Attached files
| file | filename |
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| EX-32 - Vestin Realty Mortgage II, Inc | exhibit32.htm |
| EX-31.1 - Vestin Realty Mortgage II, Inc | exhibit311.htm |
| EX-31.2 - Vestin Realty Mortgage II, Inc | exhibit312.htm |
| EX-21.1 - Vestin Realty Mortgage II, Inc | exhibit211.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2015
Or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _________ to _________
Commission File Number: 000-51892
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VESTIN REALTY MORTGAGE II, INC.
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(Exact name of registrant as specified in its charter)
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MARYLAND
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61-1502451
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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8880 W. SUNSET ROAD, SUITE 200, LAS VEGAS, NEVADA 89148
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code 702.227.0965
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, $0.0001 Par Value
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Nasdaq Global Select Market
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(Title of each class)
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(Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act:
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None
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(Title of class)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
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.
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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Smaller reporting company [X]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
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Class
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Market Value as of
June 30, 2015
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Common Stock, $0.0001 Par Value
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$
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9,492,499
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Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
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Class
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Number of Shares Outstanding
As of March 30, 2016
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Common Stock, $0.0001 Par Value
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2,490,514
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TABLE OF CONTENTS
PART I
Special Note Regarding Forward-Looking Statements
This report includes certain statements that may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements may be identified by the use of such words as “expects,” “plans,” “estimates,” “intend,” “might,” “may,” “could,” “will,” “feel,” “forecasts,” “projects,” “anticipates,” “believes” and words of similar expression. Forward-looking statements may relate to, without limitation, our business strategy, future operating results, future sources of funding for real estate investments by us, future capital expenditures, future economic conditions and other developments and trends in the commercial real estate industry and pending litigation involving us. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties discussed in this Annual Report on Form 10-K and in our other securities filings with the Securities and Exchange Commission (“SEC”). Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties. The forward-looking statements contained in this report are made only as of the date hereof. We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
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ITEM 1.
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BUSINESS
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General
Vestin Realty Mortgage II, Inc. (“VRM II”, the “Company”, “we”, “us” or “our”), formerly Vestin Fund II, LLC (“Fund II”), invests in loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our management agreement (“Management Agreement”) as mortgage assets (“Mortgage Assets”). In addition, we invest in, acquire, manage or sell real property and acquire entities involved in the ownership or management of real property. We commenced operations in June 2001. References in this report to the “Company,” “we,” “us,” or “our” refer to Fund II with respect to the period prior to April 1, 2006 and to VRM II with respect to the period commencing on April 1, 2006.
We operated as a real estate investment trust (“REIT”) through December 31, 2011. We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder. As a REIT, we were required to have a December 31 fiscal year end. We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012. Under the Code, we will not be able to make a new election to be taxed as a REIT during the four years following December 31, 2012. Pursuant to our charter, upon the determination by the Board of Directors that we should no longer qualify as a REIT, the restrictions on transfer and ownership of shares set forth in Article VII of our charter ceased to be in effect and, accordingly, shares of the Company’s stock will no longer be subject to such restrictions. In connection with the termination of our REIT status, we also amended our stockholders’ rights plan to provide that a stockholder, other than Michael Shustek, may own up to 20% of outstanding shares of common stock, and that Michael Shustek may own up to 35% of outstanding shares of common stock.
Michael Shustek owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, which is our manager (the “manager” or “Vestin Mortgage”). The business of brokerage and placement of real estate loans have been performed by affiliated or non-affiliated mortgage brokers, including Advant Mortgage, LLC (“MVP Mortgage”), a licensed Nevada mortgage broker, which is indirectly wholly owned by Mr. Shustek.
Pursuant to a management agreement, our manager is responsible for managing our operations and implementing our business strategies on a day-to-day basis. Consequently, our operating results are dependent to a significant extent upon our manager’s ability and performance in managing our operations and servicing our loans.
Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC (“Fund I”) and Vestin Fund III, LLC (“Fund III”). VRM I has investment objectives similar to ours, and Fund III is in the process of an orderly liquidation of its assets.
The consolidated financial statements include the accounts of VRM II; Building A, LLC, Building C, LLC, Wolfpack Properties, LLC; Devonshire, LLC; SE Properties, LLC; ExecuSuites, LLC; MVP Realty Advisors, LLC (“MVP Advisors”) and MVP Capital Partners II, LLC (“MVP CP II”). All significant intercompany transactions and balances have been eliminated in consolidation.
In April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services. Strategix Solutions also provides accounting and financial reporting services to VRM I and Fund III. Our CFO and other members of our accounting staff are employees of Strategix Solutions. Strategix Solutions is owned by our CFO, Ms. Gress. As used herein, “management” means our manager, its executive officers and the individuals at Strategix Solutions who perform accounting and financial reporting services on our behalf.
