageous to us. As a result, the amount of our financings may vary significantly from our expectations.
 
The tightening of the credit markets has adversely affected our ability to obtain debt financing needed to execute our investment strategies. Specifically, we rely on both revolving and term debt facilities to fund our acquisitions of equipment financings. If our banks do not renew a revolving facility upon maturity, the debt facility would convert to a term facility and we would not be able to borrow additional amounts under the line of credit. A term debt facility is a loan that is contractually repaid over a period of time. If we are unable to obtain new debt that will allow us to invest the repayments of existing leases and loans into new investments, the volume of our leases and loans will be reduced. See the caption titled “Liquidity and Capital Resources” in ITEM 7 for a further discussion.
 
Available Information
 
We file annual, quarterly and current reports and other information with the SEC. The public may read and copy information we file with the SEC, at the SEC’s public reference room at 100 F Street, NE, Washington, D.C. 20549, on official business days during the hours of 10:00 am and 3:00 pm. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The internet address of the SEC site is http://www.sec.gov. Our General Partner’s internet address is http://www.LEAFnow.com. We make our SEC filings available free of charge on or through our General Partner’s internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We are not incorporating by reference in this report any material from our General Partner’s website.


Agreements with our General Partner
 
We do not directly employ any persons to manage or operate our business. These functions are provided by our General Partner and employees of our General Partner and/or its affiliates. We reimburse our General Partner and/or its affiliates for all direct and indirect costs of services provided, including the cost of employees and benefits properly allocable to us and all other expenses necessary or appropriate to the conduct of our business. Our General Partner and its affiliates receive fees and other compensation from us. See ITEM 13 for a further discussion.
 
Competition
 
The equipment leasing business is highly fragmented and competitive. We acquire equipment from our General Partner and its affiliates. Our General Partner and its affiliates compete with:
 
 
·
a large number of national, regional and local banks, savings banks, leasing companies and other financial institutions;
 
 
·
captive finance and leasing companies affiliated with major equipment manufacturers; and
 
 
·
other sources of equipment lease financing, including other publicly- offered partnerships.
 
Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we have. Competition with these entities may reduce the creditworthiness of potential lessees or borrowers to whom we have access or decrease our yields. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. A lower cost of funds could enable a competitor to offer leases or loans at rates which are less than ours, potentially forcing us to lower our rates or lose origination volume.
 
Employees
 
As is commonly the case with limited partnerships, we do not directly employ any of the persons responsible for our management or operations. Rather, the personnel of our General Partner and/or its affiliates manage and operate our business. Officers of our General Partner may spend a substantial amount of time managing the business and affairs of our General Partner and its affiliates and may face a conflict regarding the allocation of their time between our business and affairs and their other business interests. The officers of our General Partner who provide services to us are not required to work full time on our affairs. These officers may devote significant time to the affairs of our General Partner’s affiliates and be compensated by these affiliates for the services rendered to them. There may be significant conflicts between us and affiliates of our General Partner regarding the availability of these officers to manage us.
 
ITEM 1A – RISK FACTORS
 
Risk factors have been omitted as permitted under rules applicable to smaller reporting companies.
 
ITEM 1B – UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2 – PROPERTIES
 
We do not own or lease any real property.
 
ITEM 3 – LEGAL PROCEEDINGS
 
We are not subject to any pending material legal proceedings.
 
 ITEM 4 – REMOVED AND RESERVED
 
Removed and reserved pursuant to SEC Release 33-9089A
 
PART II
 
ITEM 5 –  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Our limited partner units are not publicly traded. There is no market for our limited partner units and it is unlikely that any will develop. The following table shows the number of equity security holders:
 
   
Title of Class
 
Number of Partners as  of
December 31, 2010
Limited Partners
 
2,748
General Partner
 
1
 
Total distributions paid to limited partners for the years ended December 31, 2010, 2009 and the period ended December 31, 2008 were $8.4 million, $6.2 million and $ 366,000, respectively.
 
ITEM 6 – SELECTED FINANCIAL DATA
The following selected financial data should be read together with our consolidated financial statements, the notes to our financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 in this report. We derived the selected consolidated financial data below from our consolidated financial statements appearing elsewhere in this report which have been audited by Grant Thornton LLP, an independent registered public accounting firm. We deem September 16, 2008 to be the commencement of our operations and we refer to the period from that date through December 31, 2008 as the period ended December 31, 2008 (in thousands, except unit and per unit data):
 
   
Years Ended December 31,
   
Period Ended December  31,
 
   
2010
   
2009
   
2008
 
Revenues
  $ 40,064     $ 29,124     $ 255  
Interest expense
    26,644       22,991       -  
Provision for credit losses
    20,785       19,107       570  
Other expenses
    14,971       6,778       433  
Total expenses
    62,400       48,876       1,003  
Equity in losses of affiliate
    -       (3,261 )     (600 )
Net loss
  $ (22,336 )   $ (23,013 )   $ (1,348 )
Net loss allocated to limited partners
  $ (21,880 )   $ (22,421 )   $ (1,335 )
Distributions to partners
  $ 8,431     $ 6,216     $ 366  
Weighted average number of limited partner units outstanding during the year
    1,259,907       806,087       257,627  
Net loss per weighted average limited partner unit
  $ (17.37 )   $ (27.81 )   $ (5.18 )
                       
   
December 31,
      2010       2009       2008  
Investment in commercial finance assets, net
  $ 334,826     $ 501,174     $ 14,934  
Debt
    296,975       427,025       -  
Partners’ (deficit) capital:
                       
General partner
    (609 )     (304 )     (12 )
Limited partners
    49,642       79,933       32,240  
Accumulated other comprehensive loss
    -       -       (567 )
Total partners’ capital
  $ 49,033     $ 79,629     $ 31,661  
                         
 
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides an analysis of our operating results, an overview of our liquidity and capital resources and other items related to us.  This discussion and analysis should be read in conjunction with Item 1 and the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for the year ended December 31, 2010.
 
As used herein, the terms “we,” “us,” or “our” refer to LEAF Equipment Finance Fund 4, L.P. and its subsidiaries.

Fund Summary
 
As discussed in more detail in Item 1, we acquire a diversified portfolio of new, used or reconditioned equipment that we lease to third parties. We also acquire portfolios of equipment subject to existing leases from other equipment lessors. Our financings are typically acquired from our General Partner. In addition, we may make secured loans to end users to finance their purchase of equipment.
 
Since our commencement in September 2008, the United States has suffered through the worst economic recession in over 75 years.  The ongoing economic slowdown has impacted, and will continue to impact, our performance.  While the recession began before we were launched, its magnitude and duration have been severe and the consequences broadly felt.  In particular, the recession led to a “credit crisis” that impacted us directly (through the amount and terms of credit available to us) and indirectly (through the impact on the small and mid-sized businesses that make up our lease and loan borrowers).
 
Banks became reluctant to lend, and when they did it became more expensive to borrow.  This happened very quickly and severely.  In fact, shortly after our launch, we were able to obtain a new credit facility and we were hopeful that we would be able to continue to do so.  However, availability and terms got much worse – not better.  Interest rates increased; fees were imposed and/or increased; the lengths of extensions were shortened and the amount that lenders would advance as a percentage of the leases being financed was significantly decreased.
 
As we sought new debt facilities and our existing facilities matured or needed modifications, we had to accept these new terms and our costs increased.  Most significantly, we have not been able to maintain debt at the same levels.  The additional investment requirement reduced the amount of assets that we could purchase, and accordingly reduced our cash flow.  The lenders’ higher fees and costs also had to be paid from funds that were then unavailable to re-invest in new leases.  Because we have less debt, over time, we will pay our lenders less interest expense but current cash flow is negatively impacted. As we saw these conditions fail to improve, we recognized that we would not be able to obtain enough financing on favorable terms to operate at our proposed size, and we closed to new investments approximately ten months ahead of schedule.
 
The combination of higher interest rates, lower levels of available credit, increased fees, losses that are slightly higher than originally projected and the inability to use excess cash flow to pay for some of these costs created a “perfect storm” that is making it difficult to execute the business plan. We have worked to minimize the effects of these conditions.  We sought new forms of capital, and were able to arrange debt for us at a time when lenders were not generally providing new facilities. Additionally we have refinanced all of our existing debt facilities by completing three term securitizations (two in 2010 and the third in January 2011) totaling approximately $360 million.
 
All of these events have come in the early stages of our life cycle. With sufficient cash and debt facilities, we hope to pursue additional financings that will allow for us to acquire leases and benefit from the resulting cash flows in the future. We can continue to acquire leases until we enter our maturity phase in October 2014, at which time we will be prohibited, under the partnership agreement, from acquiring new leases.
 
To date, limited partners have received total distributions ranging from approximately 7% to 17% of their original amount invested, depending upon when the investment was made.   Management is working to maximize the amount that can be distributed to limited partners in the future. However, we could not continue to support 8.5% distributions, and beginning in August 2010, distributions were lowered to 4.0%.  The July 2010 distribution was made at the 8.5% rate. Additionally, our General Partner will not earn additional management fees for future services.
 
As we seek new financing arrangements, opportunistically sell leases and undertake other ways to improve our performance, we hope to be able to increase the distribution and re-invest in leases and loans.
 
We continued to be impacted by market uncertainties during the year ended December 31 2010 as further discussed in “Finance Receivables and Asset Quality” and in “Liquidity and Capital Resources.”
 
 
General Economic Overview
 
Our portfolio performance continued to be negatively impacted by the economic problems facing the United States.   The small and mid-size companies that are our loan and lease customers are especially sensitive to macro-economic trends. Key indicators of economic activity show a stalled economy.  At December 31, 2010, several key economic indicators continued to show a weak economy, however a slight decline in the national unemployment rate and improved manufacturing and credit indices provide the first signs of possible improvement in the economy.

 
·
The national unemployment rate at December 31, 2010 was down slightly at 9.4% but still historically high with no meaningful decline in the unemployment rate in the near future.  High unemployment results in reduced demand for goods and services and that leads to decreased revenues for the small business customers in the LEAF Funds portfolio thereby impacting their ability to repay loan or lease obligations.
 
 
·
The U.S. housing market, historically a significant contributor to economic growth and wealth, continues to be depressed. The National Association of Realtors reported that the December 2010 existing home sales seasonally adjusted annual rate of 5.22 million units continued the recent month over month downward trend.  The S&P/Case-Shiller Home Price Report for December 31, 2010 shows a continued decline in home prices in the fourth quarter of 2010 as compared to the third quarter of 2010 with prices down 3.9%. The continuing housing problem, both home sales and home prices, affects the small to mid-size business community in two ways: 1) the lack of new construction has eliminated an important source of business activity for small business; and 2) home equity that historically has provided credit availability to small business owners  has either disappeared or become scarce.
 
 
·
Nationwide, as reported by the Administrative Office of the U.S. Courts, bankruptcies continued to rise during 2010 with 1,593,081 filed in the twelve month period ending December 31, 2010 as compared to 1,473,675 filed in the twelve month period ending December 31, 2009.  Increased bankruptcies affect our performance in two ways: 1) small business customers in the portfolio may default due to bankruptcy; and 2) good performing small business customers may face reduced revenues due to bankruptcies among their customers thereby impacting their ability to repay loan or lease obligations.
 
 
·
The Institute of Supply Management reports that its manufacturing index improved slightly in December 2010 as did the National Association of Credit Managers index.  Taken together these suggest marginal improvement in the economic climate.
 
