IMH Financial Corp - FORM 10-Q

Attached files

file	filename
EX-10.46 - EXHIBIT 10.46 - IMH Financial Corp	ifcn-20150930xex1046sref.htm
EX-31.1 - EXHIBIT 31.1 - IMH Financial Corp	ifcn-20150930xex311.htm
EX-10.44 - EXHIBIT 10.44 - IMH Financial Corp	ifcn-20150930xex1044banco.htm
EX-10.47 - EXHIBIT 10.47 - IMH Financial Corp	ifcn-20150930xex1047nauo.htm
EX-31.2 - EXHIBIT 31.2 - IMH Financial Corp	ifcn-20150930xex312.htm
EX-32.1 - EXHIBIT 32.1 - IMH Financial Corp	ifcn-20150930xex321.htm
EX-10.45 - EXHIBIT 10.45 - IMH Financial Corp	ifcn-20150930xex1045sret.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2015

[ ] 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 000-52611

IMH FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



Delaware	27-1537126
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

7001 N. Scottsdale Rd #2050

Scottsdale, Arizona 85253

(Address of principal executive offices and zip code)

(480) 840-8400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 þ No ¨

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



Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	þ
(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 Exchange Act). Yes ¨ No þ

The registrant had 85,000 shares of Common Stock, 3,491,758 shares of Class B-1 Common Stock, 3,492,954 shares of Class B-2 Common Stock, 7,159,759 shares of Class B-3 Common Stock, 313,790 shares of Class B-4 Common Stock, 735,801 shares of Class C Common Stock, 2,604,852 shares of Series B-1 Preferred Stock and 5,595,148 shares of Series B-2 Preferred Stock, all of which were collectively convertible into 23,479,062 outstanding common shares as of November 12, 2015.

IMH FINANCIAL CORPORATION

INDEX



PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements.
	Condensed Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014	F-2
	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014	F-3
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2015	F-4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014	F-5
	Notes to Unaudited Condensed Consolidated Financial Statements	F-7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	1
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	24
Item 4.	Controls and Procedures.	26
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings.	27
Item 1A.	Risk Factors.	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	27
Item 3.	Defaults Upon Senior Securities.	27
Item 4.	Mine Safety Disclosures.	27
Item 5.	Other Information.	27
Item 6.	Exhibits.	28
Signatures		30

PART I

FINANCIAL INFORMATION

F-1

Item 1. Financial Statements.

IMH FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



	September 30, 2015			December 31, 2014
Assets	(Unaudited)
Cash and Cash Equivalents	$	9,317		$	1,915
Restricted Cash and Cash Equivalents	32,425			2,573
Mortgage Loans Held for Sale, Net	8,261			24,539
Real Estate Acquired through Foreclosure Held for Sale	35,047			53,686
Real Estate Acquired through Foreclosure Held for Development	27,128			8,205
Operating Properties Acquired through Foreclosure	86,668			83,481
Deferred Financing Costs, Net	2,461			754
Other Receivables	1,572			2,816
Investment in Unconsolidated Entities	3,064			—
Other Assets	2,105			3,149
Property and Equipment, Net	512			654
Total Assets	$	208,560		$	181,772
Liabilities
Accounts Payable and Accrued Expenses	$	10,008		$	6,079
Accrued Property Taxes	354			785
Dividends Payable	540			—
Accrued Interest Payable	823			1,635
Customer Deposits and Funds Held for Others	2,906			2,064
Notes Payable, Net of Discount	96,315			69,010
Note Payable to Related Party	5,000			5,000
Capital Lease Obligation	1,181			1,199
Special Assessment Obligations	4,655			4,981
Total Liabilities	121,782			90,753
Redeemable Convertible Preferred Stock, $.01 par value; 100,000,000 shares authorized; 8,200,000 outstanding; liquidation preference of $39,570 at September 30, 2015 and December 31, 2014	29,043			27,329
Commitments and Contingent Liabilities
Stockholders’ Equity
Common stock, $.01 par value; 200,000,000 shares authorized; 16,908,880 and 16,873,880 shares issued at September 30, 2015 and December 31, 2014, respectively; 15,279,062 and 15,244,062 shares outstanding at September 30, 2015 and December 31, 2014, respectively	169			169
Less: Treasury stock, 1,629,818 shares at September 30, 2015 and December 31, 2014	(5,948		)	(5,948		)
Paid-in Capital	723,471			726,189
Accumulated Deficit	(660,543		)	(656,720		)
Total IMH Financial Corporation Stockholders' Equity	57,149			63,690
Noncontrolling Interests	586			—
Total Stockholders' Equity	57,735			63,690

Total Liabilities and Stockholders’ Equity	$	208,560		$	181,772

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-2

IMH FINANCIAL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Revenue:
Operating Property Revenue	$	5,605		$	6,351		$	21,683		$	20,077
Investment and Other Income	36			324			2,190			1,213
Mortgage Loan Income, Net	477			1,321			1,150			2,191
Total Revenue	6,118			7,996			25,023			23,481
Operating Expenses:
Operating Property Direct Expenses (Exclusive of Interest and Depreciation)	5,755			5,572			17,972			16,815
Expenses for Non-Operating Real Estate Owned	239			481			853			1,627
Professional Fees	1,155			890			3,446			6,251
General and Administrative Expenses	2,226			3,582			6,967			6,739
Interest Expense	2,409			3,454			7,640			13,043
Debt Termination Charge	—			21,658			—			21,658
Depreciation and Amortization Expense	645			797			1,927			2,798
Total Operating Expenses	12,429			36,434			38,805			68,931
Recovery of Credit Losses, Impairment Charges, and Gain on Disposal
Gain on Disposal of Assets, Net	(304		)	(5,630		)	(23		)	(17,630		)
Recovery of Credit Losses, Net	(1		)	(172		)	(10,662		)	(721		)
Impairment of Real Estate Owned	—			—			140			—
Total Recovery of Credit Losses, Impairment Charges, and Gain on Disposal of Assets	(305		)	(5,802		)	(10,545		)	(18,351		)
Total Costs and Expenses	12,124			30,632			28,260			50,580
Loss before Income Taxes	(6,006		)	(22,636		)	(3,237		)	(27,099		)
Provision for Income Taxes	—			—			—			—
Net Loss	(6,006		)	(22,636		)	(3,237		)	(27,099		)
Net Income Attributable to Noncontrolling Interests	—			—			(586		)	—
Cash Dividend on Redeemable Convertible Preferred Stock	(540		)	(399		)	(1,601		)	(399		)
Deemed Dividend on Redeemable Convertible Preferred Stock	(583		)	(400		)	(1,714		)	(400		)
Net Loss Attributable to Common Shareholders	$	(7,129	)	$	(23,435	)	$	(7,138	)	$	(27,898	)
Loss per common share
Basic and Diluted	$	(0.47	)	$	(1.53	)	$	(0.47	)	$	(1.74	)
Basic and Diluted Weighted Average Common Shares Outstanding	15,279,062			15,323,933			15,269,703			16,026,515

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-3

IMH FINANCIAL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2015

(In thousands, except share data)



	Common Stock			Treasury Stock							Accumulated Deficit			Total IMH Financial Corporation Stockholders' Equity			Noncontrolling Interest		Total Stockholders' Equity
	Shares	Amount		Shares	Amount			Paid-in Capital			Accumulated Deficit			Total IMH Financial Corporation Stockholders' Equity			Noncontrolling Interest		Total Stockholders' Equity
Balance, December 31, 2014	16,873,880	$	169	1,629,818	$	(5,948	)	$	726,189		$	(656,720	)	$	63,690		$	—	$	63,690
Net Loss	—	—		—	—			—			(3,823		)	(3,823		)	586		(3,237		)
Dividends Declared on Redeemable Convertible Preferred Stock	—	—		—	—			(1,601		)	—			(1,601		)	—		(1,601		)
Deemed Dividend on Redeemable Convertible Preferred Stock	—	—		—	—			(1,714		)	—			(1,714		)	—		(1,714		)
Stock-Based Compensation	35,000	—		—	—			597			—			597			—		597
Balance, September 30, 2015	16,908,880	$	169	1,629,818	$	(5,948	)	$	723,471		$	(660,543	)	$	57,149		$	586	$	57,735

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-4

IMH FINANCIAL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



	Nine Months Ended September 30,
	2015			2014
OPERATING ACTIVITIES
Net Loss	$	(3,237	)	$	(27,099	)
Adjustments to reconcile net loss to net cash used in operating activities:
Debt Termination Charge	—			21,658
Impairment of Real Estate Owned	140			—
Non-cash Recovery of Investment in Unconsolidated Entities	(3,064		)	—
Non-cash Recovery of Real Estate Owned	(6,824		)	—
Other Non-cash Recovery of Credit Losses	(501		)	—
Stock-Based Compensation and Option Amortization	597			578
Gain on Disposal of Assets	(23		)	(17,630		)
Amortization of Deferred Financing Costs	1,383			881
Depreciation and Amortization Expense	1,927			2,798
Accretion of Mortgage Income	—			(1,689		)
Accretion of Discount on Notes Payable	456			1,425
Increase (decrease) in cash resulting from changes in:
Accrued Interest Receivable	(607		)	110
Other Receivables	1,244			(1,997		)
Other Assets	1,249			595
Accrued Property Taxes	(437		)	4
Accounts Payable and Accrued Expenses	(2,133		)	510
Customer Deposits and Funds Held For Others	842			(662		)
Accrued Interest Payable	(812		)	2,274
Total adjustments, net	(6,563		)	8,855
Net cash used in operating activities	(9,800		)	(18,244		)
INVESTING ACTIVITIES
Proceeds from Sales of Mortgage Loans	27,371			—
Proceeds from Sale/Recovery of Real Estate Owned	17,229			51,001
Purchases of Property and Equipment	(34		)	(23		)
Issuance of Other Notes Receivables	—			(2,100		)
Mortgage Loan Fundings and Protective Advances	(289		)	(27		)
Mortgage Loan Repayments	320			5,681
Collection of Other Notes Receivables	—			2,100
Investment in Real Estate Owned	(19,897		)	(4,678		)
Net cash provided by investing activities	24,700			51,954
FINANCING ACTIVITIES
Proceeds from Issuance of Preferred Equity	—			18,580
Proceeds from Notes Payable	88,333			—
Proceeds from Convertible Notes Payable	—			71
Repayment of Convertible Debt	—			(28,295		)
Debt Termination Costs	—			(1,802		)
Debt Issuance Costs Paid	(3,090		)	—
Increase in Restricted Cash	(29,852		)	(4,243		)
Repayments of Notes Payable	(61,810		)	(19,001		)
Purchase of Notes Payable	—			(1,289		)