In December 2013, we entered into a membership interest transfer agreement with MVP Capital Partners, LLC (“MVP Capital”) pursuant to which we increased our ownership interest from 40% to 60% in MVP Advisors, the manager of MVP REIT, Inc. (“MVP REIT”). At the same time, VRM I acquired from MVP Capital the remaining 40% interest in MVP Advisors. Pursuant to the transfer agreement, we and VRM I did not pay any up-front consideration for the acquired interest but will be responsible for our proportionate share of future expenses of MVP Advisors. In recognition of MVP Capital’s substantial investment in MVP Advisors for which MVP Capital received no up-front consideration, the transfer agreement further provides that once we and VRM I have been repaid in full for any capital contributions to MVP Advisors or for any expenses advanced on MVP Advisors’ behalf (“Capital Investment”), and once we and VRM I have received an annualized return on our Capital Investment of 7.5%, then MVP Capital will receive one-third of the net profits of MVP Advisors. MVP REIT is a SEC-registered, non-traded REIT that seeks to invest predominantly in parking facilities located throughout the United States as its core assets. Through our interest in MVP Advisors, we have directed, and may continue to direct, a portion of our cash towards development of the business of MVP REIT. As of December 31, 2015, we have made loans of approximately $12.9 million to MVP Advisors, which amount has been fully allowed for as discussed under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Capital and Liquidity” below. If MVP REIT is unable to deploy its initial offering proceeds and operate its business successfully, then our return on our investment in MVP Advisors and the ability of MVP Advisors to repay our loans could be adversely impacted.
During May 2015, our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%. The purpose of MVP CP II is to act as the sponsor of MVP REIT II, a Maryland corporation, which was formed as a publicly registered non traded REIT (“MVP REIT II”). MVP REIT II’s registration statement for its initial public offering has been declared effective by the SEC on October 23, 2015. MVP REIT II is offering up to $550,000,000 in shares of common stock, with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.
We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to our respective ownership interest. As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II. As part of the advisory agreement, MVP Advisors will receive a 1% annual asset management fee and 2.25% of the purchase price on all acquisitions.
MVP Advisors will also receive the lesser of 3% of contract sale price or 50% of the brokerage commission paid on dispositions of MVP REIT II assets which amount shall accrue until the MVP REIT II investors have a return of their net capital and a 6% annual cumulative non compounded return. In addition once the MVP REIT II investors have received a return of their net capital invested and a 6% annual cumulative, non-compounded return, then MVP Advisors will be entitled to receive 15% of the remaining proceeds. This fee will be payable under only one of the following events: (i) if MVP REIT II shares are listed on a national securities exchange; (ii) if MVP REIT II assets are sold, other than single assets sold in the ordinary course, or liquidated; (iii) upon a merger, share exchange, reorganization or other transaction pursuant to which MVP REIT II investors receive cash or publicly traded securities in exchange for their shares; or (iv) upon termination of the advisory agreement. The operating agreement of the Advisor provides that once we and VRM I have been repaid in full for any capital contributions to the Advisor or for any expenses advanced on the Advisor’s behalf, or capital investment, and once we and VRM I have received an annualized return on our capital investment of 7.5%, then Michael Shustek will receive 40% of the net profits of the Advisor.
Segments
We currently are authorized to operate three reportable segments, investments in real estate loans, investments in real property and investment in a real estate management company. As of December 31, 2015, the Company operates all segments.
Our objective is to invest approximately 97% of our assets in real estate loans and real estate related investments, while maintaining approximately 3% as a working capital cash reserve.
REAL ESTATE LOAN STRATEGIES
As of December 31, 2015, our loans were in the following states: Arizona, Nevada, and Ohio. The loans we invest in are selected for us by our manager from among loans originated by affiliated or non-affiliated mortgage brokers. When a mortgage broker originates a loan for us, that entity identifies the borrower, processes the loan application, brokers and sells, assigns, transfers or conveys the loan to us. We believe that our loans are attractive to borrowers because of the expediency of our manager’s loan approval process, which takes about ten to twenty days.
As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans has been higher than those generally experienced in the mortgage lending industry. Because of our willingness to fund riskier loans, borrowers are generally willing to pay us an interest rate that is above the rates generally charged by other commercial lenders.
Acquisition and Investment Policies
Generally, the collateral on our real estate loans is the real property that the borrower is purchasing or developing, together with a guarantee from the principal owners of the borrower. We sometimes refer to these real properties as the security properties. While we may invest in other types of loans, most of the loans in which we invest have been made to real estate developers.
Our real estate investments are not insured or guaranteed by any governmental agency.
Our manager continuously evaluates prospective investments, selects the loans in which we invest and makes all investment decisions on our behalf. In evaluating prospective real estate loan investments, our manager considers such factors as the following:
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The ratio of the amount of the investment to the value of the property by which it is secured, or the loan-to-value ratio;
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The potential for capital appreciation or depreciation of the property securing the investment;
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Expected levels of rental and occupancy rates, if applicable;
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Potential for rental increases, if applicable;
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Current and projected revenues from the property, if applicable;
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The status and condition of the record title of the property securing the investment;
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Geographic location of the property securing the investment; and
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The financial condition of the borrowers and their principals, if any, who guarantee the loan.
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Our manager may obtain our loans from affiliated or non-affiliated mortgage brokers. We may purchase existing loans that were originated by third party lenders or brokered by affiliates to facilitate our purchase of the loans. Our manager or any affiliated mortgage broker will sell, assign, transfer or convey the loans to us without a premium, but may include its service fees and compensation.