The various national economic problems have manifested themselves in our portfolio performance.  We are seeing delinquency trends in the portfolio that are consistent with delinquency trends reported by industry groups, including the Monthly Lease and Finance Index, that track lease and loan portfolio performance.  The overall delinquency trend in our portfolio is that delinquent balances are declining, but as stated above, the economy is still unsettled and periodic swings in performance may still be expected.

 
Finance Receivables and Asset Quality
 
Information about our portfolio of commercial finance assets is as follows (dollars in thousands):
 
 
 
December 31,
 
   
2010
   
2009
 
Investment in leases and loans, net
  $ 334,826     $ 501,174  
                 
Number of contracts
    12,900       14,000  
Number of individual end users (a)
    11,500       12,800  
Average original equipment cost
  $ 60.9     $ 60.6  
Average initial lease term (in months)
    57       60  
Average remaining lease term (in months)
    27       -  
States accounting for more than 10% of lease and loan portfolio:
         
California
    14 %     14 %
                 
Types of equipment accounting for more than 10% of lease and loan portfolio:
         
Medical equipment
    23 %     20 %
Industrial equipment
    21 %     20 %
Restaurant equipment
    11 %     11 %
                 
Types of businesses accounting for more than 10% of lease and loan portfolio:
         
Services
    46 %     46 %
Retail trade
    18 %     18 %
Finance/Insurance/Real Estate
    13 %     9 %
 
(a)
Located in the 50 states as well as the District of Columbia and Puerto Rico. No other individual end user or single piece of equipment accounted for more than 10% of our portfolio based on the origination amount.
 
We utilize debt, in addition to our equity, to fund the acquisitions of lease and loan portfolios. Our leases and loans are generally assigned as collateral for borrowings as discussed in the “Liquidity and Capital Resources” section below. As of December 31, 2010 and 2009, our outstanding debt was $297.0 million and $427.0 million, respectively.
 
Finance Receivables and Asset Quality
 
The performance of our commercial finance assets portfolio is a measure of our General Partner’s underwriting and collection standards, skills, policies and procedures and is an indication of asset quality. The table below provides information about our commercial finance assets including non-performing assets, which are those assets that are not accruing income due to non-performance or impairment (dollars in thousands):
 
   
As of and for the
   
Years Ended December 31,
               
Change
   
2010
   
2009
     $       %  
Investment in leases and loans before allowance for credit losses
  $ 344,680     $ 516,808     $ (172,128 )     (33 )%
Less: allowance for credit losses
    9,854       15,634       (5,780 )     (37 )%
Investment in leases and loans, net
  $ 334,826     $ 501,174     $ (166,348 )     (33 )%
                                 
Weighted average investment in direct financing leases and loans before allowance for credit losses
  $ 420,345     $ 286,900     $ 133,445       47 %
Non-performing assets
  $ 13,883     $ 21,329     $ (7,446 )     (35 )%
Charge-offs, net of recoveries
  $ 26,565     $ 4,043     $ 22,522       -  
As a percentage of finance receivables:
                               
Allowance for credit losses
    2.86 %     3.03 %                
Non-performing assets
    4.03 %     4.13 %                
As a percentage of weighted average finance receivables:
                               
Charge-offs, net of recoveries
    6.32 %     1.41 %                
 
We manage our credit risk by adhering to strict credit policies and procedures, and closely monitoring our receivables. Our General Partner, the servicer of our leases and loans, responded to the recent economic recession in part, by implementing early intervention techniques in collection procedures. Our General Partner has also increased its credit standards and limited the amount of business we do with respect to certain industries, geographic locations and equipment types. Because of the recent scarcity of credit available to small and mid size businesses, we have been able to increase our credit standards without reducing the interest rate we charge on our leases and loans.
 
Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables. The allowance is based on factors which include our historical loss experience on equipment finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. Our policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote. Substantially all of our assets are collateral for our debt and, therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.
 
 We focus on financing equipment used by small to mid-sized businesses. The recent economic recession in the U.S. has made it more difficult for some of our customers to make payments on their financings with us on a timely basis, which has adversely affected our operations in the form of higher delinquencies. These higher delinquencies may continue as the U.S. economy recovers. The increase in delinquencies, as well as recent economic trends has caused us to conclude that an allowance for credit losses of $9.8 million is necessary at December 31, 2010.
 
Our net charge-offs increased in the 2010 period compared to the 2009 period due to the aging of our portfolio of leases and loans as well as the recent economic recession as discussed above.
 
Critical Accounting Policies
 
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value of interest rate swaps and caps. We base our estimates on historical experience, current economic conditions and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
 
We have identified the following policies as critical to our business operations and the understanding of our results of operations.
 
Investments in Commercial Finance Assets
 
The Fund’s investments in commercial finance assets consist of direct financing leases, operating leases, loans and future payment card receivables.
 
Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable and the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted payments plus the estimated unguaranteed residual value expected to be realized at the end of the lease term over the cost of the related equipment.
 
Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s senior management’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.
 
Operating Leases. Leases not meeting the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis.
 
Generally, during the lease terms of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Fund’s policy is to review, on a quarterly basis, the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds such value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment. There were no write-downs of equipment during the years ended December 31, 2010 and 2009.
 
Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the loan. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.
 
Allowance for Credit Losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases, loans and future payment card receivables) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due, any remaining balance is fully-reserved less an estimated recovery amount. Generally, the account is then referred to our internal recovery group consisting of a team of credit specialists and collectors. The group utilizes several resources in an attempt to maximize recoveries on charged-off accounts including:1) initiating litigation against the end user customer and any personal guarantor, 2) referring the account to an outside law firm or collection agency and/or 3) repossessing and remarketing the equipment through third parties. The Fund’s policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote.
 
The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due. For future payment card receivables, the Fund discontinues revenue recognition when no payments have been received for 60 days. In addition, if the amount and timing of the future cash collections are not reasonably estimable, the Fund accounts for the future credit card receivable on the cost recovery method. Under the cost recovery method of accounting, no income is recognized until the basis of the future payment card receivable has been fully recovered. As of December 31, 2010 and, 2009, the Fund had $13.9 million and $21.3 million respectively, of leases and loans on non-accrual status. The amount of future payment card receivables on non-accrual totaled $313,000 and $2.0 million as of December 31, 2010 and 2009, respectively. The allowance for credit losses related to future payment card receivables on non-accrual was $31,000 and $1.2 million as of December 31, 2010 and, 2009, respectively. At December 31, 2010, the Fund determined that the amount and timing of future cash collections on the remaining $313,000 of credit card payment receivables was not reasonably estimable. Accordingly, the Fund will recognize revenue on these receivables using the cost recovery method. Fees from delinquent payments are recognized when received and are included in Other income.
 
Fair Value and Effectiveness of Interest Rate Swaps
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). Because our derivatives are not listed on an exchange, these instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although we have determined that the majority of the inputs used to value our derivatives fall within level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2010, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that its derivative valuations in their entirety are classified in level 2 of the fair value hierarchy.
 
Assets and liabilities measured at fair value on a recurring basis included the following as of December 31, 2010 and 2009 (in thousands):
 
   
Fair Value Measurements Using
   
Assets (Liabilities)
 
   
Level 1
   
Level 2
   
Level 3
   
At Fair Value
 
Interest rate caps at December 31, 2010
  $ -     $ 147     $ -     $ 147  
Interest rate swaps at December 31, 2010
  $ -     $ (2,856 )   $ -     $ (2,856 )
Interest rate caps at December 31, 2009
  $ -     $ 730     $ -     $ 730  
Interest rate swaps at December 31, 2009
  $ -     $ (10,458 )   $ -     $ (10,458 )
 
Results of Operations
 
 Our investments in commercial finance assets declined to $334.8 million as of December 31, 2010 as compared to $501.2 million as of December 31, 2009.  As economy recovers, we hope to pursue additional financings to be utilized to acquire additional commercial finance assets.  Our General Partner expects revenue derived from these additional leases and loans to exceed the interest expense incurred by the debt incurred to obtain these financings.

Year Ended December 31, 2010 compared to Year Ended December 31, 2009
 
The following summarizes our results of operations for the years ended December 31, 2010 and 2009 (dollars in thousands):
 
               
Increase (Decrease)
 
   
2010
   
2009
     $       %  
Revenues:
                         
Interest on equipment financings
  $ 35,008     $ 26,174     $ 8,834       34 %
Rental income
    2,871       1,764       1,107       63 %
Gains on sales of equipment and lease dispositions, net
    646       295       351       -  
Other
    1,539       891       648       73 %
      40,064       29,124       10,940       38 %
                                 
Expenses:
                               
Interest expense
    26,644       22,991       3,653       16 %
Losses (gains) on derivative activities
    4,787       (3,153 )     7,940       -  
Depreciation on operating leases
    2,423       1,522       901       59 %
Provision for credit losses
    20,785       19,107       1,678       9 %
General and administrative expenses
    1,734       1,653       81       5 %
Administrative expenses reimbursed to affiliate
    3,095       2,811       284       10 %
Management fees to affiliate
    2,932       3,945       (1,013 )     (26 )%
      62,400       48,876       13,524       28 %
Loss before equity in losses of affiliate
    (22,336 )     (19,752 )     (2,584 )        
Equity in losses of affiliate
    -       (3,261 )     3,261          
Net loss
    (22,336 )     (23,013 )     677          
Less: Net loss attributable to the noncontrolling interest
    235       366       (131 )        
Net loss attributable to LEAF 4 partners
  $ (22,101 )   $ (22,647 )   $ 546          
Net loss allocated to LEAF 4's limited partners
  $ (21,880 )   $ (22,421 )   $ 541          
 
The increase in total revenues was attributable to the following:
 
 
·
An increase in interest on equipment financings. Our weighted average net investment in financing assets increased to $420.3 million for the year ended December 31, 2010 as compared to $286.9 million for the period ended December 31, 2009, an increase of $133.4 million (47%). This growth was driven by our acquisitions of portfolios of leases and loans in 2009.
 
 
·
An increase in rental income which was principally the result of an increase in our investment in operating leases in the 2010 period compared to the 2009 period.
 
 
·
An increase in gains on sales of equipment. Gains and losses on sales of equipment may vary significantly from period to period.
 
 
·
An increase in other income, which consists primarily of late fee income. Late fee income has increased due to the increase of the equipment financing portfolio coupled with an increase in payment collection efforts.
 

The increase in total expenses was a primarily a result of the following:
 
 
·
An increase in interest expense due to the 2010-3 Term Securitization (See “Liquidity and Capital Resources” section that follows) that triggered both the charge-off of $1.4 million of deferred financing costs and a prepayment penalty of $0.4 million incurred as a result of paying off the Wells Fargo facility. Average borrowings for the year ended December 31, 2010 and 2009 were $367.4 million and $444.9 million, respectively, at an effective interest rate of 8.9% and 6.0%, respectively.
 
 
·
Losses on derivative hedging activities include cash payments or receipts relating to our hedging activities and the changes in the fair value of our derivative financial instruments. For the year ended December 31, 2010, net cash payments were $5.9 million and the change in fair value resulted in a non-cash gain of $1.1 million. Gains (losses) we incur related to derivative hedging activities are based on the value of the derivative contracts at the respective balance sheet date and, in a volatile market that is changing daily, may not necessarily reflect the cash amount to be paid at settlement. Such gains (losses) can create volatility in our results of operations, as the market value of our derivative financial instruments changes over time, and this volatility may adversely impact our results of operations and financial condition.
 