F-5



	Nine Months Ended September 30,
	2015			2014
Repayments of Capital Leases	(18		)	(41		)
Dividends Paid	(1,061		)	—
Purchase of Treasury Stock	—			(2,565		)
Net cash used in financing activities	(7,498		)	(38,585		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	7,402			(4,875		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	1,915			7,875
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	9,317		$	3,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	5,550		$	5,543
Real Estate Acquired Through Guarantor Settlement	$	6,824		$	—
Capital Expenditures in Accounts Payable and Accrued Expenses	$	6,063		$	—
Investment in Unconsolidated Entities Acquired Through Guarantor Settlement	$	3,064		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-6

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1- BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY

Our Company

IMH Financial Corporation (the “Company”) is a real estate investment and finance company based in the southwestern United States engaged in various and diverse facets of the real estate lending and investment process, including origination, acquisition, underwriting, servicing, enforcement, development, marketing, and disposition. The Company’s focus is to invest in, manage and dispose of commercial real estate mortgage investments or other real estate assets, and to perform all functions reasonably related thereto, including developing, managing and either holding for investment or disposing of real property acquired through acquisition, foreclosure or other means.

In the last few years, we acquired certain operating properties through deed-in-lieu of foreclosure which have contributed significantly to our operating revenues and expenses. Our operating properties currently consist of two operating hotels located in Sedona, Arizona, a golf course operation located in Bullhead City, Arizona, and, prior to its sale in the third quarter of 2015, a commercial office building located in Stafford, Texas. Due to our limited lending activities since 2008, these operating properties currently contribute the majority of our operating revenue.

Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete set of financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results for the periods presented have been made. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2014.

The accompanying unaudited condensed consolidated financial statements include the accounts of IMH Financial Corporation and the following wholly-owned operating subsidiaries: 11333, Inc. (formerly known as Investors Mortgage Holdings, Inc.), an Arizona corporation, Investors Mortgage Holdings California, Inc., a California corporation, IMH Holdings, LLC, a Delaware limited liability company (“Holdings”), and various other wholly owned subsidiaries established in connection with the acquisition of real estate either through foreclosure or purchase and/or for borrowing purposes, as well as its majority owned or controlled real estate entities and its interests in variable interest entities (“VIE”) in which the Company is determined to be the primary beneficiary. Holdings is a holding company for IMH Management Services, LLC, an Arizona limited liability company, which provides us and our affiliates with human resources and administrative services, including the supply of employees.

During 2014, the Company, through a wholly owned subsidiary, formed a joint venture with a third party developer, for the purpose of holding and developing certain real property contributed by the Company (the “Joint Venture”). The Joint Venture simultaneously created a wholly-owned subsidiary, IMH Gabella, LLC (“IMH Gabella”), to hold the real estate assets and enter into related agreements. A wholly owned subsidiary of the Company is the managing member of, and holds a 93% ownership interest in, the Joint Venture. The Joint Venture partner holds a 7% ownership interest in the Joint Venture with the right to acquire an additional 3.2% profits-only interest based upon the satisfaction of certain budget and completion milestones with respect to the project. The Company has the power and authority to govern the business of the Joint Venture, subject to certain conditions. The Joint Venture’s assets, liabilities, and results of operations are included in the Company’s condensed consolidated financial statements under the voting interest model.

During the second quarter of 2015, the Company, through certain subsidiaries, obtained certain real estate assets and equity interests in a number of limited liability companies and limited partnerships with various real estate holdings and related assets as a result of certain enforcement and collection efforts. Certain of these entities have been consolidated in the accompanying condensed consolidated financial statements while others have been accounted for under the equity method of accounting based on the extent of the Company’s controlling financial interest in each such entity.

All significant intercompany accounts and transactions have been eliminated in consolidation.

F-7

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1- BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY- continued

Liquidity

As of September 30, 2015, our accumulated deficit aggregated $660.5 million primarily as a result of previous provisions for credit losses recorded relating to the decrease in the fair value of the collateral securing our loan portfolio and impairment charges relating to the value of real estate owned (“REO”) assets acquired primarily through foreclosure, as well as on-going net operating losses in recent periods resulting from the lack of income-producing assets, the high cost of our debt financing and a debt restructuring which resulted in significant debt termination charges. Beginning in 2008, we experienced significant defaults and foreclosures in our mortgage loan portfolio due primarily to the erosion of the U.S. and global real estate and credit markets during those periods. As a result, since that time we have been focused on enforcing our rights under our loan documents, working to repossess the collateral properties underlying those loans, and pursuing recovery from guarantors under such loans.

Our liquidity plan has included obtaining additional financing, selling mortgage loans, and selling the majority of our legacy real estate assets. As previously disclosed, we secured various financings between 2011 and 2014 which, along with proceeds from asset sales, have been our primary sources of working capital. During the year ended December 31, 2014, we entered into a series of transactions to, among other things, restructure and partially refinance our primary senior indebtedness. As more fully described in note 7, during the first quarter of 2015, we secured $78.8 million in new financing and repaid the remaining senior loan balance and certain other bank debt.

As of September 30, 2015, our entire loan portfolio with an aggregate carrying value of $8.3 million is held for sale. In addition, as of September 30, 2015, REO assets with a carrying value totaling $35.0 million were held for sale. During the nine months ended September 30, 2015, we sold certain loans and REO assets and collected other recoveries generating approximately $44.6 million in cash.

Under the terms of certain of our current senior loans, during the period through and including November 1, 2015, if the Company causes the sale of any asset which serves as security under the respective loan, a portion of the proceeds of such sale equal to the applicable release price is to be deposited into a Company custodial account (the “Custodial Account”); provided, however that in the event the lender thereafter approves replacement collateral proposed by the Company, such proceeds may be re-borrowed by the Company in exchange for a pledge of such replacement collateral to the lender. If the lender does not approve such replacement collateral or if the Company elects not to propose replacement collateral, the amount in such Custodial Account may be used only as a payment toward the outstanding amounts due under such loan. Subsequent to September 30, 2015, we repaid $28.8 million owing under our senior loans, using primarily funds from the Custodial Account.

As previously reported, IMH Gabella secured a construction loan in 2014 in connection with the development of a multi-family project. Funding under this loan commenced during the second quarter of 2015 as the Company completed the required $11.5 million equity funding under the loan. The construction loan is subject to a completion and repayment carve-out guarantee by the Company and requires a minimum liquidity balance of $7.5 million upon the first draw of the construction loan. At September 30, 2015, we had cash and cash equivalents of $9.3 million and restricted cash of approximately $32.4 million. Subsequent to September 30, 2015, we obtained a temporary reduction in the liquidity requirement from $7.5 million to $4.0 million for a period of 120 days in order to provide us time to generate additional liquidity from anticipated asset sales, financings and/or other cash events.

While we have been successful in securing financing through September 30, 2015 to provide adequate funding for working capital purposes and have generated liquidity through asset sales and mortgage receivable collections, there is no assurance that we will be successful in selling our remaining loan and REO assets in a timely manner or in obtaining additional or replacement financing, if needed, to sufficiently fund future operations, repay existing debt or to implement our investment strategy. While the terms of our senior loans do not require lender approval for asset sales, there were established release prices for certain of the collateral assets to be applied as a principal paydowns on the related debt. Our failure to generate sustainable earning assets, and successfully liquidate a sufficient number of our loans and REO assets, including exceeding the release prices from the sale of collateral assets, may have a material adverse effect on our business, results of operations and financial position.

F-8

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

Reclassifications

Certain 2014 amounts in the condensed consolidated statement of cash flows have been reclassified to conform to the 2015 financial statement presentation. At September 30, 2014, the change in advance deposits received from hotel guests and other customers in the amount of $1.9 million was reported in the net change in accounts payable and accrued liabilities in the condensed consolidated statement of cash flows. Such amounts are now classified in the change in customer deposits and funds held for others.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company uses historical experience and various other assumptions that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates and assumptions used in preparation of the consolidated financial statements.

Restricted Cash

At September 30, 2015 and December 31, 2014, restricted cash and cash equivalents was comprised of the following:



	September 30, 2015		December 31, 2014
Senior lender controlled accounts	$	26,973	$	2,392
Escrows and other restricted accounts	5,452		181
Total restricted cash and cash equivalents	$	32,425	$	2,573

Restricted cash includes cash items that are legally or contractually restricted as to usage or withdrawal, which include amounts relating to: a) the Collateral and Custodial Accounts established pursuant to the terms of our senior secured loans and b) amounts maintained in escrow or other restricted accounts for contractually specified purposes, which includes property taxes, insurance, interest and capital reserves needed to complete the scheduled improvements at our hotel assets. The balance of the senior lender controlled account served as collateral under two loans which had an aggregate amount outstanding of $28.8 million as described in Note 7 (which were fully repaid subsequent to September 30, 2015) . Once the senior lender controlled account has sufficient cash collateral and the related loans are repaid, any remaining property collateral will be released by the senior lender and the balance of any then outstanding related reserve accounts will be released to our unrestricted operating accounts. In addition, under the terms of our construction loan we are required to maintain a minimum liquidity balance of $7.5 million. Subsequent to September 30, 2015, we obtained a temporary reduction in the liquidity requirement from $7.5 million to $4.0 million for a period of 120 days in order to provide us time to generate additional liquidity from anticipated asset sales, financings and/or other cash events.

Real Estate Ventures

The Company, through various subsidiaries, holds interests in its properties through interests in both consolidated and unconsolidated real estate ventures. The Company assesses its investments in real estate ventures to determine if a venture is a variable interest entity (“VIE”). Generally, an entity is determined to be a VIE when either (i) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support or (iii) the equity investors have voting rights that are not proportionate to their economic interests and substantially all of the activities of the entity involve or are conducted on behalf of an investor that has disproportionately fewer voting rights. The Company consolidates entities that are VIEs for which the Company is determined to be the primary beneficiary. In instances where the Company is not the primary

F-9

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES- continued

beneficiary, the Company does not consolidate the entity for financial reporting purposes. The primary beneficiary is the entity that has both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Entities that are not defined as VIEs are consolidated where the Company is the general partner (or the equivalent) and the limited partners (or the equivalent) in such investments do not have rights which would preclude control.