Real Estate Loans to Affiliates
We will not invest in real estate loans made to our manager or any of our affiliates. However, we may acquire an investment in a real estate loan payable by our Manager when our Manager has assumed the obligations of the borrower under that loan through a foreclosure on the property.
Investment of Loans From our Manager and Its Affiliates
In addition to those loans our manager selects for us, we invest in loans that were originated by affiliates as long as the loan(s) otherwise satisfies all of our lending criteria. However, we will not acquire a loan from or sell a loan to a real estate program in which our manager or an affiliate has an interest except in compliance with applicable NASAA Guidelines or as otherwise approved by the independent members of our board of directors.
Types of Loans We Invest In
We primarily invest in loans that are secured by first or second trust deeds on real property. Such loans fall into the following categories: raw and unimproved land, acquisition and development, construction, commercial property and residential loans. Investments in loans will be determined by our manager pursuant to the terms of the Management Agreement. The actual percentages invested among the various loan categories may vary as a result of changes in the size of our loan portfolio.
Collateral
Each loan is secured by a lien on either a fee simple or leasehold interest in real property as evidenced by a first deed of trust or a second deed of trust.
Generally, the loans we invest in will not contain prepayment penalties but may contain exit fees payable when the loan is paid in full, by the borrower, to our manager or its affiliates as part of their compensation. If interest rates decline, the amount we can charge as interest on our loans will also likely decline. Moreover, if a borrower should prepay obligations that have a higher interest rate from an earlier period, we will likely not be able to reinvest the funds in real estate loans earning that higher rate of interest. In the absence of a prepayment fee, we will receive neither the anticipated revenue stream at the higher rate nor any compensation for its loss. As of December 31, 2015 none of our loans had a prepayment penalty or exit fee. Depending upon the amount by which lower interest rates are available to borrowers, the amount of the exit fees may not be significant in relation to the potential savings borrowers may realize as a result of prepaying their loans.
Extensions to Term of Loan
Our original loan agreements generally permit extensions to the term of the loan by mutual consent. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing. Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan. In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal.
Interest Reserves
We may invest in loans that include a commitment for an interest reserve, which is usually established at loan closing. The interest reserve may be advanced by us or other lenders with the amount of the borrower’s indebtedness increased by the amount of such advances.
Balloon Payment
As of December 31, 2015, most of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term. There are no specific criteria used in evaluating the credit quality of borrowers for real estate loans requiring balloon payments. Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due. As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due. To the extent that a borrower has an obligation to pay real estate loan principal in a large lump sum payment, its ability to repay the loan may be dependent upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial amount of cash. As a result, these loans can involve a higher risk of default than loans where the principal is paid at the same time as the interest payments.
REAL ESTATE INVESTMENT STRATEGIES
As of December 31, 2015, we had investments in six real estate properties consisting of office buildings. These properties are located in Nevada. In addition, we may invest in other real property, including but not limited to, office buildings, shopping centers, business and industrial parks, manufacturing facilities, multifamily properties, warehouses and distribution facilities, storage facilities, parking facilities, motel and hotel properties and recreation and leisure properties. We will not invest in unimproved land (although we may invest in loans secured by unimproved land) or construction or development of properties. We intend to lease properties owned by us and to hold properties until such time as we believe it is the optimal time to capitalize on the capital appreciation of our properties.
We invest principally in properties that generate current income. Potential gain on sale of appreciated properties will be a secondary objective.
Because we hold a small number of properties at this time, we have higher fixed operating expenses as a percentage of gross income. In addition, our operating results and amounts available for distributions to stockholders are at greater risk of being affected by, and the value of the stockholders investment will vary more widely with, the performance of any one or more of the properties in our portfolio.
Maximizing Value of Acquired Properties
We seek to reposition properties that we acquire through strategic renovation and, where appropriate, re-tenanting such properties. Repositioning of properties may be accomplished by (1) stabilizing occupancy; (2) upgrading and renovating existing structures; and (3) investing significant efforts in recruiting tenants whose goods and services meet the needs of the surrounding neighborhood. We currently do not intend to engage in significant development or redevelopment of properties as the costs of development and redevelopment may exceed the cost of properties that we acquire. In addition, we seek to acquire properties that present strong characteristics that we believe are essential for a successful real estate investment.
Leasing
The terms and conditions of any lease we enter into with our tenants may vary substantially. However, we expect that our leases will conform to the standard market practices in the geographic area where the property is located. We expect to execute new tenant leases and tenant lease renewals, expansions and extensions with terms that are dictated by the current market conditions. If it is economically practical, we may verify the creditworthiness of each tenant. If we verify the creditworthiness of each tenant, we may use industry credit rating services for any guarantors of each potential tenant. We may also obtain relevant financial data from potential tenants and guarantors, such as income statements, balance sheets and cash flow statements. We may require personal guarantees from shareholders of our corporate tenants. However, there can be no guarantee that we will be able to identify suitable tenants, or that the tenants selected will not default on their leases or that we can successfully enforce any guarantees. Disruptions in the real estate and financial markets and deteriorating economic conditions could increase vacancy rates for certain classes of commercial property, including office properties, due to increased tenant delinquencies and/or defaults under leases, generally lower demand for rentable space, as well as potential oversupply of rentable space. We will incur expenses, such as for maintenance costs, insurance costs and property taxes, even though a property is vacant. The longer the period of significant vacancies for a property, the greater the potential negative impact on our revenues and results of operations.