 
·
An increase in depreciation on operating leases related to our increase in our investment in operating leases.
 
These increases were offset, in part, by:
 
 
·
A decrease in our management fees attributable to an increase in our non performing assets, since management fees are paid based on lease payments received. In addition, beginning August 1, 2010, our General Partner waived its asset management fees. Accordingly, $1.5 million of management fees were waived for the year ended December 31, 2010.  The General Partner has waived all future management fees.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the years ended December 31, 2010 and 2009 was ($17.37) and($27.81), respectively, based on the weighted average number of limited partner units outstanding of 1,259,907 and 806,087, respectively.
 
Year Ended December 31, 2009 compared to Period Ended December 31, 2008
 
The following summarizes our results of operations for the years ended December 31, 2009 and 2008 (dollars in thousands):
 
               
Increase (Decrease)
 
   
2009
   
2008
     $       %  
Revenues:
                         
Interest on equipment financings
  $ 26,174     $ 198     $ 25,976       -  
Rental income
    1,764       43       1,721       -  
Gains on sales of equipment and lease dispositions, net
    295       -       295       -  
Other
    891       14       877       -  
      29,124       255       28,869       -  
                                 
Expenses:
                               
Interest expense
    22,991       -       22,991       -  
Gains on derivative activities
    (3,153 )     -       (3,153 )     -  
Depreciation on operating leases
    1,522       35       1,487       -  
Provision for credit losses
    19,107       570       18,537       -  
General and administrative expenses
    1,653       57       1,596       -  
Administrative expenses reimbursed to affiliate
    2,811       145       2,666       -  
Management fees to affiliate
    3,945       196       3,749       -  
      48,876       1,003       47,873       -  
Loss before equity in losses of affiliate
    (19,752 )     (748 )     (19,004 )        
Equity in losses of affiliate
    (3,261 )     (600 )     (2,661 )        
Net loss
    (23,013 )     (1,348 )     (21,665 )        
Less: Net loss attributable to the noncontrolling interest
    366       -       366          
Net loss attributable to LEAF 4 partners
  $ (22,647 )   $ (1,348 )   $ (21,299 )        
Net loss allocated to LEAF 4's limited partners
  $ (22,421 )   $ (1,335 )   $ (21,086 )        
 
 
Our investments in commercial finance assets increased to $501.2 million as of December 31, 2009 as compared to $14.9 million as of December 31, 2008. The increase in total revenues was primarily attributable to the following:
 
 
·
an increase in interest income on equipment financings. Our weighted average net investment in financing assets increased to $286.9 million for the year ended December 31, 2009 as compared to $6.4 million for the period ended December 31, 2008, an increase of $280.5 million (4,383%). This growth was driven by our acquisitions of portfolios of leases and loans.
 
 
·
an increase in rental income which was principally the result of an increase in our investment in operating leases in the 2009 period compared to the 2008 period.
 
 
·
an increase in gains on sales of equipment. Gains and losses on sales of equipment may vary significantly from period to period.
 
 
·
an increase in other income, which consists primarily of late fee income. Late fee income has increased due to the increase of the equipment financing portfolio coupled with an increase in payment collection efforts.
 
The increase in total expenses was a result of the following:
 
 
·
an increase in interest due to our increase in our outstanding debt. We did not have any outstanding debt at December 31, 2008. Borrowings for the year ended December 31, 2009 were $427.0 million at an effective interest rate of 6.0%.
 
 
·
an increase in depreciation on operating leases related to our increase in our investment in operating leases.
 
 
·
an increase in our provision for credit losses. Our provision for credit losses has increased due to the growth in size of the portfolio as well as the impact of the economic recession in the United States on our customers’ ability to make payments on their leases and loans.
 
 
·
an increase in management fees attributable to the increase in our portfolio of equipment financing assets, since management fees are paid based on lease payments received.
 
 
·
an increase in administrative expenses reimbursed to affiliate due to significant growth in net assets as a result of the acquisition of portfolios of leases and loans.
 
 
·
an increase in general and administrative expenses due to significant growth in net assets as a result of the acquisition of portfolios of leases and loans.
 
 
·
the gain on derivative hedging activities includes cash payments or receipts relating to our hedging activities and the changes in the fair value of our derivative financial instruments. For the year ended December 31, 2009, net cash payments were $492,000 and the change in fair value resulted in a non-cash gain of $3.6 million.
 
Equity in losses of affiliate was $3.3 million for the year ended December 31, 2009 and $600,000 for the period ended December 31, 2008. In November 2008, we entered into a joint venture agreement with LEAF III whereby we acquired a 49% interest in that joint venture and the pool of leases held by it. As of and for the period ended December 31, 2008, we accounted for our investment in LEAF Funds JV1 under the equity method of accounting since we had the ability to exercise significant influence over operation and financial decisions of the entity.
 
In August 2009, we increased our ownership interest in LEAF Funds JV1 by an additional 47%. As a result of this transaction, we now own approximately 96% of LEAF Funds JV1 and LEAF Funds JV1 was consolidated with our results effective August 31, 2009.
 
In March 2009, we entered into a joint venture agreement with LEAF III (“LEAF Funds JV2”). We invested approximately $9.8 million for a 98% interest in LEAF Funds JV2. LEAF Funds JV2 invested $10.0 million in an entity sponsored by LEAF Financial. As of March 31, 2009, this entity owned approximately $200 million of leases and loans and had approximately $170 million of debt outstanding on its revolving $250 million line of credit, and was consolidated with us effective March 1, 2009.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner for the year and period ended December 31, 2009 and 2008 was ($27.81) and ($5.18), respectively, based on a weighted average number of limited partner units outstanding of 806,087 and 257,627, respectively.
 
Liquidity and Capital Resources
 
Our primary cash requirements, in addition to normal operating expenses, are for debt service, investment in leases and loans and distributions to partners. During the life of the partnership, we depend upon cash generated from operations, and the excess cash derived from the collection of lease payments after debt service to meet our liquidity needs.
 
Our ongoing liquidity is affected by our ability to leverage our portfolio through the use of debt facilities. Our ability to obtain or refinance debt financing to execute our investment strategies has been impacted by the continued tightening of the credit markets. Specifically, we rely on both revolving and term debt facilities to fund our acquisitions of equipment financings. If we are unable to obtain or refinance debt that will allow us to invest the repayments of existing leases and loans into new investments, the volume of our leases and loans will be reduced. As a result, our cash flows available for future distributions to our partners would be reduced.
 
We continue to seek and maintain sources of financing, including expanded bank financing which will enable us to originate investments and generate income while preserving capital. To the extent the credit markets available to us are or become adversely affected by the recent weaknesses in the national economy, our ability to obtain debt to help build our portfolio on terms we deem acceptable may be reduced or delayed and our cost of borrowings may increase. As a result, our cash flows available for future distributions to our partners would be reduced.

We anticipate that the lease and loan rates we charge to our customers will also increase to compensate for our increase in borrowing costs. However, our profitability may be negatively impacted if we are unable to increase our lease and loan rates and our borrowing costs increase.
 
Repayment of our debt is based on payments we receive from our customers. When a lease or loan becomes delinquent we may repay our lender in order for us to maintain compliance with our debt facilities.
 
Our liquidity could also be affected by higher than expected payment defaults on our commercial finance assets. These payment defaults would result in a loss of anticipated revenues. These losses may adversely affect our ability to make distributions to partners and, if the level of defaults is sufficiently large, may result in our inability to fully recover our investment in the underlying equipment.
 
Changes in interest rates will affect the market value of our portfolio and our ability to obtain financing. In general, the market value of an equipment lease will change in inverse relation to an interest rate change where the lease has a fixed rate of return. Accordingly, in a period of rising interest rates, the market value of our equipment leases will decrease. A decrease in the market value of our portfolio will adversely affect our ability to obtain financing against our portfolio or to liquidate it.
 
The following table sets forth our sources and uses of cash for the period indicated (in thousands):
 
   
Years Ended December 31,
 
   
2010
   
2009
   
2008
 
Net cash provided by (used in) operating activities
  $ 8,491     $ 1,641     $ (366 )
Net cash provided by (used in) investing activities
    138,773       (111,119 )     (26,584 )
Net cash (used in) provided by financing activities
    (148,491 )     104,363       33,686  
(Decrease) increase in cash
  $ (1,227 )   $ (5,115 )   $ 6,736  
 
Partner’s distributions paid for the year ended December 31, 2010 and, 2009 were $8.4 million and $6.2 million, respectively. Distributions to limited partners were paid at a rate of 8.5% per annum of invested capital and were lowered to 4.0% with the August 2010 distribution. The July distribution was made at the 8.5% level. Cumulative partner distributions paid from our inception to December 31, 2010 were approximately $15.0 million.
 
Future cash distributions are dependent on the performance of the fund and are impacted by a number of factors which include: our ability to obtain and maintain debt financing on acceptable terms to build and maintain our equipment finance portfolio; lease and loan defaults by our customers; and prevailing economic conditions. Due to the recent economic recession, we continue to see a scarcity of available debt on terms beneficial to the partnership and higher than expected loan defaults, resulting in poorer fund performance than projected.
 
Beginning August 1, 2010, our General Partner waived its asset management fees. Accordingly, $1.5 million of management fees were waived for the year ended December 31, 2010. The General Partner has waived all future management fees.  The cash savings on management fees and distributions is expected to be used to pay down our liabilities.
 
Cash decreased by $1.2 million primarily due to net debt repayments of $133.0 million and distributions to partners of $8.4 million which was partially offset by net proceeds from commercial finance assets of $138.8 million.
 
Our borrowing relationships each require the pledging of eligible leases and loans to secure amounts advanced. Borrowings outstanding under our debt facilities as of December 31, 2010 were as follows (in thousands):
 
           
Amount
   
Amount
   
Amount of
 
 
Type
 
Maturity
   
Outstanding
   
Available
   
Collateral (1)
 
Morgan Stanley
Term
    (2)     $ 101,855       N/A     $ 104,924  
2010-1 Term Securitization
Term
    (3)       54,638       N/A       61,544  
2010-3 Term Securitization
Term
    (4)       140,482       N/A       155,138  
              $ 296,975     $ -     $ 321,606  

(1)
Recourse under these facilities is limited to the amount of collateral pledged.

(2)
Our Morgan Stanley term loan matured on August 4, 2010. This facility was terminated and paid off on January 26, 2011 with the proceeds from the 2011-1 Term Securitization, in which 6 classes of asset-backed notes were issued that  have varying maturity dates ranging  from December 2018 to December 2023. The asset-backed notes totaled $ 96.0 million and bear interest at fixed, stated rates ranging from 1.7% to 5.5%.  As of December 31, 2010, we had breached certain financial covenants related to our debt facility with Morgan Stanley Those breaches were eliminated with the payoff and termination of this facility.

(3)
Our Morgan Stanley/RBS facility was paid off on May 18, 2010 with the proceeds from the 2010-1 Term Securitization in which 3 classes of asset-backed notes were issued that mature on October 23, 2016 and September 23, 2018, respectively. The asset-backed notes totaled $92.7 million and bear interest at a fixed, stated rate of 5% and were issued at an original issue discount of approximately $6.5 million.