For entities where the Company is the general partner (or the equivalent), but does not control the real estate venture, and the other partners (or the equivalent) hold substantive participating rights, the Company uses the equity method of accounting. For entities where the Company is a limited partner (or the equivalent), management considers factors such as ownership interest, voting control, authority to make decisions and contractual and substantive participating rights of the partners (or the equivalent) to determine if the presumption that the general partner controls the entity is overcome. In instances where these factors indicate the Company controls the entity, the Company would consolidate the entity; otherwise the Company accounts for its investments using the equity method of accounting.

Under the equity method of accounting, investments are initially recognized in the consolidated balance sheet at cost, or fair value in the case of legal assignments of such interests, and are subsequently adjusted to reflect the Company’s proportionate share of net earnings or losses of the entity, distributions received, contributions and certain other adjustments, as appropriate. Any difference between the carrying amount of these investments on the Company’s balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings (loss) of unconsolidated entities. When circumstances indicate there may have been a loss in value of an equity method investment, and the Company determines the loss in value is other than temporary, the Company recognizes an impairment charge to reflect the investment at fair value.

Noncontrolling Interests

Noncontrolling interests represent the portion of equity in the Company’s consolidated subsidiaries which is not attributable to the Company’s stockholders. Accordingly, noncontrolling interests are reported as a component of equity, separate from stockholders’ equity, in the accompanying condensed consolidated balance sheets. On the condensed consolidated statements of operations, operating results are reported at their consolidated amounts, including both the amount attributable to the Company and to noncontrolling interests.

Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 . This update applies to entities that enter into contracts with customers to transfer goods or services or for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with customers. This ASU is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2016 for public companies. Management is evaluating the effect, if any, on the Company’s financial position and results of operations.

In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires an entity to treat performance targets that can be met after the requisite service period of a share-based award has ended, as a performance condition that affects vesting. The ASU is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015. The adoption of this update did not have a material impact on the Company’s operating results or financial position.

F-10

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES- continued

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,. ASU 2014-15 introduces an explicit requirement for management to assess and provide certain disclosures if there is substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 is effective for the annual period ending after December 15, 2016. The Company does not expect the adoption of ASU 2014-15 to have a material impact on the Company’s operating results or financial position.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which amends current consolidation guidance by modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminating the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with variable interest entities. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. All legal entities are subject to reevaluation under the revised consolidation model. The Company is currently evaluating the impact the adoption of this update will have on the Company’s consolidated financial position, results of operations and cash flows.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This update is effective for interim and annual reporting periods beginning after December 15, 2015 and requires retrospective application. The implementation of this update is not expected to cause any material changes to our condensed consolidated financial statements other than the reclassification of debt issuance costs from assets to liabilities on our condensed consolidated balance sheets. As of September 30, 2015 and December 31, 2014, $2.5 million and $0.8 million, respectively, would be reclassified from assets to liabilities on our condensed consolidated balance sheets.

F-11

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 — MORTGAGE INVESTMENTS, LOAN PARTICIPATIONS AND LOAN SALES

Lending Activities

Given the non-performing status of the majority of the Company’s loan portfolio and the suspension of significant lending activities, there has been limited loan activity during the three and nine months ended September 30, 2015. One new loan in the amount of $11.0 million was originated, (and subsequently sold in the same quarter), in connection with the partial financing of an asset sale during the three and nine months ended September 30, 2015. In addition, the Company was assigned one loan in the principal amount of $0.3 million through the purchase of a lien on real property during the nine months ended September 30, 2015. The Company originated two loans during the nine months ended September 30, 2014 in the principal amount of $8.4 million in connection with the partial financing of the sale of certain REO assets. During the nine months ended September 30, 2015, the Company received $0.3 million in mortgage loan principal payments.

A roll-forward of loan activity for the nine months ended September 30, 2015 is as follows (in thousands):



	Principal Outstanding			Interest Receivable			Valuation Allowance			Carrying Value
Balance, December 31, 2014	$	39,734		$	367		$	(15,562	)	$	24,539
Additions:
New loan originations	11,000			—			—			11,000
Assignment of mortgage loans	289			—			—			289
Interest adjustment	—			64			—			64
Accrued interest revenue	138			963			—			1,101
Reductions:
Principal and interest repayments	(320		)	(652		)	—			(972		)
Recovery of allowance for credit losses	—			—			501			501
Foreclosures/transfers to real estate owned	(663		)	—			—			(663		)
Foreclosures/transfers to other assets	(200		)	—			—			(200		)
Sale of mortgage loans	(29,535		)	(242		)	2,379			(27,398		)
Balance, September 30, 2015	$	20,443		$	500		$	(12,682	)	$	8,261

As of September 30, 2015, the Company had five loans outstanding with an average principal and interest balance of $4.1 million, as compared to $4.5 million for nine loans at December 31, 2014. Of the five outstanding loans at September 30, 2015, three of the loans were performing with an average outstanding principal and interest balance of $2.8 million and a weighted average interest rate of 8.8%. Of the nine outstanding loans at December 31, 2014, there were three performing loans with an average outstanding principal and interest balance of $7.2 million and a weighted average interest rate of 8.2%. As of September 30, 2015 and December 31, 2014, the valuation allowance represented 60.6% and 38.8%, respectively, of the total outstanding loan principal and interest balances.

Loan Sales

During the nine months ended September 30, 2015, the Company sold four loans with a carrying value of $27.4 million for a net loss of $0.1 million. no loans were sold during the nine months ended September 30, 2014.

Scheduled Loan Maturities

The outstanding principal and interest balance of mortgage investments, net of the valuation allowance, as of September 30, 2015, have scheduled maturity dates within the next several quarters as follows (in thousands):

F-12

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 — MORTGAGE INVESTMENTS, LOAN PARTICIPATIONS AND LOAN SALES- continued



Quarter	Outstanding Balance			Percent		#
Matured	$	12,682		60.6	%	2
Q2 2016	7,200			34.4	%	1
Q1 2017	679			3.2	%	—
Q1 2020	45			0.2	%	1
Thereafter	337			1.6	%	1
Total Principal and Interest	20,943			100.0	%	5
Less: Valuation Allowance	(12,682		)
Net Carrying Value	$	8,261

From time to time, the Company may extend a mortgage loan’s maturity date in the normal course of business. In this regard, the Company has modified certain loans, extending maturity dates in some cases to two or more years, and it is likely that additional loans will be modified in the future in an effort to preserve collateral. Accordingly, repayment dates of the loans may vary from their currently scheduled maturity date. If the maturity date of a loan is not extended, the loans are classified and reported as matured and in default. During the nine months ended September 30, 2015, a borrower for one performing loan exercised its option to extend the maturity date from the third quarter 2015 to the second quarter of 2016.

Given the non-performing status of the majority of the loan portfolio, the Company does not expect the payoffs to materialize for legacy loans, particularly for loans past their respective maturity date. The Company may find it necessary to foreclose, modify, extend, make protective advances or sell such loans in order to protect collateral, maximize return or generate additional liquidity.

Summary of Loans in Default

The Company continues to experience loan defaults due to, among other reasons, loan balances that exceed the value of the underlying collateral and the absence of takeout financing in the marketplace. A summary and roll-forward of activity of loans in default for the nine months ended September 30, 2015 is as follows (dollars in thousands):



	Principal Outstanding			Interest Receivable			Valuation Allowance			Carrying Value			# of Loans
Balance, December 31, 2014	$	18,275		$	311		$	(15,562	)	$	3,024		6
Additions:
Interest adjustment	—			64			—			64			—
Reductions:
Provision for credit losses	—			—			501			501			—
Foreclosures/transfers to Other Assets	(200		)	—			—			(200		)	—
Foreclosures/transfers to Real Estate Owned	(663		)	—			—			(663		)	(2	)
Sale of mortgage loans	(5,100		)	(5		)	2,379			(2,726		)	(2	)
Balance, September 30, 2015	$	12,312		$	370		$	(12,682	)	$	—		2

Of the six loans that were in default at December 31, 2014, two remained in default status as of September 30, 2015, two loans were removed upon foreclosure and transferred to REO and two loans were sold.

During the nine months ended September 30, 2015, we completed foreclosure on two loan assets and transferred the underlying real estate collateral to REO held for sale, with a non-real estate portion going to other assets. We are exercising enforcement action which could lead to foreclosure or other disposition with respect to the remaining loans in default, but we have not completed foreclosure on any such loans subsequent to September 30, 2015. During the quarter ended September 30, 2015, we received a payoff of one note in default. The completion and/or timing of foreclosure on the remaining loans is dependent on several factors, including applicable state statutes, potential bankruptcy filings by the borrowers, our ability to negotiate a deed-in-lieu of foreclosure and other factors.

F-13

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 — MORTGAGE INVESTMENTS, LOAN PARTICIPATIONS AND LOAN SALES- continued

At September 30, 2015 and December 31, 2014, all loans in default were also in non-accrual status. In addition, as of September 30, 2015 and December 31, 2014, interest receivable recorded on such loans prior to being placed in non-accrual status totaled $0.4 million for each period and is included in mortgage loans held for sale on the accompanying condensed consolidated balance sheet.

No interest income was recognized on any non-accrual loans on a cash or accrual basis during the periods ended September 30, 2015 or 2014. Borrower concentrations, geographic concentrations of our loan portfolio, related loan classifications and end-user categories have not materially changed since December 31, 2014, except as a result of loan sales and foreclosures.

Sale of Mortgage Note to Related Party

During the three months ended September 30, 2015, the Company sold a mortgage note in the amount of $11.0 million to SREOF II Holdings, LLC, an affiliate of one of the Company’s directors. The note was sold at par value, and therefore, the sale had no impact on the profit or loss of the Company. Of the $11.0 million in sale proceeds received, $9.2 million was the applicable release price and was deposited to the Custodial Account, as discussed in Note 1 - Liquidity. The remaining $1.8 million of proceeds are available for working capital purposes.