Financing Sources
We will seek financing from a variety of sources to fund our potential acquisitions. Such sources may include cash on hand, cash flow from operating activities and cash proceeds from any public offering or private placement of equity or debt securities. We may also seek to obtain a revolving credit facility and other secured or unsecured loans to fund acquisitions. We cannot provide any assurance that we will be successful in obtaining any financing for all or any of our potential acquisitions.
Borrowing
We may incur indebtedness. Our indebtedness should not exceed 70% of the fair market value of our real estate loans and real estate investments. This indebtedness may be with recourse to our assets.
Competition
We have significant competition with respect to both our acquisition of real property and our mortgage lending business. Our competitors include REITs, insurance companies, commercial banks, private investment funds, hedge funds, specialty finance companies and other investors, many of which have significantly greater resources than us. We may not be able to compete successfully for investments. In addition, the number of entities and the amount of funds competing for suitable investments may increase. If we pay higher prices for investments, our returns will be lower and the value of our assets may not increase or may decrease significantly below the amount we paid for such assets.
We will compete with numerous other persons while seeking to attract tenants to real property we acquire. These persons or entities may have greater experience and financial strength than us. There is no assurance that we will be able to attract tenants on favorable terms, if at all. For example, our competitors may be willing to offer space at rental rates below our rates, causing us to lose existing or potential tenants and pressuring us to reduce our rental rates to retain existing tenants or convince new tenants to lease space at our properties. Each of these factors could adversely affect our results of operations, financial condition, value of our investments and ability to pay distributions.
Regulation
We are managed by Vestin Mortgage, subject to the oversight of our board of directors, pursuant to the terms and conditions of our management agreement. MVP Mortgage, an affiliate of Vestin Mortgage, operates as a mortgage broker and is subject to extensive regulation by federal, state and local laws and governmental authorities. Mortgage brokers we may use conduct their real estate loan businesses under a license issued by the State of Nevada Mortgage Lending Division. Under applicable Nevada law, the division has broad discretionary authority over the mortgage brokers’ activities, including the authority to conduct periodic regulatory audits of all aspects of their operations.
We, our manager, and certain affiliates are also subject to the Equal Credit Opportunity Act of 1974, which prohibits creditors from discriminating against loan applicants on the basis of race, color, sex, age or marital status, and the Fair Credit Reporting Act of 1970, which requires lenders to supply applicants with the name and address of the reporting agency if the applicant is denied credit. We are also subject to various other federal and state securities laws regulating our activities. In addition, our manager is subject to the Employee Retirement Income Security Act of 1974.
The NASAA Guidelines have been adopted by various state agencies charged with protecting the interests of investors. Administrative fees, loan fees, and other compensation paid to our manager and its affiliates would be generally limited by the NASAA Guidelines. These Guidelines also include certain investment procedures and criteria, which are required for new loan investments. We are not required to comply with NASAA Guidelines; however, we voluntarily comply with applicable NASAA Guidelines unless a majority of our unaffiliated directors determines that it is in our best interest to diverge from such NASAA Guidelines.
Because our business is regulated, the laws, rules and regulations applicable to us are subject to modification and change. There can be no assurance that laws, rules or regulations will not be adopted in the future that could make compliance much more difficult or expensive, restrict our ability to invest in or service loans, further limit or restrict the amount of commissions, interest and other charges earned on loans, or otherwise adversely affect our business or prospects.
Employees
We have 25 employees through our majority owned subsidiary MVP Advisors. Our manager has provided and will continue to provide most of the employees necessary for our operations, not related to MVP Advisors except as described in this report regarding Strategix Solutions, LLC. As of December 31, 2015, the Vestin entities had a total of three full-time and no part-time employees. Except as hereinafter noted, all employees are at-will employees and none are covered by collective bargaining agreements. John Alderfer, our former CFO, is a party to an employment, non-competition, confidentiality and consulting contract with Vestin Group, Inc., through December 31, 2016.
During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services. Strategix Solutions also provides accounting and financial reporting services to VRM I, Fund III and MVP REIT. Our CFO and other members of our accounting staff are employees of Strategix Solutions. Strategix Solutions is managed and owned by our CFO, Ms. Gress. As of December 31, 2015, Strategix Solutions dedicates to us a total of three full time employees.
We believe that our success depends, in large part, upon our manager and its affiliates’ ability to retain highly skilled managerial, operational and marketing professionals. Our executive officers and our manager’s key real estate, finance and securities professionals are also officers, directors, managers and/or key professionals of VRM I and other affiliated entities. Accordingly, they will face conflicts of interest relating to performing services on our behalf and such conflicts may not be resolved in our favor. Our manager and other affiliated entities have and will continue to receive substantial fees from us, which were not determined at arms’ length. These fees could influence the advice given to us by the key personnel of our manager and its affiliates.
Available Information
Our Internet website address is www.vestinrealtymortgage2.com. We make available free of charge through http://phx.corporate-ir.net/phoenix.zhtml?c=193758&p=irol-sec our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practical after such material is electronically filed with or furnished, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, to the United States Securities and Exchange Commission (“SEC”). Further, a copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operations of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. Information contained on our website does not constitute a part of this Report on Form 10-K.