(4)
The Wells Fargo and UniCredit facilities were paid off on August 17, 2010 with the proceeds from the 2010-3 Term Securitization in which 5 classes of asset-backed notes were issued that mature on June 20, 2016 and February 20, 2022, respectively. The asset-backed notes total $171.4 million and bear interest at fixed, stated rates ranging from 3.5% to 5.5 % and were issued at an original issue discount of approximately $3.7 million.
 
Legal Proceedings
 
We are a party to various routine legal proceedings arising out of the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
 
Recently Issued Accounting Pronouncements
 
See Note 2 in the Notes to Consolidated Financial Statements for a description of certain new accounting pronouncements that will or may affect our consolidated financial statements.
 
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Quantitative and Qualitative Disclosures about Market Risk have been omitted as permitted under rules applicable to smaller reporting companies.
 
 
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Partners
LEAF Equipment Finance Fund 4, L.P.
 
We have audited the accompanying consolidated balance sheets of LEAF Equipment Finance Fund 4, L.P. and subsidiaries as of December 31, 2010 and 2009 and the related consolidated statements of operations, changes in partners’ capital and cash flows for the years ended December 31, 2010 and 2009 and for the period from September 16, 2008 (commencement of operations) through December 31, 2008. These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LEAF Equipment Finance Fund 4, L.P. as of December 31, 2010 and 2009 and the consolidated results of their operations and their cash flows for the years ended December 31, 2010 and 2009 and for the period from September 16, 2008 (commencement of operations) through December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
 
/s/ GRANT THORNTON LLP
 
Philadelphia, Pennsylvania
 
March 31, 2011

 
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
 
   
December 31,
   
2010
   
2009
 
ASSETS
           
Cash
  $ 394     $ 1,621  
Restricted cash
    20,505       22,851  
Investment in leases and loans, net
    334,826       501,174  
Derivative assets at fair value
    147       730  
Deferred financing costs, net
    3,487       3,458  
Other assets
    253       393  
Total assets
  $ 359,612     $ 530,227  
                 
LIABILITIES AND PARTNERS’ CAPITAL
               
Liabilities:
               
Debt
  $ 296,975     $ 427,025  
Accounts payable, accrued expenses and other liabilities
    894       2,840  
Derivative liabilities at fair value
    2,856       10,458  
Due to affiliates
    25       211  
Subordinated notes payable
    9,355       9,355  
Total liabilities
    310,105       449,889  
                 
Commitments and contingencies
               
                 
Partners’ Capital:
               
General partner
    (609 )     (304 )
Limited partners
    49,642       79,933  
Total LEAF 4 partners' capital
    49,033       79,629  
Noncontrolling interest
    474       709  
Total partners’ capital
    49,507       80,338  
Total liabilities and partners' capital
  $ 359,612     $ 530,227  
 
The accompanying notes are an integral part of these consolidated financial statements.


LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except unit and per unit data)
 
   
Years Ended December 31,
     
From September 16, 2008 (commencement of Operations) through December 31,
 
   
2010
   
2009
   
2008
 
Revenues:
                 
Interest on equipment financings
  $ 35,008     $ 26,174     $ 198  
Rental income
    2,871       1,764       43  
Gains on sales of equipment and lease dispositions, net
    646       295       -  
Other
    1,539       891       14  
      40,064       29,124       255  
                         
Expenses:
                       
Interest expense
    26,644       22,991       -  
Losses (gains) on derivative activities
    4,787       (3,153 )     -  
Depreciation on operating leases
    2,423       1,522       35  
Provision for credit losses
    20,785       19,107       570  
General and administrative expenses
    1,734       1,653       57  
Administrative expenses reimbursed to affiliate
    3,095       2,811       145  
Management fees to affiliate
    2,932       3,945       196  
      62,400       48,876       1,003  
Loss before equity in losses of affiliate
    (22,336 )     (19,752 )     (748 )
Equity in losses of affiliate
    -       (3,261 )     (600 )
Net loss
    (22,336 )     (23,013 )     (1,348 )
Less: Net loss attributable to the noncontrolling interest
    235       366       -  
Net loss attributable to LEAF 4 partners
  $ (22,101 )   $ (22,647 )   $ (1,348 )
Net loss allocated to LEAF 4's limited partners
  $ (21,880 )   $ (22,421 )   $ (1,335 )
Weighted average number of limited partner units outstanding during the period
    1,259,907       806,087       257,627  
Net loss per weighted average limited partner unit
  $ (17.37 )   $ (27.81 )   $ (5.18 )
 
The accompanying notes are an integral part of these consolidated financial statements.


LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Consolidated Statements of Changes in Partners’ Capital
(In thousands, except unit data)
 
   
General
               
Accumulated Other
   
LEAF 4
   
Non-
   
Total
       
   
Partner
   
Limited Partners
   
Comprehensive
   
Partners’
   
Controlling
   
Partners'
   
Comprehensive
 
   
Amount
   
Units
   
Amount
   
(Loss) Income
   
Capital
   
Interest
   
Capital
   
(Loss) Income
 
Balance, at September 16, 2008
  $ 1       -     $ -     $ -     $ 1     $ -     $ 1     $ -  
Limited partner contributions
    -       390,925       39,063       -       39,063       -       39,063          
Offering costs related to the sale of limited partnership units
    -       -       (5,122 )     -       (5,122 )     -       (5,122 )        
Cash distributions paid
    -       -       (366 )     -       (366 )     -       (366 )        
Comprehensive loss:
                                                               
Net loss
    (13 )     -       (1,335 )     -       (1,348 )     -       (1,348 )   $ (1,348 )
Comprehensive loss attributable to noncontrolling interest
    -       -       -       (567 )     (567 )     -       (567 )     (567 )
Balance, at December 31, 2008
    (12 )     390,925       32,240       (567 )     31,661       -       31,661     $ (1,915 )
                                                                 
Sales of limited partnership units
    -       875,493       87,203       -       87,203       -       87,203          
Offering costs related to the sale of limited partner units
    -       -       (10,421 )     -       (10,421 )     -       (10,421 )        
Issuance of membership interest to noncontrolling interest
    -       -       -       -       -       428       428          
Cash distributions paid
    (66 )     -       (6,150 )     -       (6,216 )     -       (6,216 )        
Redemption of limited partnership units
    -       (6,054 )     (518 )     -       (518 )     -       (518 )        
Comprehensive loss:
                                                               
Net loss
    (226 )     -       (22,421 )     -       (22,647 )     (366 )     (23,013 )   $ (23,013 )
Unrealized gains on financial derivatives
    -       -       -       1,347       1,347       -       1,347       1,347  
Comprehensive loss
    -       -       -       -       -       -       -       (21,666 )
Consolidation of LEAF Funds JV1
    -       -       -       (780 )     (780 )     647       (133 )        
Comprehensive loss attributable to noncontrolling interest
    -       -       -       -       -       -       -       366  
Comprehensive loss attributable to LEAF 4
    -       -       -       -       -       -       -       -  
Balance, December 31, 2009
    (304 )     1,260,364       79,933       -       79,629       709       80,338     $ (21,300 )
                                                                 
Return of offering costs related to the sale of limited partnership units
    -       -       8       -       8       -       8          
Cash distributions paid
    (84 )     -       (8,347 )     -       (8,431 )     -       (8,431 )        
Redemption of limited partnership units
    -       (827 )     (72 )     -       (72 )     -       (72 )        
Comprehensive loss:
                                                               
Net loss
    (221 )     -       (21,880 )     -       (22,101 )     (235 )     (22,336 )   $ (22,336 )
Comprehensive loss attributable to noncontrolling interest
    -       -       -       -       -       -       -       235  
Comprehensive loss attributable to LEAF 4
    -       -       -       -       -       -       -     $ (22,101 )
Balance, December 31, 2010
  $ (609 )     1,259,537     $ 49,642     $ -     $ 49,033     $ 474     $ 49,507          
 
The accompanying notes are an integral part of these consolidated financial statements.
 
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
 
   
Years Ended December 31,
     
Period Ended December 31,
 
   
2010
   
2009
   
2008
 
Cash flows from operating activities:
                 
Net loss attributable to LEAF 4
  $ (22,101 )   $ (22,647 )   $ (1,348 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
                       
Gains on sales of equipment and lease dispositions, net
    (646 )     (295 )     -  
Amortization of deferred charges and discount on debt
    11,090       6,274       -  
Depreciation on operating leases
    2,423       1,522       35  
Provision for credit losses
    20,785       19,107       570  
Equity in losses in affiliate
    -       3,261       600  
Net loss attributable to the noncontrolling interest
    (235 )     (366 )     -  
Unrealized gains on derivative hedging activities
    (841 )     (3,645 )     -  
Changes in operating assets and liabilities, net of effect of acquisitions:
                       
Other assets
    140       (39 )     (125 )
Accounts payable, accrued expenses, other liabilities and other assets
    (1,946 )     685       (400 )
Due to affiliates
    (178 )     (2,216 )     302  
Net cash provided by (used in) operating activities
    8,491       1,641       (366 )
                         
Cash flows from investing activities:
                       
Purchases of leases and loans
    (12,150 )     (182,608 )     (16,579 )
Proceeds from leases and loans
    154,352       96,992       1,726  
Security deposits collected, net of returns
    (3,429 )     (1,130 )     (98 )
Investment in LEAF Funds JV1
    -       (1,225 )     (11,633 )
Issuance of membership interest in LEAF Funds JV2 to noncontrolling interest
    -       428       -  
Investment in LEAF Commercial Finance Fund (see Note 3), net of cash required
    -       (7,649 )     -  
Investment in RCF (see Note 2)
    -       (7,545 )     -  
Investment in LEAF Funds JV1, net of cash acquired
    -       (8,382 )     -  
Net cash provided by (used in) investing activities
    138,773       (111,119 )     (26,584 )
                         
Cash flows from financing activities:
                       
Borrowings of  debt
    272,622       143,009       -  
Repayment of  debt
    (405,605 )     (102,731 )     -  
Decrease (increase) in restricted cash
    2,346       (3,988 )     (16 )
Increase in deferred financing costs
    (2,912 )     (1,895 )     -  
Acquisition of financial derivatives
    -       (80 )     -  
Termination of financial derivatives
    (6,439 )     -       -  
General partner's capital contributions
    -       -       1  
Limited partners' capital contributions
    -       87,203       39,063  
Offering costs incurred for the sale of partnership units
    -       (10,421 )     (4,996 )
Cash distributions to partners
    (8,431 )     (6,216 )     (366 )
Redemption of limited partnership units
    (72 )     (518 )     -  
Net cash (used in) provided by financing activities
    (148,491 )     104,363       33,686  
                         
(Decrease) increase in cash
    (1,227 )     (5,115 )     6,736  
Cash, beginning of period
    1,621       6,736       -  
Cash, end of period
  $ 394     $ 1,621     $ 6,736  
 
The accompanying notes are an integral part of these consolidated financial statements.


LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
December 31, 2010

 
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
 
LEAF Equipment Finance Fund 4, L.P. (the “Fund”), a Delaware limited partnership, was formed on January 25, 2008 by its general partner, LEAF Asset Management, LLC (the “General Partner”), which manages the Fund. The General Partner is a Delaware limited liability company and a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of October 30, 2009, the Fund raised $125.7 million by selling 1.2 million of its limited partner units. It commenced operations in September 2008.
 