F-14

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 — OPERATING PROPERTIES AND REAL ESTATE HELD FOR DEVELOPMENT OR SALE

Operating properties and REO assets consist primarily of properties acquired as a result of foreclosure or purchase and were initially recorded at the lower of cost or fair value, less estimated costs to sell the property. Our fair value assessment procedures are more fully described in Note 6. At September 30, 2015, we held total operating properties and REO assets of $148.8 million, of which $27.1 million were held for development, $35.0 million were held for sale, and $86.7 million were held as operating properties. At December 31, 2014, we held total operating properties and REO assets of $145.4 million, of which $8.2 million were held for development, $53.7 million were held for sale, and $83.5 million were held as operating properties. A roll-forward of REO activity from December 31, 2014 to September 30, 2015 is as follows (dollars in thousands):



	Operating Properties			# of Projects	Held for Development		# of Projects	Held for Sale			# of Projects		Total Net Carrying Value
Balance, December 31, 2014	$	83,481		3	$	8,205	1	$	53,686		29		$	145,372
Additions:
Net principal carrying value of loans foreclosed	—			—	—		—	663			2		663
Capital costs/ additions	4,955			—	18,923		—	7,772			12		31,650
Reductions:
Cost of properties sold	—			—	—			(26,934		)	(17	)	(26,934		)
Impairment	—			—	—		—	(140		)	—		(140		)
Depreciation and amortization	(1,768		)	—	—		—	—			—		(1,768		)
Balance, September 30, 2015	$	86,668		3	$	27,128	1	$	35,047		26		$	148,843

During the nine months ended September 30, 2015, we sold twenty REO assets (or portions thereof) for $28.2 million (net of selling costs), of which we financed $11.0 million, resulting in a total net gain of $0.1 million. During the nine months ended September 30, 2014, we sold eighteen REO assets (or portions thereof) for $59.4 million (net of selling costs), of which we financed $8.4 million, for a net gain of $17.6 million.

During the nine months ended September 30, 2015, we acquired two REO assets resulting from foreclosure of the related loans. In addition, as discussed in Note 1, we were awarded certain real estate assets and equity interests in a number of limited liability companies and limited partnerships with various real estate holdings and related assets in connection with certain enforcement and collection activities. Certain of these entities have been consolidated in the accompanying condensed consolidated financial statements based on our determination of the Company’s controlling financial interest in each such entity.

Based on our analysis, the consolidated entities in which these equity interests were awarded did not meet the definition of a business under GAAP since the only assets of such entities consist of unimproved real estate holdings, and the entities lack inputs and processes necessary to produce outputs. For this and other reasons, the entities did not qualify under the VIE model, and we instead applied the voting interest model to ascertain the need for consolidation. Because the entities do not qualify as businesses, the acquisition of such interests in these entities was deemed to be an asset acquisition, whereby we recorded our proportionate interest of each entity’s total assets and liabilities at fair value at the date of acquisition. Thereafter, any subsequent income or loss was allocated to controlling and noncontrolling interests based on their respective ownership percentages. The aggregate fair value of our interest in the underlying real estate assets of the consolidated entities, after elimination of intercompany balances, totaled $7.0 million, which is classified as held for sale in the accompanying condensed consolidated balance sheets. Certain of such assets were sold during the nine months ended September 30, 2015, resulting in the recording of a noncontrolling interest totaling $0.6 million.

The initial accounting for these newly consolidated entities is incomplete with respect to the values assigned to other potential assets and liabilities as the Company did not have sufficient time to finalize these respective valuations and, accordingly, the amounts recognized in these condensed consolidated financial statements are provisional. We are continuing to investigate and evaluate the remaining assets and liabilities of these entities, but after elimination of intercompany balances, do not believe such amounts will be material.

F-15

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 — OPERATING PROPERTIES AND REAL ESTATE HELD FOR DEVELOPMENT OR SALE- continued

REO Planned Development

As previously reported, during the year ended December 31, 2014, the Company, through a wholly owned subsidiary, formed a joint venture with a third party developer, Titan Investments, LLC (“Titan”), for the purpose of holding and developing certain real property for a planned multi-family residential housing and retail development located in the Minneapolis suburb of Apple Valley to be known as Parkside Village (the “Apple Valley Project”). The first phase of the Apple Valley Project will consist of a 196-unit multi-family residential housing development known as Gabella (“Gabella”).

A wholly owned subsidiary of the Company is the managing member of IMH Gabella and holds a 93% ownership interest in the Joint Venture. Titan holds a 7% ownership interest in the Joint Venture with the right to acquire an additional 3.2% profits-only interest based upon the satisfaction of certain budget and completion milestones with respect to the project. The Company has the power and authority to govern the business of the Joint Venture, subject to certain conditions. During the year ended December 31, 2014, we contributed certain land and made certain cash equity contributions to the Joint Venture, and IMH Gabella secured a construction loan in the amount of $24.0 million for which the Company provided a completion and repayment carve-out guarantee. Funding under this loan commenced during the second quarter of 2015 as the Company completed the required $11.5 million equity funding under the loan. The Company has no further capital contribution requirements under the loan. In the event that certain specified occupancy targets are met, Titan has the right to have its interests repurchased by the Joint Venture. The Joint Venture also has certain rights to redeem Titan’s interests in the event Titan fails to exercise those put rights within a specified time. Generally, income or loss will be allocated among the members of the Joint Venture in accordance with their respective percentage interests. Upon a sale of the project, the sale proceeds shall be distributed first to the Company in an amount equal to its capital contributions less any previous distributions it may have received, and then to the members in accordance with their respective interests in the Joint Venture.

The Company’s interests in the Joint Venture relate to equity ownership and profits participation between the partners; a profits interest arrangement between the partners involving certain budget and completion milestones; equity option provisions; a parental guarantee related to construction financing; and contractual arrangements limiting Titan’s initial participation in the economics of certain assets and liabilities. Terms of the equity option require the Company to purchase Titan’s equity investment upon certain conditions, after a specified period of time if Titan elects to sell its equity investment. The Company will provide the Joint Venture with all initial capital, execute contracts on behalf of the Joint Venture, and has final approval rights over all significant matters. The assets, liabilities, and results of operations of IMH Gabella are included in the Company’s condensed consolidated financial statements under the voting interest model. Titan had no reportable interest in the assets, liabilities or equity at September 30, 2015 or December 31, 2014, or in the net loss during the nine months ended September 30, 2015 of the Joint Venture.

Costs related to the development or improvements of the Company’s real estate assets are generally capitalized and costs relating to holding the assets are generally charged to expense. Cash outlays for capitalized development costs totaled $19.9 million during the nine months ended September 30, 2015. In addition, costs and expenses related to operating, holding and maintaining such properties (including property taxes), which are expensed and included in property taxes and other operating expenses for REO assets in the accompanying consolidated statement of operations, totaled approximately $6.0 million and $18.8 million for the three and nine months ended September 30, 2015, respectively, and $6.1 million and $18.4 million for the three and nine months ended September 30, 2014, respectively.

We continue to evaluate our use and disposition options with respect to our REO assets. REO assets that are classified as held for sale are measured at the lower of carrying amount or fair value, less estimated cost to sell and are subject to fair value analysis on not less than a quarterly basis. REO assets that are classified as held for development or as operating properties are considered “held and used” and are evaluated for impairment when circumstances indicate that the carrying amount exceeds the sum of the un-discounted net cash flows expected to result from the development or operation and eventual disposition of the asset.

F-16

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - INVESTMENT IN UNCONSOLIDATED ENTITIES AND RELATED MATTERS

As described in Note 1, during the second quarter of 2015, the Company, through certain subsidiaries, obtained certain real estate assets and equity interests in a number of limited liability companies and limited partnerships with various real estate holdings and related assets as a result of certain enforcement and collection efforts. Several of the limited liability companies and partnerships hold interests in real property and are now co-owned with various unrelated third parties. Certain of these entities have been consolidated in the accompanying condensed consolidated financial statements while others have been accounted for under the equity method of accounting, based on the extent of the Company’s controlling financial interest in each such entity. For entities where the Company does not control the real estate venture, and the other partners (or the equivalent) hold substantive participating rights, the Company uses the equity method of accounting.

ASC 323 Investments - Equity Method and Joint Ventures and Article 4.08(g) of Regulation S-X require that summarized financial information of material investments accounted for under the equity method be provided for the investee’s financial position and results of operations including assets, liabilities and results of operations. Notwithstanding the extensive efforts of the Company to compile the necessary financial information, the Company has determined that the information needed for the preparation of historical financial statements of these entities to satisfy these requirements is not available or otherwise sufficiently reliable. As a result, the Company has elected to present financial information on its investment in these entities based on the fair value of the underlying real estate assets and estimable liabilities as of September 30, 2015, as it believes this information is reliable and relevant to the users of its financial statements.

The initial accounting for the business combination is incomplete with respect to the values assigned to other potential tangible and intangible assets acquired and liabilities assumed as the Company did not have sufficient time to finalize these respective valuations and, accordingly, the amounts recognized in these condensed consolidated financial statements are provisional. We are continuing to investigate and evaluate the remaining assets and liabilities of these entities, but after elimination of intercompany balances, do not believe such amounts are material. Further, although the Company acknowledges that the information provided does not comply with all of the provisions of ASC 323 or Article 4.08(g) of Regulation S-X, it does not believe that the lack of the omitted disclosure, or the information of the financial position reflecting the cost basis of its investment provided, results in a material omission or misstatement of the Company’s condensed consolidated financial statements taken as a whole.

The following information summarizes the financial position of the entities in which the Company holds investments that are recorded on the equity method of accounting as of September 30, 2015 (in thousands).



Summary of Financial Position	Total assets		Total liabilities		Total Equity		Total Liabilities and Equity		Company's Investment
	$	15,575	$	927	$	14,648	$	15,575	$	3,064

The assets of the foregoing entities include primarily unimproved real estate and rights to develop water located in the Southwestern United States. The Company does not consolidate the foregoing entities because the Company and the other owners of equity interests in these entities share decision making abilities and have joint control over the entities, and/or because the Company does not control the activities of the entities. Under the court-approved settlement, the Company does not have any obligation to fund the outstanding liabilities or working capital needs of these entities. The Company’s interests in these entities range from 2.4% to 48.0% and, collectively, the Company’s net investment in these entities totals $3.1 million at September 30, 2015.