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ITEM 2.
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PROPERTIES
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Our manager shares office facilities through a sublease, in Las Vegas, Nevada, with its affiliate, Vestin Group. In March 2010, Vestin Group entered into a ten–year lease agreement for office facilities in Las Vegas, Nevada which we hold a 72% ownership interest.
Investments in Real Estate
The following table provides information regarding each of the properties we owned an interest in as of December 31, 2015:
| Property Description | Location | Year Built | Leasable Square Feet | Acquisition Closing Date | Aggregate Purchase Price | Percentage Owner |
Occupancy at
December 31, 2015
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Wolfpack Properties LLC single-tenant office building
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Las Vegas, Nevada
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2008
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22,000 |
04/30/14
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$ | 6,500,000 | 72 | % | 100 | % | ||||||
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Building C office building
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Las Vegas, Nevada
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2008
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47,500 |
07/31/14
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$ | 15,000,000 | 72 | % | 89 | % | ||||||
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Building A office building
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Las Vegas, Nevada
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2008
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47,500 |
08/29/14
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$ | 15,000,000 | 72 | % | 100 | % | ||||||
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Devonshire office building
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Las Vegas, Nevada
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2008
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22,000 |
04/30/14
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$ | 6,400,000 | 72 | % | 100 | % | ||||||
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SE Properties office building
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Las Vegas, Nevada
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2008
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22,000 |
04/30/14
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$ | 6,100,000 | 72 | % | 100 | % | ||||||
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ExecuSuites office building
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Las Vegas, Nevada
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2008
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22,000 |
04/30/14
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$ | 6,100,000 | 72 | % | 94 | % |
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ITEM 3.
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LEGAL PROCEEDINGS
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Please refer to Note Q - Legal Matters Involving The Company in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K for information regarding legal proceedings, which discussion is incorporated herein by reference.
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ITEM 4.
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MINE SAFETY DISCLOSURES
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None.
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ITEM 5.
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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol VRTB and began trading on May 1, 2006. The price per share of common stock presented below represents the highest and lowest sales price for our common stock on the Nasdaq Global Select Market.
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2015
|
High
|
Low
|
||||||
|
First Quarter
|
$ | 4.82 | $ | 2.76 | ||||
|
Second Quarter
|
$ | 5.35 | $ | 3.28 | ||||
|
Third Quarter
|
$ | 3.87 | $ | 3.05 | ||||
|
Fourth Quarter
|
$ | 3.41 | $ | 2.45 | ||||
|
2014
|
High
|
Low
|
||||||
|
First Quarter
|
$ | 7.40 | $ | 5.00 | ||||
|
Second Quarter
|
$ | 6.33 | $ | 3.82 | ||||
|
Third Quarter
|
$ | 6.37 | $ | 4.20 | ||||
|
Fourth Quarter
|
$ | 5.25 | $ | 3.00 | ||||
On February 18, 2016, the Company received a deficiency notification from NASDAQ that it failed to maintain, for the last thirty (30) business days, a minimum of $5,000,000 in its Market Value of Publicly Held Shares to remain on the NASDAQ Global Capital Markets. The NASDAQ rules provide the Company with a compliance period of 180 calendar days in which to regain compliance. The Company is currently considering applying to transfer the Company’s securities to The Nasdaq Capital Market.
Holders
As of March 30, 2016, there were approximately 589 holders of record of 2,490,514 shares of our common stock.
Dividend Policy
During June 2008, our Board of Directors decided to suspend the payment of dividends. No dividends were declared during the years ended December 31, 2015 or 2014. In light of our accumulated loss, we do not expect to pay dividends in the foreseeable future.
Recent Sales of Unregistered Securities
None
Equity Compensation Plan Information
None
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In October, 2014, our board agreed to increase the amount available to us to repurchase our stock by $500,000. The Board had previously granted management the authority to repurchase up to $10,000,000 worth of our stock.
The following is a summary of our stock acquisitions during the year ended December 31, 2015, as required by Regulation S-K, Item 703.
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Period
|
(a) Total Number of Shares Purchased
|
(b) Average Price Paid per Share
|
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
|
||||||||||||
|
January 1 – January 31, 2015
|
-- | $ | -- | -- | $ | 395,615 | ||||||||||
|
February 1 – February 28, 2015
|
-- | -- | -- | 395,615 | ||||||||||||
|
March 1 – March 31, 2015
|
-- | -- | -- | 395,615 | ||||||||||||
|
April 1 – April 30, 2015
|
-- | -- | -- | 395,615 | ||||||||||||
|
May 1 – May 31, 2015
|
23,425 | 3.89 | 23,425 | 304,641 | ||||||||||||
|
June 1 – June 30, 2015
|
45,224 | 4.94 | 45,224 | 81,487 | ||||||||||||
|
July 1 – July 31, 2015
|
-- | -- | -- | 81,487 | ||||||||||||
|
August 1 – August 31, 2015
|
-- | -- | -- | 81,487 | ||||||||||||
|
September 1 – September 30, 2015
|
-- | -- | -- | 81,487 | ||||||||||||
|
October 1 – October 31, 2015
|
-- | -- | -- | 81,487 | ||||||||||||
|
November 1 – November 30, 2015
|
-- | -- | -- | 81,487 | ||||||||||||
|
December 1 – December 31, 2015
|
-- | -- | -- | 81,487 | ||||||||||||
|
Total
|
68,649 | $ | 4.58 | 68,649 | $ | 81,487 | ||||||||||
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following is a financial review and analysis of our financial condition and results of operations for the years ended December 31, 2015 and 2014. This discussion should be read in conjunction with our financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this annual report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see “Special Note Regarding Forward-Looking Statements” above for a description of some of these risks and uncertainties.