The Fund is expected to have a nine-year life, consisting of an offering period of up to two years, a five-year reinvestment period and a subsequent maturity period of two years, during which the Fund’s leases and secured loans will either mature or be sold. In the event the Fund is unable to sell its leases and loans during the maturity period, the Fund expects to continue to return capital to its partners as those leases and loans mature. Substantially all of the Fund’s leases and loans mature by the end of 2015. The Fund expects to enter its maturity period beginning in October 2014. The Fund will terminate on December 31, 2032, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.
 
The Fund acquires diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquires existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily an affiliate of its General Partner. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.
 
In addition to its 1% general partnership interest, the General Partner has also invested $1.0 million for a 0.85% limited partnership interest in the Fund.
 
The Fund has evaluated its December 31, 2010 financial statements for subsequent events through the date the financial statements were issued.  The Fund is not aware of any subsequent events which would require recognition or disclosure in the financial statements, except as discussed in Note 7.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The consolidated financial statements include the accounts of the Fund and its wholly owned subsidiaries, LEAF Receivables Funding 4, LLC and LEAF 4A SPE, LLC. Effective March 1, 2009, the consolidated financial statements also include LEAF Funds Joint Venture 2, LLC (“LEAF Funds JV2”), in which the Fund acquired and maintains a 98% interest. Effective June 30, 2009, the consolidated financial statements also include Resource Capital Funding, LLC (“RCF”) in which the Fund acquired a 100% interest. Effective August 31, 2009, the consolidated financial statements include LEAF Funding, LLC (“LEAF Funds JV1”) in which the Fund holds an approximate 96% interest. All intercompany accounts and transactions have been eliminated in consolidation.
 
The Fund reflects the participation of LEAF Equipment Leasing Income Fund III, L.P. (“LEAF III”) in the net assets and in the income or losses of LEAF Funds JV1 and LEAF Funds JV2 as noncontrolling interests in the consolidated balance sheets and statements of operations. Noncontrolling interest adjusts the Fund’s consolidated operating results to reflect only the Fund’s share of the earnings or losses of LEAF Funds JV1 and LEAF Funds JV2.

Reclassification
 
A reclassification has been made to the 2009 and 2008 consolidated financial statements to conform to the 2010 presentation.  In the statements of operations, renewal income of approximately $10,000 and $0 for the periods ended December 31, 2009 and 2008, respectively, that was previously included in “Interest on Equipment Financings” has been reclassified to “Other Revenues.”
 
Use of Estimates
 
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value of interest rate swaps and caps. The Fund bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
 
 
Restricted Cash
 
Restricted cash includes cash being held in reserves by the Fund’s lenders. Restricted cash also includes approximately $3.5 million of customer payments deposited into a lockbox shared with LEAF Financial Corporation and other entities serviced by LEAF Financial Corporation. The lockbox is in the name of U.S. Bank NA as trustee under an inter-creditor agreement amongst LEAF Financial, the other entities and their respective lenders. These amounts represent customer payments received by the lockbox, applied to the respective customer’s accounts, but not yet transferred to the Fund’s bank account.
 
Concentration of Credit Risk
 
Financial instruments which potentially subject the Fund to concentrations of credit risk consist of excess cash. The Fund deposits its excess cash in high-quality financial institutions. As of December 31, 2010, the Fund had deposits totaling $20.9 million of which $20.4 million was over the $250,000 insurance limit of the Federal Deposit Insurance Corporation (“FDIC”). No losses have been experienced on such deposits.
 
As of December 31, 2010 and 2009, 14% and 14%, respectively, of the Fund’s commercial finance assets were located in California.
 
Investments in Commercial Finance Assets
 
The Fund’s investments in commercial finance assets consist of direct financing leases, operating leases, loans and future payment card receivables.
 
Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable and the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted payments plus the estimated unguaranteed residual value expected to be realized at the end of the lease term over the cost of the related equipment.
 
Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s senior management’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.
 
Operating Leases. Leases not meeting the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis.
 
Generally, during the lease terms of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Fund’s policy is to review, on a quarterly basis, the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds such value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment. There were no write-downs of equipment during the periods ended December 31, 2010, 2009, and 2008.
 
Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the loan. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.
 
Allowance for Credit Losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases, loans and future payment card receivables) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due, any remaining balance is fully-reserved less an estimated recovery amount. Generally, the account is then referred to our internal recovery group consisting of a team of credit specialists and collectors. The group utilizes several resources in an attempt to maximize recoveries on charged-off accounts including:1) initiating litigation against the end user customer and any personal guarantor, 2) referring the account to an outside law firm or collection agency and/or 3) repossessing and remarketing the equipment through third parties. The Fund’s policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote.
 
The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due. For future payment card receivables, the Fund discontinues revenue recognition when no payments have been received for 60 days. In addition, if the amount and timing of the future cash collections are not reasonably estimable, the Fund accounts for the future credit card receivable on the cost recovery method. Under the cost recovery method of accounting, no income is recognized until the basis of the future payment card receivable has been fully recovered. As of December 31, 2010 and, 2009, the Fund had $13.9 million and $21.3 million respectively, of leases and loans on non-accrual status. The amount of future payment card receivables on non-accrual totaled $313,000 and $2.0 million as of December 31, 2010 and 2009, respectively. The allowance for credit losses related to future payment card receivables on non-accrual was $31,000 and $1.2 million as of December 31, 2010 and, 2009, respectively. At December 31, 2010, the Fund determined that the amount and timing of future cash collections on the remaining $313,000 of credit card payment receivables was not reasonably estimable. Accordingly, the Fund will recognize revenue on these receivables using the cost recovery method. Fees from delinquent payments are recognized when received and are included in other income.
 
Derivative Instruments
 
The Fund’s debt facilities generally require it to enter into derivative contracts, including interest rate swaps and interest rate caps, to add stability to its financing costs and to manage its exposure to interest rate movements or other identified risks. U.S. GAAP requires recognition of all derivatives at fair value as either assets or liabilities in the consolidated balance sheets. The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment. The Fund has elected not to apply hedge accounting, and therefore any changes in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative hedging activities in the consolidated statements of operations.
 
Interest rate swaps and caps are recorded at fair value based on a value determined by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. There can be no assurance that the Fund’s hedging strategies or techniques will be effective, that profitability will not be adversely affected during any period of change in interest rates or that the costs of hedging will not exceed the benefits.
 
Income Taxes
 
Federal and state income tax laws provide that the income or losses of the Fund are reportable by the partners on their individual income tax returns. Accordingly, no provision for such taxes has been made in the accompanying financial statements.
 
Transfers of Financial Assets
 
In connection with establishing its debt facilities with its banks, the Fund has formed bankruptcy remote special purpose entities through which the financings are arranged. The Fund’s transfers of assets to these special purpose entities do not qualify for sales accounting treatment due to certain call provisions that the Fund maintains. Accordingly, assets and related debt of the special purpose entities are included in the Fund’s consolidated balance sheets. The Fund’s leases and restricted cash are assigned as collateral for these borrowings and there is no further recourse to the general credit of the Fund. Collateral in excess of these borrowings represents the Fund’s maximum loss exposure.
 
Comprehensive Income (Loss)
 
Comprehensive income (loss) includes net income (loss) and all other changes in the equity of a business during a period from transactions and other events and circumstances from non-owner sources. These changes, other than net income (loss) are referred to as “other comprehensive income (loss)” and for the Fund only includes the Fund’s share of unrealized losses on hedging contracts held by affiliates that the Fund accounts for under the equity method.
 
Allocation of Partnership Income (Loss) and Cash Distributions
 
Cash available for distributions, if any, are made monthly as follows: 99% to the limited partners and 1% to the General Partner until the limited partners have received an amount equal to their unpaid cumulative return (8.5%) of their adjusted capital contribution and thereafter.
 
Net income (loss) for any fiscal period during the reinvestment period is allocated 99% to the limited partners and 1% to the General Partner. Income during the liquidation period, as defined in the Partnership Agreement, will be allocated first to the partners in proportion to and to the extent of the deficit balances, if any, in their respective capital accounts. Thereafter, net income (loss) will be allocated 99% to the limited partners and 1% to the General Partner.
 
Net Loss Per Limited Partner Unit
 
Net loss per limited partner unit is computed by dividing net loss allocated to the Fund’s limited partners by the weighted average number of limited partner units outstanding during the period. The weighted average number of limited partner units outstanding during the period is computed based on the number of limited partner units issued during the period weighted for the days outstanding during the period.
 
Recent Accounting Standards

Newly Adopted Accounting Principles
 
The Fund adopted the following accounting guidance during the year ended December 31, 2010:
 
Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the Financial Accounting Standards Board (“FASB”) issued guidance that will require SEC filers to provide more information about the credit quality of their financing receivables in the disclosures to financial statements including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators.  The guidance is effective for the Fund as of December 15, 2010.  The Fund has provided the required disclosures in the notes to its consolidated financial statements (See Note 5).

Subsequent Events.  In February 2010, FASB issued guidance which removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either a correction of error or retrospective application of U.S. GAAP.  This guidance was effective upon issuance. The adoption of this guidance did not have a material effect on the Fund’s consolidated financial statements.

Fair Value Measurements. In January 2010, the FASB issued guidance that requires new disclosures and clarifies some existing disclosure requirements about fair value measurements. The new pronouncement requires a reporting entity: (1) to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (2) to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs. In addition, it clarifies the requirements of the following existing disclosures: (1) for purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and (2) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The new guidance was effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this guidance did not have a material effect on the Fund’s consolidated financial statements.

Transfers of financial assets. In June 2009, the FASB issued guidance for accounting for transfers of financial assets.  The guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires greater transparency of related disclosures.  This statement was effective for fiscal years beginning after November 15, 2009.  Adoption of this guidance did not have a material impact on the Fund’s consolidated financial statements.
 

NOTE 3 – SUPPLEMENTAL CASH FLOW INFORMATION
 
Supplemental disclosure of cash flow information is as follows (in thousands):
 
   
Years Ended
December 31,
 
Period Ended December 31,
 
   
2010
   
2009
   
2008
 
Cash paid for:
                 
Interest
  $ 22,086     $ 16,234     $ -  
                         
Non-cash investing activities:
                       
Increase in participation in loans
  $ 4,121     $ 1,730     $ -  
 
NOTE 4 – INVESTMENT IN LEASES AND LOANS
 
The Fund’s investment in leases and loans, net, consists of the following (in thousands):
 
             
   
December 31,
 
   
2010
   
2009
 
Direct financing leases (1)
  $ 108,406     $ 170,083  
Loans (2)
    231,953       338,177  
Operating leases
    4,008       6,562  
Future payment card receivables
    313       1,986  
      344,680       516,808  
Allowance for credit losses
    (9,854 )     (15,634 )
    $ 334,826     $ 501,174  
 
(1)
The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 96 months.
(2)
The interest rates on loans generally range from 7% to 14%.

The components of direct financing leases and loans are as follows (in thousands):
 
   
December 31,
   
December 31,
 
   
2010
   
2009
 
   
Leases
   
Loans
   
Leases
   
Loans
 
Total future minimum lease payments
  $ 117,370     $ 266,679     $ 191,038     $ 399,842  
Unearned income
    (11,228 )     (29,713 )     (21,797 )     (53,967 )
Residuals, net of unearned residual income (1)
    3,578       -       3,252       -  
Security deposits
    (1,314 )     (5,013 )     (2,410 )     (7,698 )
    $ 108,406     $ 231,953     $ 170,083     $ 338,177  
 
(1)
Unguaranteed residuals for direct financing leases represent the estimated amounts recoverable at lease termination from lease extensions or disposition of the equipment.
 