The results of operations of our acquired interest in these entities have been included in the accompanying consolidated statements of operations since the respective acquisition closing dates. We have not presented pro forma consolidated financial information for the Company for three and nine months ended September 30, 2015 and 2014 as if the acquired interest in these entities discussed above had occurred at the beginning of the earliest period presented because, as described above, the information needed for the preparation of historical financial statements of these entities to satisfy these requirements is not available or otherwise sufficiently reliable. Moreover, we believe that there was minimal activity during the last two fiscal years. Accordingly, we do not believe that the lack of the omitted disclosure results in a material omission or misstatement of the Company’s condensed consolidated financial statements taken as a whole.

F-17

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — INVESTMENT IN UNCONSOLIDATED ENTITIES AND RELATED MATTERS- continued

Guarantee on Preferred Investment Senior Secured Indebtedness

In connection with the sale of our preferred equity investment in a joint venture to the holder of the other primary interests in the joint venture during the fourth quarter of 2013, the Company agreed to continue to serve as a limited guarantor on the senior indebtedness of the joint venture that was secured by the joint venture’s operating properties and for which we were entitled to receive certain remuneration until we were released from the limited guarantee. We agreed to remain as a limited guarantor until the earlier of 1) the borrower’s identification of a suitable substitute guarantor, the approval thereof by the senior lender, and our release from the guarantee, or 2) repayment of the senior indebtedness which was scheduled to mature in February 2017. As consideration for its limited guarantee, the Company received aggregate payments of $0.5 million and $1.1 million during the nine months ended September 30, 2015 and 2014, respectively. Such payments were considered earned when received. During the first quarter of 2015, the borrower secured a replacement guarantor on the senior loan, and we entered into a court-approved settlement with the borrower pursuant to which the Company received a settlement payment of $1.3 million and was released from any potential liability under the guarantee.

F-18

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 — FAIR VALUE

Valuation Allowance and Fair Value Measurement of Loans and Real Estate Held for Sale

Our valuation analysis processes and procedures are disclosed in our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2014. We perform a valuation analysis of our loans, REO held for sale and derivative investments not less frequently than on a quarterly basis. We consider all relevant, material circumstances to determine if, and the extent to which, a valuation allowance is required.

Impairment for our collateral dependent loans is measured at the balance sheet date based on the then fair value of the collateral in relation to contractual amounts due under the terms of the applicable loan if foreclosure is probable. Substantially all of our loans are deemed to be collateral dependent.

Similarly, REO assets that are classified as held for sale are measured at the lower of carrying amount or fair value, less estimated cost to sell. REO assets that are classified as operating properties or held for development are considered “held and used” and are evaluated for impairment when circumstances indicate that the carrying amount exceeds the sum of the undiscounted net cash flows expected to result from the development and eventual disposition of the asset. If an asset is considered impaired, an impairment loss is recognized equal to the difference between the asset’s carrying amount and its fair value, less estimated cost to sell. If we elect to change the disposition strategy for our real estate held for development, and such assets were deemed to be held for sale, we may record additional impairment charges, and the amounts could be significant. See our consolidated audited financial statements in our previously filed Annual Report on Form 10-K for the year ended December 31, 2014 for a detailed description of the procedures performed and assumptions utilized in connection with our impairment analysis of real estate owned assets. We assess the extent, reliability and quality of market participant inputs such as sales pricing, cost data, absorption, discount rates, and other assumptions, as well as the significance of such assumptions in deriving the valuation. We generally employ one of five valuation approaches, or a combination of such approaches, in determining the fair value of the underlying collateral of each loan: the development approach, the income capitalization approach, the sales comparison approach, the cost approach, or the receipt of recent offers or executed purchase and sales agreements on specific properties.

For projects in which we have received a bona fide written third-party offer (or have executed a purchase and sale agreement) to buy our real estate or loan, or we or the borrower has received a bona fide written third-party offer (or has executed a purchase and sale agreement) to buy the related project, we generally utilize the offer or agreement amount in cases in which such amount may fall outside our current valuation range. Such offers or agreements are only considered if we deem it to be valid, reasonable, negotiable, and we believe the counterparty has the financial wherewithal to execute the transaction. When deemed appropriate, the offers received may be discounted to allow for potential changes in our on-going negotiations.

Factors Affecting Valuation

The underlying collateral of our loans and our REO varies by stage of completion, which consists of either raw land (also referred to as pre-entitled land), entitled land, partially developed, or mostly developed/completed lots or projects. Historically, for purposes of determining whether a valuation allowance was required, we primarily utilized a modeling technique utilizing the development approach, known as residual analysis commonly used in the lending industry, which is based on the assumption that development of our collateral was the highest and best use of the property.

We engage outside independent third-party valuation firms on a periodic, as-needed basis to provide complete valuation reports for certain of our larger loans and REO assets. In recent periods, we noted indications that a stabilizing trend in real estate market values began to unfold and, in certain circumstances, improved in certain markets. As a result, we have recently reduced the extent to which we utilize outside independent third-party valuation firms to assist with our analysis of fair value of the collateral supporting our loans and REO. As such, we currently rely largely on our internal asset management staff and certain other third party consultants to gather available market participant data from independent sources to update assumptions used to derive fair value of the collateral supporting our loans and REO assets not subject to third party valuation.

Our fair value measurement is based on the highest and best use of each property which is generally consistent with our current use for each property subject to valuation. In addition, our assumptions are established based on assumptions that we believe market participants for those assets would also use. During the period ended September 30, 2015, we performed both a macro analysis of market trends and economic estimates, as well as a detailed analysis on selected significant loan and REO assets.

F-19

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 — FAIR VALUE- continued

The following is a summary of the procedures performed in connection with our fair value analysis as of and for the period ended September 30, 2015:


1.	We reviewed the status of each of our loans to ascertain the likelihood that we will collect all amounts due under the terms of the loans at maturity based on current real estate and credit market conditions.


2.	We reviewed the status of each of our REO assets to determine whether such assets continue to be properly classified as held for sale, held for development or as operating properties as of the reporting date.

For the period ended September 30, 2015, given the lack of significant change in overall general market conditions since December 31, 2014 of our legacy portfolio, we performed an internal analysis to evaluate fair value of our portfolio. Our internal analysis of fair value included a review and update of current market participant activity, overall market conditions, the current status of the project, our direct knowledge of local market activity affecting the project, as well as other market indicators obtained through our asset management group and various third parties to determine whether there were any indications of a material increase or decrease in the value of the underlying collateral or REO asset since the last complete third party valuation for such asset. Our asset-specific analysis focused on the higher valued assets of our loan collateral and REO portfolio. We considered the results of our analysis and the potential valuation implication to the balance of the portfolio based on similar asset types and geographic location.

For the real estate assets received directly and those owned by the entities for which we recently acquired equity interests as a result of our enforcement and collection efforts, we obtained valuation reports from outside independent third-party valuation firms to assist management in determining the fair value for the majority of such assets, other than those assets which sold during the nine months ended September 30, 2015.

In addition, in those instances where we have received a bona fide written third-party offer to buy our loans or REO assets (or have executed a purchase and sale agreement), or the borrower has received a bona fide written third-party offer to buy the related project (or has executed a purchase and sale agreement), we generally utilized the purchase price in such offer or agreement when that amount was outside our current valuation range. Such offers or agreements are only considered if we deem it to be valid, reasonable and negotiable, and we believe the counterparty has the financial wherewithal to execute the transaction.

Based on our analysis, the valuation approach taken and assumptions utilized with respect to each asset at December 31, 2014 remained generally applicable at September 30, 2015, except for those assets subject to a recent bona fide written third-party offer or executed purchase and sales agreements to buy our loan or REO asset. See our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2014 for a summary of the key assumptions and valuation methodologies utilized to derive fair value.

Selection of Single Best Estimate of Value

As previously described, we have historically obtained periodic valuation reports from third-party valuation specialists, consultants and/or from our internal asset management department for the underlying collateral of our loans and REO held for sale. The results of our valuation efforts generally provide a range of values for the collateral valued rather than a single point estimate because of variances in the potential value indicated from the available sources of market participant information. The selection of a value from within a range of values depends upon general overall market conditions as well as specific market conditions for each property valued and its stage of entitlement or development. In addition to third-party valuation reports, we utilize recently received bona fide purchase offers from independent third-party market participants or executed purchase and sale agreements that may be outside of the range of values indicated by the report from the third-party valuation specialist. In selecting the single best estimate of value, we consider the information in the valuation reports, credible purchase offers received and agreements executed, as well as multiple observable and unobservable inputs.

Valuation Conclusions

Based on the results of our evaluation and analysis, during the nine months ended September 30, 2015, we recorded a non-cash recovery of prior credit losses on our loan portfolio of $0.5 million, and none for the three months ended September 30, 2015 and for three and nine months ended September 30, 2014. In addition, we recorded other net recoveries of credit losses of $1,000 and $10.2 million for the three and nine months ended September 30, 2015, respectively, and $0.2 million and $0.7

F-20

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 — FAIR VALUE- continued

million during the three and nine months ended September 30, 2014, respectively, relating to the collection of cash and other assets from guarantors on certain legacy loans. We recorded impairment charges of zero and $0.1 million for real estate owned during the three and nine months ended September 30, 2015, respectively, and none for the three and nine months ended September 30, 2014, respectively.

As of September 30, 2015 and December 31, 2014, the valuation allowance totaled $12.7 million and $15.6 million, respectively, representing 60.6% and 38.8%, respectively, of the total outstanding loan principal and accrued interest balances. Based on the valuation and impairment allowance recorded as of September 30, 2015, we believe that, as of that date, the fair value of our loans and REO assets held for sale is adequate in relation to the net carrying value of the related assets and that no additional valuation allowance or impairment is considered necessary. While the above results reflect management’s assessment of fair value as of September 30, 2015 based on currently available data, we will continue to evaluate our loan and REO portfolio to determine the adequacy and appropriateness of the valuation allowance and/or impairment balances. Depending on market conditions, such updates may yield materially different values and potentially increase or decrease the valuation allowance for loans or impairment charges for REO assets.

Valuation Categories

There were no losses recorded during the three and nine months ended September 30, 2015 or 2014 in the categories for which net mortgage loans and REO held for sale were measured at fair value on a non-recurring basis based upon the lowest level of significant input to the valuation as of September 30, 2015 or 2014.