RESULTS OF OPERATIONS
OVERVIEW
Our investment strategy is to invest substantially in a portfolio of real estate secured loans (including first and second mortgage loans, mezzanine loans, bridge loans, convertible mortgages, variable interest rate real estate secured loans, where a portion of the return is dependent upon performance-based metrics and other loans related to real estate), and direct investments in real property that meet our investment objectives. We have recently increased our investments in office buildings. In addition, we invest in companies that manage real estate or mortgage investment programs.
As of December 31, 2015, we have acquired, along with affiliated entities, six properties of which our share of the purchase price totaled $15.4 million, including closing costs. During the year ended December 31, 2015, we funded two loans totaling approximately $4.6 million. During the year ended December 31, 2014, we funded ten loans totaling approximately $7.6 million. As of December 31, 2015, our loan-to-value ratio was 58.61%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals.
Through our interest in MVP Advisor, we have directed, and may continue to direct, a portion of our cash towards development of the business of MVP REIT. As of December 31, 2015, we have made loans of approximately $12.9 million, which amount has been fully allowed for, to our 60% owned subsidiary, MVP Advisors, the manager of MVP REIT. MVP REIT is a SEC-registered, non-traded REIT that seeks to invest predominantly in parking facilities located throughout the United States as its core assets. We believe MVP Advisors has the opportunity to generate fees for the services it will render to MVP REIT. However, MVP REIT recently completed its initial publicly registered offering in September 2015 and the fees paid to date to MVP Advisors have not been significant. We may not realize interest income from the loan to MVP Advisors or any return on our investment in MVP Advisors until it is able to generate sufficient fees to service the interest on our loan and generate a return on our investment. On March 20, 2014, our board of directors agreed to continue funding MVP Advisors. We recorded an impairment of this investment due to uncertainty as to when we will be repaid the amounts loaned. To further support development of the business of MVP REIT, MVP Advisors also has agreed to waive certain fees and expense reimbursements it otherwise would have been entitled to receive under the terms of its advisory agreement with MVP REIT. MVP Advisors ability to repay the loans and the return on our investment in MVP Advisors will likely depend upon the success of MVP REIT’s ability to successfully deploy the offering proceeds. We expect such investments to ultimately generate a return through management fees payable by MVP REIT to MVP Advisors. If MVP REIT is unable to deploy the capital and operate its business successfully, then our return on our investment in MVP Advisors and the ability of MVP Advisors to repay our loans could be adversely impacted.
During May 2015, our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%. The purpose of MVP CP II is to act as the sponsor of MVP REIT II. MVP REIT II has filed its initial registration statement with the Securities Exchange Commission and all of the states. MVP REIT II’s registration statement has been declared effective by the SEC on October 22, 2015. MVP REIT II is a proposed $550,000,000 offering with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.
We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to our respective ownership interest. As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II. As part of the advisory agreement, MVP Advisors will receive a 1% annual asset management fee and 2.25% of the purchase price on all acquisitions. MVP Advisors will also receive the lesser of 3% of contract sale price or 50% of the brokerage commission paid on dispositions of MVP REIT II assets which amount shall accrue until the MVP REIT II investors have a return of their net capital and a 6% annual cumulative non compounded return. In addition once the MVP REIT II investors have received a return of their net capital invested and a 6% annual cumulative, non-compounded return, then MVP Advisors will be entitled to receive 15% of the remaining proceeds. This fee will be payable under only one of the following events: (i) if MVP REIT II shares are listed on a national securities exchange; (ii) if MVP REIT II assets are sold, other than single assets sold in the ordinary course, or liquidated; (iii) upon a merger, share exchange, reorganization or other transaction pursuant to which MVP REIT II investors receive cash or publicly traded securities in exchange for their shares; or (iv) upon termination of the advisory agreement. The operating agreement of the Advisor provides that once we and VRM I have been repaid in full for any capital contributions to the Advisor or for any expenses advanced on the Advisor’s behalf, or capital investment, and once we and VRM I have received an annualized return on our capital investment of 7.5%, then Michael Shustek will receive 40% of the net profits of the Advisor.
As of December 31, 2015 we have made loans of approximately $1.1 million to MVP CP II. Similar to our investments in MVP Advisor in connection with MVP REIT, the return on our investment in MVP CP II in connection with MVP REIT II, including the ability of MVP CP II to repay its loans, will likely depend upon the success of the pending public offering of MVP REIT II and the ability of MVP CP II and MVP Advisor to successfully deploy the offering proceeds. As with our investment in MVP REIT, while we expect any such investments to ultimately generate a return through management fees payable by MVP REIT II to MVP CP II and MVP Advisor, the amount of fees may not be significant during the near term as MVP REIT II begins its operations. If MVP REIT II is unable to raise sufficient capital in its publicly registered offering or deploy the capital and operate its business successfully, then our return on our investment in MVP CP II and the ability of MVP CP II to repay our loans could be adversely impacted. Based on this uncertainty, we have determined to fully impair the balance of our $1.1 million loan to MVP CP II. As of December 31, 2015, MVP REIT II has fulfilled its minimum offering of $2.0 million in subscriptions and has not purchased any properties or earned any income.