The Fund’s investment in operating leases, net, consists of the following (in thousands):
 
   
December 31,
 
   
2010
   
2009
 
Equipment
  $ 8,549     $ 9,105  
Accumulated depreciation
    (4,541 )     (2,543 )
    $ 4,008     $ 6,562  
 
At December 31, 2010, the future payments scheduled to be received on non-cancelable commercial finance assets for each of the five succeeding annual periods ending December 31 and thereafter are as follows (in thousands):
 
   
Direct
Financing
   
Loans
   
Operating
Leases (1)
   
Total
 
2011
  $ 52,855     $ 99,037     $ 2,421     $ 154,313  
2012
    35,256       69,318       633       105,207  
2013
    22,275       45,080       109       67,464  
2014
    4,889       24,130       13       29,032  
2015 and thereafter
    2,095       29,114       -       31,209  
    $ 117,370     $ 266,679     $ 3,176     $ 387,225  
 
(1)
Operating lease amounts as shown are net of the residual value, if any, at the end of the lease term.
 
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY

The disclosures in this footnote are required per new guidance issued by the FASB that requires companies to provide more information about the credit quality of their financing receivables including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators.

The following table is an age analysis of the Fund’s receivables from leases and loans (presented gross of allowance for credit losses of $9.9 million) as of December 31, 2010 (in thousands):
 
Age of receivable
 
Investment in leases and loans
   
%
 
Current
  $ 298,521       86.6 %
Delinquent:
               
31 to 91 days past due
    32,276       9.4 %
Greater than 91 days (a)
    13,883       4.0 %
    $ 344,680       100.0 %
(a) Balances in this age category are collectivelly evaluated for impairment.
 

The Fund had $13.9 million and $21.3 million of leases and loans on nonaccrual status as of December 31, 2010 and 2009, respectfully. The credit quality of the Fund’s investment in leases and loans as of December 31, 2010 is as follows (in thousands):
       
Performing
  $ 330,797  
Nonperforming
    13,883  
    $ 344,680  
 
The following table summarizes the annual activity in the allowance for credit losses (in thousands):
 
   
Years Ended December 31,
   
Period Ended
December 31
 
   
2010
   
2009
   
2008
 
Allowance for credit losses, beginning of year
  $ 15,634     $ 570     $ -  
Provision for credit losses
    20,785       19,107       570  
Charge-offs
    (28,229 )     (4,321 )     -  
Recoveries
    1,664       278       -  
Allowance for credit losses, end of year (a)
  $ 9,854     $ 15,634     $ 570  
                   
(a) End of year balances were collectively evaluated for impairment.
                 
 
NOTE 6 – DEFERRED FINANCING COSTS
 
As of December 31, 2010 and 2009, deferred financing costs include $3.5 million and $3.5 million, respectively, of unamortized deferred financing costs which are being amortized over the terms of the estimated useful life of the related debt. Accumulated amortization as of December 31, 2010 and, 2009 was $1.8 million, and $1.3 million, respectively. Estimated amortization expense of the Fund’s existing deferred financing costs for the years ending December 31, and thereafter, is as follows (in thousands):
 
2011
  $ 1,406  
2012
    993  
2013
    711  
2014
    276  
2015
    69  
Thereafter
    32  
    $ 3,487  
 
NOTE 7 –DEBT
 
The Fund’s debt consists of the following (in thousands):
 
                             
Interest rate
   
December  31,
 
            December 31, 2010          
per annum
   
2009
 
           
Outstanding
         
Interest rate per
   
adjusted for
   
Outstanding
 
 
Type
 
Maturity Date
   
Balance (1)
   
Available
   
annum
   
swaps (2)
   
Balance
 
Morgan Stanley
Term
    (3 )   $ 101,855       N/A    
One month LIBOR +  3.%
    6.9 %   $ 150,366  
Morgan Stanley/RBS
Term
    (4 )     N/A       N/A    
One month LIBOR +7.55%
    11.9 %     101,668  
2010-1 Term Securitization
Term
    (4 )     54,638       N/A       5.00%     5.0 %     N/A  
Wells Fargo
Revolving
    (5 )     N/A       N/A    
Three month LIBOR +  4.1%
    5.5 %     74,991  
UniCredit
Revolving
    (5 )     N/A       N/A    
Commercial paper +2.5%
    5.0 %     100,000  
2010-3 Term Securitization
Term
    (5 )     140,482       N/A    
3.5% to 5.5%
      3.9 %     N/A  
              $ 296,975     $ -                     $ 427,025  
 
 
(1)
Collateralized by specific leases and loans and related equipment. As of December 31, 2010, $304.9 million of leases and loans and $16.7 million of restricted cash were pledged as collateral under the Fund’s credit facilities.
 
 
(2)
To mitigate fluctuations in interest rates, the Fund entered into interest rate swap and cap agreements. The interest rate swap agreements terminate on various dates and fix the London Interbank Offered Rate (“LIBOR”) component of the interest rate.

 
(3)
The Morgan Stanley term loan matured on August 4, 2010. This facility was terminated and paid off on January 26, 2011 with the proceeds from the 2011-1 Term Securitization, in which 6 classes of asset-backed notes were issued that  have varying maturity dates ranging  from December 2018 to December 2023. The asset-backed notes totaled $ 96.0 million and bear interest at fixed, stated rates ranging from 1.7% to 5.5%.

 
(4)
The Morgan Stanley/RBS facility was paid off on May 18, 2010 with the proceeds from the 2010-1 Term Securitization in which 3 classes of asset-backed notes were issued, one that matures on October 23, 2016 and two that mature on September 23, 2018, respectively. The asset-backed notes total $92.7 million and bear interest at a fixed, stated rate of 5% and were issued at an original discount of approximately $6.5 million.

 
(5)
The Wells Fargo and UniCredit facilities were paid off on August 17, 2010 with the proceeds from the 2010-3 Term Securitization in which 5 classes of asset-backed notes were issued, one that matures on June 20, 2016 and 4 that mature on February 20, 2022, respectively. The asset-backed notes total $171.4 million and bear interest at fixed, stated rates ranging from 3.5% to 5.5% and were issued at an original discount of approximately $3.7 million.
 
As of September 30, 2010, the Fund had breached certain financial covenants related to its debt facility with Morgan Stanley Those breaches were eliminated on January 26, 2011 with the payoff and termination of that facility as part of the 2011-1 Term Securitization.
 
Debt Repayments: Estimated annual principal payments on the Fund’s aggregate borrowings (considering the impact of the 2011-1 Term Securitization) over the next five years ended December 31, and thereafter, are as follows (in thousands):
 
2011
  $ 98,211  
2012
    89,227  
2013
    58,909  
2014
    25,651  
2015
    12,143  
Thereafter
    12,834  
    $ 296,975  
 
NOTE 8 – SUBORDINATED NOTES PAYABLE
 
LEAF Commercial Finance Fund, LLC (“LCFF”), a subsidiary LEAF Funds JV2, has $9.4 million of 8.25% secured promissory notes (the “Notes”) outstanding, which are recourse to LCFF only. The Notes have a six-year term and require interest only payments until their maturity in February 2015. The Notes are subordinated to the 2011-1 Term Securitization. LCFF may call or redeem the Notes, in whole or in part, at any time during the interest only period.
 
NOTE 9 – DERIVATIVE INSTRUMENTS
 
Since the Fund’s assets are structured on a fixed-rate basis, and funds borrowed through warehouse facilities are obtained on a floating-rate basis, the Fund is exposed to interest rate risk if interest rates rise, because it will increase the Fund’s borrowing costs. In addition, when the Fund acquires assets, it bases its pricing in part on the spread it expects to achieve between the interest rate it charges its customers and the effective interest cost the Fund will pay when it funds those loans. Increases in interest rates that increase the Fund’s permanent funding costs between the time the assets are originated and the time they are funded could narrow, eliminate or even reverse this spread.
 
To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as interest rate swaps and caps. The Fund has elected not to apply hedge accounting; therefore, changes in the fair value of those derivatives are recorded directly to earnings as they occur. The Fund does not use derivative financial instruments for trading or speculative purposes. The Fund manages the credit risk of possible counterparty default in these derivative transactions by dealing exclusively with counterparties with investment grade ratings. The Fund has agreements with certain of its derivative counterparties that contain a provision where if the Fund defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Fund could also be declared in default on its derivative obligations. The Fund has agreements with certain of its derivative counterparties that incorporate the loan covenant provisions of the Fund’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Fund being in default on any derivative instrument obligations covered by the agreement. As of December 31, 2010, the Fund has not posted any collateral related to these agreements. If the Fund had breached any of these provisions at December 31, 2010, it could be required to settle its obligations under the agreements at their termination value of $2.8 million.
 
There can be no assurance that the Fund’s hedging strategies or techniques will be effective, that profitability will not be adversely affected during any period of change in interest rates or that the costs of hedging will not exceed the benefits.
 
At December 31, 2010, the Fund had 12 interest rate swap agreements that terminate on various dates ranging from November 2011 to November 2020, and 11 interest rate cap agreements that terminate on various dates ranging from June 2011 to February 2016. The following tables present the fair value of the Fund’s derivative financial instruments as well as their classification on the consolidated balance sheet as of December 31, 2010 and on the consolidated statements of operations for the years ended December 31, 2010 and 2009 (in thousands):

Fair Value of Derivative Instruments
 
   
Notional Amount
 
Balance Sheet Location
 
Fair Value
   
December 31,
     
December 31,
 
   
2010
   
2009
     
2010
   
2009
 
Derivatives not designated as hedging instruments:                                  
Interest rate cap contracts
  $ 51,099     $ 70,706  
Derivative assets at fair value
  $ 147     $ 730  
Interest rate swap contracts
    37,552       302,800  
Derivative liabilities at fair value
    (2,856 )     (10,458 )
    $ 88,651     $ 373,506                    
 
The Effect of Derivative Instruments on the Consolidated Statements of Operations:
 
           
Years Ended
 
   
Notional
     
December 31,
 
   
Amount
 
Statement of Operations Location
 
2010
   
2009
 
Derivatives not designated as hedging instruments:                          
Interest rate cap contracts
  $ 51,099  
(Losses) gains on derivative activities
  $ (474 )   $ 220  
Interest rate swap contracts
    37,552  
(Losses) gains on derivative activities
    (4,313 )     2,933  
    $ 88,651       $ (4,787 )   $ 3,153  
 
 
NOTE 11 – FAIR VALUE MEASUREMENT
 
For cash, receivables and payables, the carrying amounts approximate fair values because of the short term maturity of these instruments. The carrying value of debt approximates fair market value since interest rates approximate current market rates.
 