Additionally, there was one other asset that was measured at fair value using Level 2 inputs for which a loss of $0.1 million was recorded during the nine months ended September 30, 2015. Generally, all of our mortgage loans and REO held for sale are valued using significant unobservable inputs (Level 3) obtained through updated analysis prepared by our asset management staff, except for such assets for which third party offers or executed purchase and sale agreements were used, which are considered Level 2 inputs. Changes in the use of Level 3 valuations are based solely on whether we utilized third party offers for valuation purposes.

F-21

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 — DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS

At September 30, 2015 and December 31, 2014, our notes payable and special assessment obligations consisted of the following (in thousands):



	September 30, 2015		December 31, 2014
Notes Payable, Net of Discount
$50.0 million non-recourse note payable secured by first liens on operating hotel properties and related assets, bears annual interest at the greater of a) 7.25% or b) LIBOR plus 6.75%, actual interest at minimum rate of 7.25% at September 30, 2015, matures February 1, 2018, interest only payable monthly, principal due at maturity, subject to a carve-out guarantee by the Company	$	50,000	$	—
$24.4 million non-recourse note payable secured by first liens on certain real estate assets of the Company, bears annual interest at greater of a) 9.0% or b) LIBOR plus 8.5%, actual interest at minimum rate of 9.0% at September 30, 2015, matures February 1, 2017, interest only payable monthly, subject to a carve-out guarantee by the Company (repaid subsequent to September 30, 2015)	24,365		—
$4.4 million non-recourse note payable secured by first liens on certain real estate assets of the Company, bears annual interest at greater of a) 9.0% or b) LIBOR plus 8.5%, actual interest at minimum rate of 9.0% at September 30, 2015, matures February 1, 2017, interest only payable monthly, subject to a carve-out guarantee by the Company (repaid subsequent to September 30, 2015)	4,385		—
$24.0 million construction note payable to a bank dated October 2014 for the construction of Gabella, secured by real property and improvements, bears annual interest of LIBOR plus 3.75%, with a floor of 4.25% (4.25% at September 30, 2015 and December 31, 2014), matures October 20, 2017	9,583		1
Restructured senior note payable dated July 24, 2014 secured by substantially all Company assets, bears contractual annual interest at 17%, matures July 24, 2015 (repaid during nine months ended September 30, 2015)	—		36,000
$24.8 million note payable to a bank assumed on May 14, 2013 in connection with a deed-in-lieu of foreclosure acquisition, secured by operating hotel properties, bears annual interest of 8%, matures March 24, 2017 (repaid during nine months ended September 30, 2015)	—		24,765
Unsecured note payable under class action settlement, face value of $10.2 million, net of discount of $3.0 million at September 30, 2015, 4% annual interest rate (14.6% effective yield), interest payable quarterly, matures April 28, 2019	7,220		6,763
$1.1 million development assistance note payable to Apple Valley Economic Development Authority, dated March 29, 2013, secured by developmental real estate, annual interest rate 6%, maturing December 31, 2016. Expected to be forgiven upon completion of Gabella project, subject to various requirements	762		762
$3.7 million settlement payable to a municipality dated June 2012, for outstanding property tax and related obligations for certain parcels, payable over five and ten years, bearing annual interest of 10%, maturing in June 2017 and 2022, respectively (repaid during the nine months ended September 30, 2015)	—		467
Other financings	—		252
Special Assessment Obligations
$3.7 million community facility district bonds dated 2005, secured by residential land located in Buckeye, Arizona, annual interest rate ranging from 5%-6%, maturing various dates through April 30, 2030	3,207		3,339
$2.3 million special assessment bonds dated between 2002 and 2007, secured by residential land located in Dakota County, Minnesota, annual interest rate ranging from 6%-7.5%, maturing various dates through 2022	1,448		1,642
Note Payable to Related Party
$5.0 million unsecured note payable to an affiliate of a shareholder dated December 31, 2014, bears interest at 16% per annum plus exit fee, all amounts due and payable upon maturity, original maturity of April 24, 2015 extended to November 23, 2015	5,000		5,000
Totals	$	105,970	$	78,991

F-22

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 — DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS- continued

A roll-forward of notes payable and related obligations from December 31, 2014 to September 30, 2015 is as follows (in thousands):



	Notes Payable, Net			Special Assessment Obligations			Note Payable to Related Party		Totals
Balance, December 31, 2014	$	69,010		$	4,981		$	5,000	$	78,991
Additions:
Accretion of discount	456			—			—		456
Note additions	88,333			—			—		88,333
Reductions:
Principal payments	(61,484		)	(326		)	—		(61,810		)
Balance, September 30, 2015	$	96,315		$	4,655		$	5,000	$	105,970

Interest expense for the three months ended September 30, 2015 and 2014 was $2.4 million and $3.5 million, respectively. Interest expense for the nine months ended September 30, 2015 and 2014 was $7.6 million and $13.0 million, respectively.

Senior Indebtedness

During the nine months ended September 30, 2015, the Company, through various of its subsidiaries, entered into a series of loan agreements, promissory notes and related agreements with Calmwater Capital 3, LLC (“Calmwater”) for loans in the aggregate principal amount of $78.8 million for the purposes of refinancing 1) the Company’s $36.0 million senior secured loan with NWRA Ventures I, LLC (“NW Capital”) and 2) a $24.8 million note payable from a bank, as well as to provide working capital for certain development activities and operational costs.

The Company set aside $4.0 million of the loan proceeds to fund a portion of the balance of its $11.5 million equity commitment for the construction of Gabella, as described below. In addition, the Company is utilizing $2.0 million of the loan proceeds to complete a $6.3 million capital improvement program at the Company’s hotel properties and restaurant located in Sedona, Arizona, which commenced during the second quarter of 2015. The balance of the loan proceeds is expected to be used for certain fees, reserves, and working capital.

The general terms of the respective loans are as follows:

•

The first loan is a $50.0 million non-recourse loan secured by first liens on the Company’s two operating hotel properties and restaurant located in Sedona, Arizona (“the Sedona Loan”). The Sedona Loan requires interest only payments beginning on March 1, 2015 and bears annual interest at a base equal to the sum of: (i) the greater of (A) 0.50% per annum or (B) LIBOR (as defined) plus (ii) 6.75% per annum. In connection with the Sedona Loan, the Company entered into an interest rate cap agreement for the initial two-year term of the loan with a LIBOR-based strike rate, which the Company elected to expense upon execution. The Sedona Loan has a maturity date of February 1, 2018 with an option by the Company to extend the maturity date for two consecutive 12-month periods, provided that 1) there are no outstanding events of default, 2) the Company obtains an extended interest rate cap agreement and 3) the Company complies with the other applicable terms set forth in the loan agreement including the payment of an extension fee of $0.5 million. The Sedona Loan is subject to a non-recourse carve-out guaranty by the Company which also includes a guarantee of completion of certain capital improvements at the Company’s hotel properties.

The Sedona Loan contains customary affirmative and negative covenants and requires the Company to fund customary annual interest, tax, and insurance reserve accounts, each of which are pledged as additional collateral for the Sedona Loan. Additional reserves are required in connection with certain scheduled capital improvements that commenced during the second quarter of 2015. The Sedona Loan also contains customary events of default, the occurrence of which could result in the acceleration of the obligations under the loan and, under certain circumstances, the application of a default interest rate during the existence of an event of default at a rate equal 5.0% in excess of the note rate. The Company is permitted to make optional prepayments at any time, subject to a yield maintenance prepayment fee if the prepayment is made prior to February 1, 2016 and a .50% prepayment premium if paid prior to

F-23

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 — DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS- continued

February 1, 2017, and other conditions set forth in the loan agreement. Thereafter, the Company may prepay the Sedona Loan in full or in part without yield maintenance fees or prepayment premium costs.

•

The second loan is a $24.4 million non-recourse loan (“Asset Loan 1”) secured by a) first liens on certain operating and non-operating real estate assets owned by affiliates of the Company, b) pledges by certain Company affiliates of their interests in certain mortgage loan documents evidencing payment obligations owed to such affiliates and c) the Company’s membership interest in IMH Gabella. Asset Loan 1 requires interest only payments beginning on March 1, 2015 and bears annual interest at a base equal to the sum of: (i) the greater of (A) 0.50% per annum or (B) LIBOR (as defined) plus (ii) 8.5% per annum. Asset Loan 1 has a maturity date of February 1, 2017, with an option by the Company to extend the maturity date for one 12-month period, provided that there are no outstanding events of default and the Company complies with the other applicable terms set forth in the loan agreement, including the payment of an extension fee of 1% of the outstanding principal balance. Asset Loan 1 is subject to a non-recourse carve-out guaranty by the Company which also includes a guarantee of completion of certain entitlement work at a property located in Buckeye, Arizona. As described in Note 11, subsequent to September 30, 2015, the loan was repaid in full.

•

The third loan is a $4.4 million non-recourse loan (“Asset Loan 2”) secured by a) first liens on certain operating and non-operating real estate assets owned by affiliates of the Company and b) pledges by certain Company affiliates of their interests in certain mortgage loan documents evidencing payment obligations owed to such affiliates. Asset Loan 2 requires interest only payments beginning on March 1, 2015 and bears annual interest at a base equal to the sum of: (i) the greater of (A) 0.50% per annum or (B) LIBOR (as defined) plus (ii) 8.5% per annum. Asset Loan 2 has a maturity date of February 1, 2017 with an option by the Company to extend the maturity date for one 12-month period provided that there are no outstanding events of default, and the Company complies with the other applicable terms in the loan agreement, including the payment of an extension fee of 1% of the outstanding principal balance. Asset Loan 2 is subject to a non-recourse carve-out guarantee by the Company, which also includes a guarantee by the Company of completion of certain entitlement work at certain properties located in Minnesota and Arizona, and a guarantee of completion of certain construction defect remediation at a property located in Albuquerque, New Mexico. As described in Note 11, subsequent to September 30, 2015, the loan was repaid in full.