On January 14, 2014, we, VRM I and MVP REIT sold MVP PF Baltimore 2013, LLC to a third party for $1,550,000 which resulted in a nominal loss. On April 1, 2014, MVP REIT exercised the Purchase Right to acquire our and VRM I’s interest in five parking facilities and our interest in a storage facility, in each case, net of the assumed debt secured by the real estate. In exchange, we and VRM I received MVP REIT’s interest in four office properties, net of the assumed debt secured by the real estate. The difference between the net amount of the assets exchanged was paid in cash. Following this transaction, MVP REIT holds a 100% interest in the five parking facilities and storage facility. We and VRM I together hold 100% interest in the four office properties. These transferred properties have been reported as Discontinued Operations in the accompanying statement of operations. See “Note F – Assets held for sale” to the Financial Statements included in Part II, Item 8 Consolidated Financial Statements of this Annual Report on Form 10-K.
During March 2014, we acquired a 42% interest in Building C, LLC whose sole asset is an office property located in Las Vegas, NV from MVP REIT. During July 2014, we and VRM I entered into an agreement to acquire the remaining 58% interest in Building C, LLC and 100% interest in Building A, LLC whose sole asset is an office building also located in Las Vegas, NV from MVP REIT. The cash consideration, net of assumed debt of approximately $16.9 million, totals approximately $10.3 million, of which our portion is approximately $3.7 million. On July 31, 2014, we and VRM I completed the acquisition of the remaining 58% interest in Building C, LLC. The acquisition of the interests in Building A, LLC was completed on August 29, 2014. The purchase price for both buildings is equal to the amount paid by MVP to acquire the buildings as all of the buildings were acquired by MVP within the past twelve (12) months. No commissions were paid in connection with the purchase.
During April 2015, we committed to a plan to sell all interests in our six office buildings, at which point we began classifying the related assets as assets held for sale, and the related liabilities as liabilities related to assets held for sale. Additionally, we have classified the six office building’s results as discontinued operations. On January 29, 2016, we closed on the sale of its interest in three office buildings that it owned with VRM I through various subsidiaries. The first building was owned by Building C, LLC and is located at 8930 West Sunset Road, Las Vegas, Nevada (the “8930 Building”). The second building was owned by SE Property Investments, LLC and is located at 8905 West Post Road, Las Vegas, Nevada (the “8905 Building”) and the third building was owned by ExecuSuite Properties, LLC and is located at 8945 West Post Road, Las Vegas, Nevada (the “8945 Building”).
The sales price for the 8930 Building is $12.1 million less the current debt on the property of approximately $8.1 million, which was assumed by the purchaser for a net of approximately $4.0 million of which our share was approximately $2.9 million. The sales price for the 8905 Building is $5.6 million less the current debt on the property of approximately $3.3 million, which was assumed by the purchaser for a net of approximately $2.3 million of which our share was approximately $1.6 million. The sales price for the 8945 Building is $5.0 million less the current debt on the property of approximately $3.0 million, which was assumed by the purchaser for a net of approximately $2.0 of which our share was approximately $1.4 million.
We and VRM I, through its subsidiaries, have the right, for a period of one year from the Closing Date, to repurchase one or more of the buildings at a price equal to (i) the sales price for each building, plus (ii) $65,000 for the 8930 Building, $30,000 for the 8905 Building and $30,000 for the 8945 Building, plus (iii) twelve percent less any profit realized by the purchaser of the building being repurchased. Each purchaser is managed by Stable Development, LLC, a limited liability company owned and managed by Lance Bradford. Mr. Bradford is the former President of MVP REIT, whose advisor, MVP Advisors is wholly owned by us and VRM I.
As of December 31, 2015, VRM II purchased 5,000 shares of MVP REIT II’s outstanding common stock for $125,000.
Our financial results, including the sources of our revenues and expenses, for the year ended December 31, 2015 reflect, in significant part, the shift in our investment focus from real estate secured loans to direct investments in real estate and investments in a real estate management company. So long as such real estate investments remain part of our investment portfolio, we would expect that, in the near term, rental income will continue to be a significant source of revenue and interest expense will make up a greater portion of our total expenses. Our advisor fee income related to our investment in MVP Advisors also may become a more significant source of revenues in the future, depending upon the level of success achieved by MVP Advisors in its management of MVP REIT.
While we do not anticipate any near term change in the composition of our revenues, we may, from time to time, decide to sell one or more of our investments, including our real property investments, and redeploy those assets in investments in real estate secured loans, direct investments in real property or other real property related investments. For example, during April 2015, we committed to a plan to sell all interests in our six office buildings. This plan may result in a further change in the composition of our revenues depending upon how we redeploy the proceeds from such sale.