It is not practicable for the Fund to estimate the fair value of the Fund’s commercial finance assets. They are comprised of a large number of transactions with commercial customers in different businesses, and may be secured by liens on various types of equipment and may be guaranteed by third parties and cross-collateralized. Any difference between the carrying value and fair value of each transaction would be affected by a potential buyer’s assessment of the transaction’s credit quality, collateral value, guarantees, payment history, yield, term, documents and other legal matters, and other subjective considerations. Value received in a fair market sale of a transaction would be based on the terms of the sale, the Fund’s and the buyer’s views of economic and industry conditions, the Fund’s and the buyer’s tax considerations, and other factors.
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
 
 
·
Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
 
 
·
Level 2 – Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
 
 
·
Level 3 –. Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
 
The Fund employs a hedging strategy to manage exposure to the effects of changes in market interest rates. All derivatives are recorded in the consolidated balance sheets at their fair value as either assets or liabilities. Because the Fund’s derivatives are not listed on an exchange, these instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although the Fund has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, the Fund has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Fund has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
 
Assets and liabilities measured at fair value on a recurring basis include the following as of December 31, 2010 and 2009 (in thousands):
 
   
Fair Value Measurements Using
   
Assets (Liabilities)
 
   
Level 1
   
Level 2
   
Level 3
   
At Fair Value
 
Interest rate caps at December 31, 2010
  $ -     $ 147     $ -     $ 147  
Interest rate swaps at December 31, 2010
  $ -     $ (2,856 )   $ -     $ (2,856 )
Interest rate caps at December 31, 2009
  $ -     $ 730     $ -     $ 730  
Interest rate swaps at December 31, 2009
  $ -     $ (10,458 )   $ -     $ (10,458 )
 
NOTE 12 – CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES
 
The Fund relies on the General Partner and its affiliates to manage the Fund’s operations and pays the General Partner or its affiliates fees to manage the Fund. The following is a summary of fees and costs of services and materials charged by the General Partner or its affiliates (in thousands):
 
   
Years Ended December 31,
   
Period Ended
December 31,
 
   
2010
   
2009
   
2008
 
Acquisition fees
  $ 241     $ 2,965     $ 180  
Management fees
    2,932       3,945       196  
Administrative expenses
    3,095       2,811       145  
Organization and offering expense allowance
    -       1,972       1,172  
Underwriting fees
    -       8,449       3,950  
 
Acquisition Fees. An affiliate of the General Partner is paid a fee for assisting the Fund in acquiring equipment subject to existing equipment leases equal to up to 2% of the purchase price the Fund pays for the equipment or portfolio of equipment subject to existing equipment financing.
 
Management Fees. The General Partner is paid a subordinated annual asset management fee equal to 4% of gross rental payments for operating leases or 2% for full payout leases or a competitive fee, whichever is less. During the Fund’s five-year investment period, the management fees will be subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.5% of their capital contributions, as adjusted by distributions deemed to be a return of capital. Beginning August 1, 2009, the General Partner waived asset management fees.  Approximately $1.5 million of management fees were waived for the year ended December 31, 2010.  The General Partner has waived all future management fees.
 
Administrative Expenses. The Fund reimburses the General Partner and its affiliates for certain costs of services and materials used by or for the Fund except those items covered by the above-mentioned fees.
 
Organization and Offering Expense Allowance and Underwriting Fees. The Fund paid the General Partner and Chadwick Securities, Inc. (“Chadwick”), a wholly owned subsidiary of RAI, an organization and offering expense allowance based on a sliding scale of the offering proceeds raised. This amount includes reimbursement to Chadwick to use for the selling dealers’ bona fide accountable due diligence expenses of up to 0.5% of the proceeds of each unit sold by them. These charges were recorded by the Fund as offering costs related to the sale of partnership units.
 
Chadwick was paid an underwriting fee of 3% of the offering proceeds for obtaining and managing the group of selling broker-dealers who sold the units in the offering. Chadwick also received sales commissions of 7% of the proceeds of each unit that they sold. Chadwick did not sell any units and did not retain sales commissions through December 31, 2010.
 
Due to Affiliates. Due to affiliates includes amounts due to the General Partner and LEAF Financial related to acquiring and managing portfolios of equipment, management fees and reimbursed expenses.
 
Distributions. The General Partner owns a 1% general partner interest and 0.85% limited partner interest in the Fund. The General Partner was paid cash distributions of $80,000 and $76,000 respectively, for its general partner and limited partner interests in the Fund in 2010.
 
NOTE 13 – COMMITMENTS AND CONTINGENCIES
 
The Fund is party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Fund’s financial condition or results of operations.
 
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A – CONTROLS AND PROCEDURES
 
Disclosure Controls
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or 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 management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
Under the supervision of our General Partner’s chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level discussed above.
 
Management’s Report on Internal Control over Financial Reporting
 
Our General Partner’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our General Partner’s management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010   In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control – Integrated Framework. Based upon this assessment, our General Partner’s management concluded that, as of December 31, 2010, our internal control over financial reporting is effective.
 
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only our General Partner’s management’s report in this annual report.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting that occurred during the three months ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B – OTHER INFORMATION
 
None.
 
PART III
 
ITEM 10 – DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
Our General Partner manages our activities. Although our limited partners have limited voting rights under our partnership agreement, they do not directly or indirectly participate in our management or operation or have actual or apparent authority to enter into contracts on our behalf or to otherwise bind us. Our General Partner will be liable, as General Partner, for all of our debts to the extent not paid, except to the extent that indebtedness or other obligations incurred by it are specifically with recourse only to our assets. Whenever possible, our General Partner intends to make any of our indebtedness or other obligations with recourse only to our assets.
 
As is commonly the case with limited partnerships, we do not directly employ any of the persons responsible for our management or operation. Rather, our General Partner’s personnel manage and operate our business. Officers of our General Partner may spend a substantial amount of time managing the business and affairs of our General Partner and its affiliates and may face a conflict regarding the allocation of their time between our business and affairs and their other business interests.
 
The following tables sets forth information with respect to the Directors and Executive Officers of our General Partner:
 
Name
 
Age
 
Position
Crit S. DeMent
 
58
 
Chairman of the Board of Directors and Chief Executive Officer
Miles Herman
 
51
 
President, Chief Operating Officer, and Director
Jonathan Z. Cohen
 
40
 
Director
Jeffrey F. Brotman
 
47
 
Director
Robert K. Moskovitz
 
54
 
Chief Financial Officer
David H. English
 
60
 
Executive Vice President and Chief Investment Officer
 
Crit S. DeMent has been Chairman of the Board of Directors and Chief Executive Officer of LEAF Financial since November 2001. Mr. DeMent also serves as Chairman of the Board of Directors and Chief Executive Officer of LEAF Asset Management since it was formed in August 2006, Chairman of the Board of Directors and Chief Executive Officer of LEAF Funding since March 2003, a Senior Vice President of Resource America since 2005 and Senior Vice President – Equipment Leasing of Resource Capital Corp. since March 2005. Beginning January 1, 2011, Mr. DeMent serves as the Chairman of the Board of Directors and Chief Executive Officer of LEAF Commercial Capital, Inc, a new LEAF formed subsidiary of LEAF Financial.  Before that, he was President of Fidelity Leasing, Inc. and its successor, the Technology Finance Group of Citi-Capital Vendor Finance from 1998 to 2001. Mr. DeMent was Vice President of Marketing for Tokai Financial Services from 1987 through 1996. Mr. DeMent serves on the Executive Committee of the Board of Directors of the Equipment Leasing and Finance Association.
 
Miles Herman has been President, Chief Operating Officer, and a Director of LEAF Financial since January 2002. Mr. Herman also serves as President, Chief Operating Officer and as a Director of LEAF Asset Management since 2006. Mr. Herman has served as a director of LEAF Funding since January 2004. He was a Senior Vice President of LEAF Funding from 2004 until 2009 and an Executive Vice President from 2009 until the present. Beginning January 1, 2011, Mr. Herman serves as the Chief Operating Officer, and a Director of LEAF Commercial Capital, Inc, a new LEAF formed subsidiary of LEAF Financial.  Mr. Herman held various senior operational offices with Fidelity Leasing, Inc. and its successor from 1998 to 2001, ending as Senior Vice President. From 1990 to 1998, he held various operational, marketing, program management, business development and sales positions with Tokai Financial, most recently as Director of Capital Markets. Before that, he served as Vice President, Operations and Sales at LSI Leasing Services, Inc. from 1989 to 1990, and as a manager of operations at Master Lease Corporation from 1984 to 1989. Mr. Herman holds a Bachelor of Science degree from Villanova University.
 
Jonathan Z. Cohen has been a Director of LEAF Financial Corporation since January 2002 and a Director of LEAF Asset Management since it was formed in August 2006. Mr. Cohen also serves, or has served, in the following positions with Resource America: a Director since 2002, President since 2003, Chief Executive Officer since 2004, Chief Operating Officer from 2002 to 2004, Executive Vice President from 2001 to 2003, and Senior Vice President from 1999 to 2001. In addition, Mr. Cohen serves as Chief Executive Officer, President and a Director of Resource Capital Corp. (a publicly-traded real estate investment trust) since its formation in 2005. Mr. Cohen also serves as Vice Chairman of the Managing Board of Atlas Pipeline Partners GP, LLC since its formation in 1999, Vice Chairman and a Director of Atlas America, Inc. since its formation in 2000, Vice Chairman of Atlas Pipeline Holdings GP, LLC since its formation in 2006 and Vice Chairman of Atlas Energy Resources, LLC (a publicly-traded energy company) since its formation in 2006.
 
Jeffrey F. Brotman has been a Director of LEAF Financial since April 2008. Mr. Brotman has also been Executive Vice President of Resource America since June 2007. Mr. Brotman was a co-founder of Ledgewood, P.C. (a Philadelphia-based law firm) and was affiliated with the firm from 1992 until June 2007, serving as its managing partner from 1995 until March 2006. Mr. Brotman is also a non-active Certified Public Accountant and an Adjunct Professor at the University of Pennsylvania Law School. Mr. Brotman was Chairman of the Board of Directors of TRM Corporation (a publicly-traded consumer services company) from September 2006 until September 2008 and was its President and Chief Executive Officer from March 2006 through June 2007.
 
The board of directors of our General Partner has not adopted specific minimum qualifications for service on the board, but rather seeks a mixture of skills that are relevant to our business. The following presents a brief summary of the attributes of each director that led to the conclusion that such person should serve as a director:
 
Mr. DeMent has lengthy and extensive experience in the equipment leasing and finance industry.
 
Mr. Herman has lengthy and extensive experience in the equipment leasing and finance industry.
 
Mr. Cohen has extensive financial and operational experience, including as the chief executive officer of our general partner’s publicly traded parent company.
 
Mr. Brotman has significant experience in finance, as an attorney, and as the chief executive officer of a public company.
 
Robert K. Moskovitz has been Chief Financial Officer of LEAF Financial since February 2004, Treasurer of LEAF Financial from September 2004 until April 2009 and Assistant Secretary of LEAF Financial since June 2007. Mr. Moskovitz also serves as Chief Financial Officer and Assistant Secretary of LEAF Asset Management since it was formed in August 2006, and Chief Financial Officer and a Director of LEAF Funding since May 2004. Beginning January 1, 2011, Mr. Moskovitz serves as the Chief Financial Officer of LEAF Commercial Capital, Inc, a new LEAF formed subsidiary of LEAF Financial.  He has over twenty years of experience as the Chief Financial Officer of both publicly and privately owned companies. From 2002 to 2004, Mr. Moskovitz was an independent consultant on performance management initiatives, primarily to the financial services industry. From 2001 to 2002 he was Executive Vice President and Chief Financial Officer of ImpactRx, Inc., which provides advanced sales and marketing intelligence to pharmaceutical companies. From 1983 to 2001 Mr. Moskovitz held senior executive level financial positions with several high growth public and privately held companies. He began his professional career with Deloitte & Touché (formerly Touché Ross & Co). Mr. Moskovitz holds a B.S. degree in Business Administration from Drexel University.
 