Convertible Notes Payable/Exit Fee Payable

As more fully described in our Form 10-K for the year ended December 31, 2014, on June 7, 2011, we entered into and closed funding of a $50.0 million senior secured convertible loan with NW Capital. The loan was originally scheduled to mature on June 6, 2016 and bore contractual interest at a rate of 17% per year. The loan agreement also contained certain restrictive covenants which required NW Capital’s consent as a condition to our taking certain actions. The restrictive covenants related to our ability to sell or encumber our assets, issue additional indebtedness, restructure or modify our ownership structure, settle litigation over $10.5 million, enter into new material agreements and certain other operational matters. On July 24, 2014, the Company entered into a series of agreements and transactions in connection with the partial refinancing and restructuring of the NW Capital loan pursuant to a payoff agreement, as amended (“Payoff Agreement”).

Pursuant to the Payoff Agreement, the Company and NW Capital entered into certain amendments to the NW Capital loan (collectively, the “Modified Loan”) the principal terms of which were as follows: (1) the maturity date was changed to July 22, 2015 (the “Maturity Date”); (2) the conversion rights that had been held by NW Capital to convert the debt into our Series A preferred stock were eliminated; (3) the new principal balance was set at $45.0 million (and subsequently paid down to $36 million at December 31, 2014); (4) interest would accrue at 17% per annum, payable by the Company on a quarterly basis; and (5) on October 24, 2014, and no later than every 90 days thereafter until the Maturity Date, the Company was required to make payments equal to the sum of: (x) $5.0 million (which payment was to be applied toward the then-outstanding principal and interest due on the Modified Loan); and (y) a fee of one percent (1)% of the then-outstanding principal balance of the Modified Loan. As a result of the material change in loan terms, the NW Capital loan was treated as a termination of the existing loan and issuance of a new loan.

As described above, during the nine months ended September 30, 2015, we secured replacement financing and repaid the Modified Loan in full.

F-24

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 — DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS- continued

Exchange Notes

As more fully described in our annual report on Form 10-K for the year ended December 31, 2014, we were required under the terms of a class action settlement to effect an offering to issue up to $20 million in five-year, 4%, unsecured notes to participating shareholders in exchange for common stock held by such shareholders at a price of $8.02 per share (“Exchange Offering”). The Exchange Offering was completed in April 2014 and we issued Exchange Offering notes (“EO Notes”) to participating shareholders with a face value of $10.2 million, which were recorded by the Company at fair value. The estimated fair value of the EO Notes was $6.4 million based on the fair value and the imputed effective yield of such notes of 14.6% (as compared to the note rate of 4%) resulting in an original debt discount of the EO Notes of $3.8 million, with a balance of $2.9 million as of September 30, 2015. This amount is reflected as a debt discount in the accompanying financial statements, and is being amortized as an adjustment to interest expense using the effective interest method over the term of the EO Notes. The amortized discount added to the principal balance of the EO Notes during the nine months ended September 30, 2015 totaled $0.5 million. Interest is payable quarterly in arrears each January, April, July and October during the term of the EO Notes with the initial interest payment made in July 2014. The EO Notes mature on April 28, 2019, and may be prepaid in whole or in part without penalty at the option of the Company. However, subject to certain minimum cash and profitability conditions, the terms of the EO Notes may require a 50% prepayment on April 29, 2018.

Construction Loan

During the year ended December 31, 2014, the Company secured a construction loan in connection with the Gabella development in the amount of $24.0 million (the “Construction Loan”) pursuant to a Construction Loan Agreement entered into between IMH Gabella and Bank of the Ozarks (“Ozarks”) dated October 20, 2014. In addition to the Construction Loan, the project’s development costs were financed through an equity contribution of $11.5 million by the Company consisting of entitled land and working capital. The equity funding requirement was satisfied in the second quarter of 2015, and the Company made draws totaling $9.6 million on the Construction Loan during the nine months ended September 30, 2015. The Construction Loan is secured by a first lien mortgage on the project, as well as certain adjacent parcels that are planned for future development, improvements thereon, and an assignment of rents and revenues. As of September 30, 2015, the total carrying value of the land and improvements totaled $23.5 million. Unless there is an event of default, the Construction Loan bears annual interest at the greater of (i) three-month LIBOR plus 375 basis points, or (ii) 4.25%. The loan matures October 20, 2017, provided, however, that the initial term may be extended for two additional one-year terms subject to the satisfaction of certain conditions, including the payment of an extension fee equal to 0.25% of the then outstanding principal balance of the Construction Loan. Interest only payments on any outstanding principal commenced on November 1, 2014. Monthly payments of principal and interest will commence on the earlier of (i) November 1, 2016 and (ii) the first month following stabilization (as defined in the loan agreement). The Construction Loan is subject to certain financial covenants, one of which is a requirement that the Company maintain a minimum net worth of $50.0 million throughout the term of the loan. The Construction Loan is also subject to a completion and repayment carve-out guarantee by the Company and requires a minimum liquidity balance of $7.5 million which commenced on the initial construction draw in April 2015. Subsequent to September 30, 2015, we obtained a temporary reduction in the liquidity requirement from $7.5 million to $4.0 million for a period of 120 days in order to provide us time to generate additional liquidity from anticipated asset sales, financings and/or other cash events. In the event of prepayment of the Construction Loan within two years from the initial funding date, a prepayment penalty shall be due equal to two years of interest less non-default interest paid through the prepayment date. Thereafter, the Construction Loan may be pre-paid without penalty.

Other Notes Payable Activity

During 2013, we assumed a $24.8 million note payable from a bank in connection with a deed-in-lieu of foreclosure that was secured by the related hotel operating properties. The note payable bore annual interest of 8%, with required monthly payments of principal and interest and the outstanding principal due at maturity on March 28, 2017. During the first quarter of 2015, we secured replacement financing and repaid the note payable in full and paid a $0.5 million prepayment penalty.

In connection with the Gabella project, we entered into, among other agreements, a business subsidy agreement and related loan agreement dated March 29, 2013, as amended on July 10, 2014, with the Apple Valley Economic Development Authority (“EDA”). Under the terms of the business subsidy agreement, the EDA agreed to advance to us up to $1.1 million as a loan, but in no event to exceed the amount received from Dakota County, Minnesota for the statutory penalty and interest on special assessment taxes which were assessed in the tax years 2007 through 2011, which has been paid in full as of September 30, 2015. The EDA loan bears interest at the rate of 6.0% per annum which accrues until the loan is satisfied or paid in full. If we

F-25

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 — DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS- continued

complete the Gabella project by no later than April 30, 2016, and certain other conditions are satisfied, the EDA is expected to forgive the loan in its entirety. If we do not meet certain specified development goals, the loan and all accrued unpaid interest must be repaid on or before December 31, 2017. In addition, under the business subsidy agreement, we are not allowed to sell, transfer or otherwise convey all or part of the property for a period of five years following completion without the prior written consent of EDA. As of September 30, 2015 and December 31, 2014, the total amount advanced to us under the EDA loan agreement was $0.8 million.

In conjunction with the Gabella project described above, we also entered into a settlement agreement in June 2012 with the local municipality relating to outstanding past due property taxes, penalties and interest on various parcels totaling $3.7 million and bearing annual interest of 10%. Under the terms of the settlement agreement, we were required to make annual payments over either a five or ten year period, depending on the parcel. The outstanding balance of the settlement obligation totaled $0.5 million at December 31, 2014 which was repaid in full during the first quarter of 2015.

Special Assessment Obligations

As of September 30, 2015 and December 31, 2014, obligations arising from our allocated share of certain community facilities district special revenue bonds and special assessments had carrying values of $4.7 million and $5.0 million, respectively. These obligations are described below.

One of the special assessment obligations had an outstanding balance of $3.2 million and $3.3 million as of September 30, 2015 and December 31, 2014, respectively, and has an amortization period that extends through April 30, 2030, with an annual interest rate ranging from 5% to 6%. This special assessment obligation is secured by certain real estate held for sale consisting of 171 acres of unentitled land located in Buckeye, Arizona which had a carrying value of $5.1 million at September 30, 2015.

The other special assessment obligations are comprised of a series of special assessments that collectively had an outstanding balance of $1.4 million and $1.6 million as of September 30, 2015 and December 31, 2014, respectively. These special assessment obligations have amortization periods that extend through 2022, with annual interest rates ranging from 6% to 7.5%. These special assessment obligations are secured by certain real estate held for development consisting of 13 acres of unentitled land located in Dakota County, Minnesota, which land has a carrying value of approximately $27.1 million at September 30, 2015. We made principal repayments on these special assessment obligations of $0.3 million during the nine months ended September 30, 2015.

The responsibility for the repayment of each of the foregoing special assessment obligations rests with the owner of the property and will transfer to the buyer of the related real estate upon sale. Accordingly, if the assets to which these obligations arise from are sold before the full amortization period of such obligations, the Company would be relieved of any further liability since the buyer would assume the remaining obligations. Nevertheless, these special assessment obligations are deemed to be obligations of the Company in accordance with GAAP because they are fixed in amount and for a fixed period of time.

Note Payable to Related Party

On December 31, 2014, the Company executed a loan agreement with SRE Monarch Lending, LLC for an unsecured non-revolving credit facility (“SRE Note”) in an amount not to exceed $5.0 million and drew down the full amount of the SRE Note. The Company used the proceeds under the SRE Note to make a scheduled payment under the Modified Loan. SRE Monarch Lending, LLC is a related party of Seth Singerman, one of the Company’s directors and an affiliate of one of our preferred equity holders.

The SRE Note was originally scheduled to mature on the 91st day after full repayment of the Modified Loan, which was repaid on January 23, 2015, resulting in an original maturity date of the SRE Note of April 24, 2015. The SRE Note contained a facility exit fee equal to the amount of interest that would accrue through August 23, 2015. During the second quarter of 2015, the Company entered into two separate amendments to extend the maturity date to August 24, 2015, and agreed to pay a previously agreed upon fee of $50,000 for the first such extension, and the same fee for the second extension plus payment of all accrued interest through each of the amendment dates. During the three-month period ended September 30, 2015, the Company entered into an additional amendment to further extend the maturity date to November 23, 2015 (“Extended Maturity Date”) for a fee of $100,000. The SRE Note bears interest at a per annum base rate of 16%, and is subject to increase in the event the SRE Note is not repaid in full on or prior to the maturity date. In connection with the execution of the loan agreement on December 31, 2014, the Company paid a structuring fee of $0.1 million.

F-26

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 — DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS- continued

Our debt, notes payable and special assessment obligations have the following scheduled maturities as of September 30, 2015 (in thousands):



Year	Amount
2015	$	33,790
2016	1,134
2017	9,963
2018	50,383
2019	7,611
Thereafter	3,089
Total	$	105,970

F-27

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION

Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which discrete financial information is available that is evaluated regularly by our chief operating decision makers in deciding how to allocate resources and in assessing performance. As of and for the period ended September 30, 2015, the Company’s reportable segments are based on the products and services offered by the Company and management’s intent for such assets, which include the following:

Mortgage and REO – Legacy Portfolio and Other Operations — Consists of the collection, workout and sale of new and legacy loans and REO assets, including financing of such asset sales. This also encompasses the carrying costs of such assets and other related expenses. This segment also reflects the carrying value of such assets and the related finance and operating obligations.

Commercial Real Estate Leasing Operations — Consists of rental revenue and tenant recoveries less direct property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses) and depreciation and amortization. This segment also reflects the carrying value of such assets and the related finance and operating obligations. After September 30, 2015, this segment was redefined to include the Gabella project which commenced operations after September 30, 2015.

Hospitality and Entertainment Operations — Consists of revenues less direct operating expenses, depreciation and amortization relating to hotel, golf, spa, and food & beverage operations. This segment also reflects the carrying value of such assets and the related finance and operating obligations.

Corporate and Other — Consists of our centralized general and administrative and corporate treasury and deposit gathering activities, and interest expense associated with non-property specific debt issuances. Corporate and Other also includes reclassifications and eliminations between the reportable operating segments, if any. This segment also reflects the carrying value of such assets and the related finance and operating obligations.

The information presented in our reportable segments tables that follow may be based in part on internal allocations, which involve management judgment. Substantially all revenues recorded are from external customers. There is no material intersegment activity.

Disposal of Individually Significant Component

As previously reported, we entered into an agreement in 2014 to sell the operating assets that comprise our currently sole commercial real estate leasing operating segment. The transaction closed in the third quarter of 2015. Accordingly, the related operating assets were classified as held for sale in the accompanying condensed consolidated balance sheets as of December 31, 2014. Based on management’s analysis, the sale of this business segment did not require separate discontinued operations financial statement presentation since the disposition of this asset represented neither a strategic shift for the Company, nor did it have a major effect on our operations and financial results.

As noted in the following tables, the commercial real estate leasing operation segment contributed a pretax loss of $88,000 and $28,000 for the three and nine months ended September 30, 2015, respectively, and $0.1 million and $0.9 million in pretax losses for the three and nine months ended September 30, 2014, respectively.

Condensed consolidated financial information for our reportable operating segments as of September 30, 2015 and December 31, 2014 and for the three and nine month periods ended September 30, 2015 and 2014 is summarized as follows (in thousands):

F-28

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION- continued



Balance Sheet Items	September 30, 2015		December 31, 2014
Total Assets	(unaudited)
Mortgage and REO - Legacy Portfolio and Other Operations	$	106,624	$	73,883
Commercial Real Estate Leasing Operations	51		16,291
Hospitality and Entertainment Operations	94,805		85,437
Corporate and Other	7,080		6,161
Consolidated	$	208,560	$	181,772
Notes Payable, Special Assessment Obligations, Capital Leases and Other Long Term Obligations
Mortgage and REO - Legacy Portfolio and Other Operations	$	43,750	$	6,297
Hospitality and Entertainment Operations	51,173		25,948
Corporate and Other	12,228		47,945
Consolidated	$	107,151	$	80,190
Operating Liabilities
Mortgage and REO - Legacy Portfolio and Other Operations	$	7,607	$	2,235
Commercial Real Estate Leasing Operations	27		651
Hospitality and Entertainment Operations	4,550		3,964
Corporate and Other	2,447		3,715
Consolidated	$	14,631	$	10,565



	Three Months Ended September 30, 2015 (Unaudited)
Income Statement Items	Mortgage and REO - Legacy Portfolio and Other Operations		Commercial Real Estate Leasing Operations		Hospitality and Entertainment Operations		Corporate and Other		Consolidated
Revenues:
Operating property revenue	$	20	$	100	$	5,485	$	—	$	5,605
Investment and other income	28		8		—		—		36
Mortgage loan income, net	477		—		—		—		477
Total Revenue	525		108		5,485		—		6,118
Expenses:
Operating Property Direct Expenses (exclusive of interest and depreciation):
Payroll related expenses	—		41		2,670		—		2,711
Cost of sales	—		—		623		—		623
Property taxes	—		28		70		—		98
Management fees	—		15		350		—		365
Other costs	—		112		1,846		—		1,958
Operating Property Direct Expenses (exclusive of interest and depreciation)	—		196		5,559		—		5,755
Expenses for Non-Operating Real Estate Owned:
Property taxes	171		—		—		—		171
Other costs	66		—		—		2		68

F-29

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION- continued



	Three Months Ended September 30, 2015 (Unaudited)
Income Statement Items	Mortgage and REO - Legacy Portfolio and Other Operations			Commercial Real Estate Leasing Operations			Hospitality and Entertainment Operations			Corporate and Other			Consolidated
Expenses for Non-Operating Real Estate Owned	237			—			—			2			239
Professional Fees:
Financial reporting - audit, legal and tax	4			—			—			254			258
Other legal	527			—			—			(63		)	464
Asset management	221			—			—			16			237
Other costs	—			—			—			196			196
Professional Fees	752			—			—			403			1,155
General and Administrative Expenses:
Payroll related expenses	(4		)	—			—			1,412			1,408
Insurance expense	32			—			—			251			283
Rent	—			—			—			53			53
Other general and administrative costs	10			—			—			472			482
General and Administrative Expenses	38			—			—			2,188			2,226
Other Expenses (Income):
Interest expense	908			—			1,058			443			2,409
Depreciation and amortization expense	1			—			593			51			645
Gain on disposal of assets, net	(304		)	—			—			—			(304		)
Recovery of credit losses, net	(1		)	—			—			—			(1		)
Other Expenses (Income)	604			—			1,651			494			2,749
Total Expenses, net	1,631			196			7,210			3,087			12,124
Net Loss	(1,106		)	(88		)	(1,725		)	(3,087		)	(6,006		)
Cash Dividend on Redeemable Convertible Preferred Stock	—			—			—			(540		)	(540		)
Deemed Dividend on Redeemable Convertible Preferred Stock	—			—			—			(583		)	(583		)
Net Loss Attributable to Common Shareholders	$	(1,106	)	$	(88	)	$	(1,725	)	$	(4,210	)	$	(7,129	)

	Three Months Ended September 30, 2014 (Unaudited)
Income Statement Items	Mortgage and REO - Legacy Portfolio and Other Operations			Commercial Real Estate Leasing Operations			Hospitality and Entertainment Operations			Corporate and Other			Consolidated
Revenues:
Operating property revenue	$	—		$	419		$	5,931		$	1		$	6,351
Investment and other income	322			—			1			1			324
Mortgage loan income, net	1,317			—			—			4			1,321
Total Revenue	1,639			419			5,932			6			7,996

F-30

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION- continued



	Three Months Ended September 30, 2014 (Unaudited)
Income Statement Items	Mortgage and REO - Legacy Portfolio and Other Operations			Commercial Real Estate Leasing Operations			Hospitality and Entertainment Operations			Corporate and Other			Consolidated
Expenses:
Operating Property Direct Expenses (exclusive of interest and depreciation):
Payroll related expenses	—			11			2,275			—			2,286
Cost of sales	—			—			731			—			731
Property taxes	—			84			86			—			170
Management fees	—			10			348			—			358
Other costs	—			258			1,769			—			2,027
Operating Property Expenses (exclusive of interest and depreciation)	—			363			5,209			—			5,572

Expenses for Non-Operating Real Estate Owned:
Property taxes	210			—			—			—			210
Other costs	267			—			—			4			271
Expenses for Non-Operating Real Estate Owned	477			—			—			4			481
Professional Fees:
Financial reporting - audit, legal and tax	26			—			—			188			214
Other legal	461			—			—			(110		)	351
Asset management	13			—			—			—			13
Other costs	10			—			—			302			312
Professional Fees	510			—			—			380			890
General and Administrative Expenses:
Payroll related expenses	—			—			—			2,860			2,860
Insurance expense	1			—			—			257			258
Rent	—			—			—			53			53
Other general and administrative costs	13			—			—			398			411
General and Administrative Expenses	14			—			—			3,568			3,582
Other Expenses (Income):
Interest expense	288			—			533			2,633			3,454
Debt termination charge	—			—			—			21,658			21,658
Depreciation and amortization expense	—			226			519			52			797
Gain on disposal of assets, net	(5,624		)	—			—			(6		)	(5,630		)
Recovery of credit losses, net	(151		)	(21		)	—			—			(172		)
Other Expenses (Income)	(5,487		)	205			1,052			24,337			20,107
Total Expenses, net	(4,486		)	568			6,261			28,289			30,632
Net Income (Loss)	6,125			(149		)	(329		)	(28,283		)	(22,636		)
Cash Dividend on Redeemable Convertible Preferred Stock	—			—			—			(399		)	(399		)
Deemed Dividend on Redeemable Convertible Preferred Stock	—			—			—			(400		)	(400		)
Net Income (Loss) Attributable to Common Shareholders	$	6,125		$	(149	)	$	(329	)	$	(29,082	)	$	(23,435	)

F-31

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION- continued



	Nine Months Ended September 30, 2015 (Unaudited)
Income Statement Items	Mortgage and REO - Legacy Portfolio and Other Operations		Commercial Real Estate Leasing Operations		Hospitality and Entertainment Operations		Corporate and Other		Consolidated
Revenues:
Operating property revenue	$	—	$	941	$	20,683	$	59	$	21,683
Investment and other income	2,133		53		—		4		2,190
Mortgage loan income, net	1,150		—		—		—		1,150
Total Revenue	3,283		994		20,683		63		25,023
Expenses:
Operating Property Direct Expenses (exclusive of interest and depreciation):
Payroll related expenses	—		71		7,872		—		7,943
Cost of sales	—		—		2,324		—		2,324
Property taxes	—		195		211		—

IMH Financial Corp - FORM 10-Q - November 12, 2015

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