David H. English has been an Executive Vice President and Chief Investment Officer of LEAF Financial since April 2003 and Assistant Secretary of LEAF Financial since June 2007. Mr. English also serves Executive Vice President and Chief Investment Officer of LEAF Asset Management since it was formed in August 2006, as President and a Director of LEAF Funding since May 2003.  Beginning January 1, 2011, Mr. English serves as the Executive Vice President and Chief Investment Officer of LEAF Commercial Capital, Inc, a new LEAF formed subsidiary of LEAF Financial.  From 1996 until joining LEAF Financial, Mr. English was the Senior Vice President-Risk Management for Citi-Capital Vendor Finance’s Technology Finance Group, and its predecessor, Fidelity Leasing, Inc., where he held a similar position. From 1991 to 1996 Mr. English held various credit and operational management positions with Tokai Financial Services, Inc., including Director of Credit for the small ticket leasing division. Mr. English served in credit management positions with the Commercial Finance Division of General Electric Capital Corporation from 1990 to 1991 and with Equitable Life Leasing Corporation from 1985 through 1990. Mr. English began his career with Household Finance Corporation in 1974. Mr. English is a 1975 graduate of the University of Pittsburgh with a B.S. degree in Mathematics.
 
Code of Business Conduct and Ethics
 
Because we do not directly employ any persons, we rely on a Code of Business Conduct and Ethics adopted by Resource America, Inc. that applies to the principal executive officer, principal financial officer and principal accounting officer of our General Partner, as well as to persons performing services for us generally. You may obtain a copy of this code of ethics by a request to our General Partner at LEAF Asset Management, LLC, One Commerce Square, 2005 Market Street, 14th Floor, Philadelphia Pennsylvania 19103.
 
ITEM 11 – EXECUTIVE COMPENSATION
 
We do not have, and do not expect to have, any employees as discussed in Item 10 — “Directors and Executive Officers of the Registrant.” Instead, our management and day-to-day activities are provided by the employees of its General Partner and its affiliates. No officer or director of our General Partner will receive any direct remuneration from us. Those persons will receive compensation solely from our General Partner or its affiliates other than us.
 
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNIT HOLDER MATTERS
 
 
(a)
We had approximately 2,748 limited partners as of December 31, 2010.
 
 
(b)
In 2008, our General Partner contributed $1,000 to our capital as our General Partner and received its General Partner interest in us. As of December 31, 2010, our General Partner owned 10,753, or 0.85%, of our limited partner units. These purchases of limited partner units by our General Partner and its affiliates were at a price discounted by the 7% sales commission which was paid by most of our other limited partners.
 
 
(c)
We know of no arrangements that would, at any date subsequent to the date of this report, result in a change in control of us.
 
 
(d)
Our General Partner’s name and address is LEAF Asset Management, LLC, One Commerce Square, 2005 Market Street, 14th Floor, Philadelphia, Pennsylvania 19103.
 
 
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
We rely on our General Partner and its affiliates to manage our operations and pay the General Partner or its affiliates fees to manage us. The following is a summary of fees and costs of services and materials charged by the General Partner or its affiliates (in thousands):
 
   
Years Ended December 31,
   
Period Ended
December 31,
 
   
2010
   
2009
   
2008
 
Acquisition fees
  $ 241     $ 2,965     $ 180  
Management fees
    2,932       3,945       196  
Administrative expenses
    3,095       2,811       145  
Organization and offering expense allowance
    -       1,972       1,172  
Underwriting fees
    -       8,449       3,950  
 
Acquisition Fees. An affiliate of the General Partner is paid a fee for assisting us in acquiring equipment subject to existing equipment leases equal to up to 2% of the purchase price the Fund  pays for the equipment or portfolio of equipment subject to existing equipment financing.
 
Management Fees. The General Partner is paid a subordinated annual asset management fee equal to 4% of gross rental payments for operating leases or 2% for full payout leases or a competitive fee, whichever is less. During our five-year investment period, the management fees will be subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.5% of their capital contributions, as adjusted by distributions deemed to be a return of capital. Beginning August 1, 2009, the General Partner waived asset management fees.  Approximately $1.5 million of management fees were waived for the year ended December 31, 2010.  The General Partner has waived all future management fees.
 
Administrative Expenses. The Fund reimburses the General Partner and its affiliates for certain costs of services and materials used by or for the Fund except those items covered by the above-mentioned fees.
 
Organization and Offering Expense Allowance and Underwriting Fees. The Fund paid the General Partner and Chadwick Securities, Inc. (“Chadwick”), a wholly owned subsidiary of RAI, an organization and offering expense allowance based on a sliding scale of the offering proceeds raised. This amount includes reimbursement to Chadwick to use for the selling dealers’ bona fide accountable due diligence expenses of up to 0.5% of the proceeds of each unit sold by them. These charges were recorded by the Fund as offering costs related to the sale of partnership units.
 
Chadwick was paid an underwriting fee of 3% of the offering proceeds for obtaining and managing the group of selling broker-dealers who sold the units in the offering. Chadwick also received sales commissions of 7% of the proceeds of each unit that they sold. Chadwick did not sell any units and did not retain sales commissions through December 31, 2010.
 
Due to Affiliates. Due to affiliates includes amounts due to the General Partner and LEAF Financial related to acquiring and managing portfolios of equipment, management fees and reimbursed expenses.
 
Distributions. Our General Partner owns a 1% general partner interest and 0.85% limited partner interest in us. The General Partner was paid cash distributions of $80,000 and $76,000 respectively, for its general partner and limited partner interests in us in 2010.
 
Because we are not listed on any national securities exchange or inter-dealer quotation system, we have elected to use the Nasdaq National Stock Market’s definition of “independent director” in evaluating whether any of our General Partner’s directors are independent. Under this definition, the board of directors of our General Partner has determined that our General Partner does not have any independent directors, nor are we required to have any.
 
 
ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Audit Fees. The aggregate fees billed by our independent auditors, Grant Thornton, LLP for the years ended December 31, 2010, 2009 and period ended December 31, 2008 for professional services rendered were $140,000, $190,000 and $124,265, respectively.
 
Audit-Related Fees. We did not incur fees in 2010 for other services not included above.
 
Tax Fees. We did not incur fees in 2010 for other services not included above.
 
All Other Fees. We did not incur fees in 2010 for other services not included above.
 
Procedures for Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor.
 
Our General Partner’s Board of Directors reviews and approves in advance any audit and any permissible non-audit engagement or relationship between us and our independent auditors.
 
PART IV
 
ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
The following documents are filed as part of this Annual Report on Form 10-K:
 
1.     Financial Statements
 
The financial statements required by this Item are set forth in Item 8 – “Financial Statements and Supplementary Data.”
 
2.     Financial Statement Schedules
 
No schedules are required to be presented in this report under Regulation S-X promulgated by the SEC.
 
3.     Exhibits
 
 
Exhibit
   
No.
 
Description
3.1
 
Certificate of Limited Partnership (1)
3.2
 
Amended and Restated Agreement of Limited Partnership (2)
4.1
 
Forms of letters sent to limited partners confirming their investment (1)
10.1
 
Form of Origination and Servicing Agreement Among LEAF Financial Corporation, LEAF Equipment Finance Fund 4, LP and LEAF Funding, Inc. (1)
10.2
 
Receivables Loan and Security Agreement, dated as of October 31, 2006, among Resource Capital Funding II, LLC, as the Borrower, and LEAF Financial Corporation, as the Servicer, and Morgan Stanley Bank, as a Lender and Collateral Agent, and U.S. Bank National Association, as the Custodian and the Lender’s Bank and Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services), as the Backup Servicer, as amended through November 13, 2008 (3)
10.3
 
Forbearance and Reservation of Rights, dated as of May 14, 2009, by and among Resource Capital Funding II, LLC, LEAF Financial Corporation, Morgan Stanley Bank, NA, and Morgan Stanley Capital Services Inc. (4)
10.4
 
Indenture by and between LEAF Commercial Finance Fund, LLC and U.S. Bank National Association (3)
10.5
 
Amended and Restated Limited Liability Company Agreement of LEAF Commercial Finance Fund, LLC(3)
10.6
 
Limited Liability Company Agreement of LEAF Funds Joint Venture 2, LLC (3)
10.7
 
Seventh Amendment to the Receivables Loan and Security Agreement and Waiver, dated as of July 14, 2009, with Morgan Stanley Bank, N.A., as lender and as collateral agent (5)
10.8
 
Eight Amendment to Receivable Loan and Security Agreement and Waiver dated December 22, 2009 among Resource Capital Funding II, LLC, LEAF Financial Corporation, Morgan Stanley Bank , N.A, Lyon Financial; Services, Inc, U.S. Bank National Association, Morgan Stanley Capital Services, Inc and Morgan Stanley Asset Funding Inc.(6)
10.9
 
Ninth Amendment to Receivable Loan and Security Agreement and Waiver dated April 21, 2010 among Resource Capital Funding II, LLC, LEAF Financial Corporation, Morgan Stanley Bank , N.A, Lyon Financial; Services, Inc, U.S. Bank National Association, Morgan Stanley Capital Services, Inc and Morgan Stanley Asset Funding Inc.(7)
10.10
 
Indenture between LEAF Receivables Funding 2, LLC and U.S. Bank National Association dated as of May 1, 2010 (8)
10.11
 
Indenture between LEAF Receivables Funding 4, LLC and U.S. Bank National Association dated as of July 4, 2010 (9)
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)
Filed previously as an exhibit to our Registration Statement on Form S-1 filed on March 24, 2008 and by this reference incorporated herein.
(2)
Filed previously as an exhibit to Form 8-K on May 8, 2009 and by this reference incorporated herein.
(3)
Filed previously on May 12, 2009 in Post-Effective Amendment No. 1 as an exhibit to our Registration Statement and by this reference incorporated herein.
(4)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and by this reference incorporated herein.
(5)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and by this reference incorporated herein.
(6)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2009 and by this reference incorporated herein.
(7)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and by this reference incorporated herein.
(8)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2010 and by this reference incorporated herein.
(9)
Files previously as an exhibit to our Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2010 and by this reference incorporated herein.
 
SIGNATURES
 
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.
 
 
LEAF EQUIPMENT FINANCE FUND 4, L.P.
   
 
A Delaware Limited Partnership
     
 
By:
LEAF Asset Management, LLC, the General Partner
     
March 31, 2011
By:
/s/ CRIT S. DEMENT
   
Crit S. DeMent
   
Chairman and Chief Executive Officer
     
     
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.
 
       
/s/ Crit S. DeMent
 
Chairman of the Board and Chief Executive Officer of the
March 31, 2011
Crit S. Dement
  General Partner (Principal Executive Officer)  
       
/s/ Miles Herman
 
President, Chief Operating Officer and Director of the
March 31, 2011
Miles Herman
  General Partner  
       
/s/ Robert K. Moskovitz
 
Chief Financial Officer
March 31, 2011
Robert K. Moskovitz
 
(Principal Accounting and Financial Officer)
 
       
/s/ Jonathan Z. Cohen
 
Director of the General Partner
March 31, 2011
Jonathan Z. Cohen
     
       
/s/ Jeffrey F. Brotman
 
Director of the General Partner
March 31, 2011
Jeffrey F. Brotman