SUMMARY OF FINANCIAL RESULTS
Comparison of operating results for the year ended December 31, 2015, to the year ended December 31, 2014
|
Total Revenue:
|
2015
|
2014
|
$ Change
|
% Change
|
||||||||||||
|
Interest income from investment in real estate loans
|
$ | 645,000 | $ | 979,000 | $ | (334,000 | ) | (34 | %) | |||||||
|
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
|
1,623,000 | 560,000 | 1,063,000 | 190 | % | |||||||||||
|
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
|
552,000 | 198,000 | 354,000 | 179 | % | |||||||||||
|
Acquisition fee income
|
1,830,000 | -- | 1,830,000 | 100 | % | |||||||||||
|
Advisor fee
|
566,000 | 379,000 | 187,000 | 49 | % | |||||||||||
|
Total
|
$ | 5,216,000 | $ | 2,116,000 | $ | 3,100,000 | 147 | % | ||||||||
Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans. Acquisition fee and advisor fee income is related to MVP Advisors, which advises MVP REIT and MVP RIET II and earns certain fees for these services. During the year ended December 31, 2015, MVP REIT purchased 11 properties which resulted in acquisition fee income of approximately $1.8 million. On November 25, 2014, Shustek Investments Inc., a company wholly owned by our CEO Mike Shustek, entered into a loan purchase contract with us to acquire a loan with a book value of approximately $2.4 million. The loan was originated during March 2009 with an original principal balance of $7.45 million earning interest at a rate of 11%. The borrower made principal payments during the life of the loan; however, they also received extensions for the maturity of the note. As of the date of the loan purchase contract, the loan was extended through January 2015. The purchase price of the loan was approximately $3.0 million, which includes the purchase of interest assigned to third parties. As additional consideration we may receive 50% of any amount collected in excess of the purchase price less any expenses incurred by Shustek Investments. After three years, the 50% shall be reduced to 33%. This transaction resulted in a gain on sale of loan – related party totaling approximately $0.6 million for the year ended December 31, 2014. During year ended December 31, 2015 this loan was paid in full, and we received approximately $1.6 million.
For additional information see Note D – Investments in Real Estate Loans and Note F – Assets Held for Sale of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
|
Operating expenses:
|
2015
|
2014
|
$ Change
|
% Change
|
||||||||||||
|
Management fees – related party
|
$ | 1,096,000 | $ | 1,098,000 | $ | (2,000 | ) | (0.18 | %) | |||||||
|
MVP REIT II organization and offering costs
|
1,329,000 | -- | 1,329,000 | 100 | % | |||||||||||
|
Wages and benefits
|
3,330,000 | 1,784,000 | 1,546,000 | 86 | % | |||||||||||
|
Acquisition expense
|
1,000 | 29,000 | (28,000 | ) | (96 | %) | ||||||||||
|
Depreciation
|
2,000 | -- | 2,000 | 100 | % | |||||||||||
|
Forgiveness of debt – related party
|
-- | 533,000 | (533,000 | ) | (100 | %) | ||||||||||
|
Professional fees
|
1,073,000 | 1,237,000 | (164,000 | ) | (13 | %) | ||||||||||
|
Seminars
|
1,175,000 | 308,000 | 867,000 | 281 | % | |||||||||||
|
Consulting
|
221,000 | 413,000 | (192,000 | ) | (46 | %) | ||||||||||
|
Insurance
|
259,000 | 267,000 | (8,000 | ) | (3 | %) | ||||||||||
|
Commissions
|
3,162,000 | 722,000 | 2,440,000 | 337 | % | |||||||||||
|
Travel
|
867,000 | 686,000 | 181,000 | 26 | % | |||||||||||
|
Other
|
1,209,000 | 766,000 | 443,000 | 57 | % | |||||||||||
|
Total
|
$ | 13,724,000 | $ | 7,843,000 | $ | 5,881,000 | 74 | % | ||||||||
Wages and benefits were higher during the year ended December 31, 2015 due to increase in staff compared to the year ended December 31, 2014. During the year ended December 31, 2015, MVP Advisors incurred and paid 5.25% commission, approximately $3.2 million, to third party brokers for all MVP REIT common shares sold. During the year ended December 31, 2014, a forgiveness of debt was recognized due to the reduction of liabilities due from MVP REIT to MVP Advisors totaling approximately $0.5 million. The increase in 2015 for seminar and travel expenses compared to 2014 is due to increase in selling activity for 2015.
During May 2015, our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%. The purpose of MVP CP II is to act as the sponsor of MVP REIT II. MVP REIT II has filed its initial registration statement with the Securities Exchange Commission and all of the states. MVP REIT II’s registration statement has been declared effective by the SEC as of October 23, 2015. MVP REIT II is a proposed $550,000,000 offering with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor. We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to their ownership interest. During the year ended December 31, 2015, our portion of these costs and expenses totaled approximately $1.3 million.
|
Non-operating income (loss):
|
2015
|
2014
|
$ Change
|
% Change
|
||||||||||||
|
Gain related to recovery of allowance on note payable – related party
|
$ | 24,000 | $ | 1,774,000 | $ | (1,750,000 | ) | (98 | %) | |||||||
|
Other income
|
2,000 | -- | 2,000 | 100 | % | |||||||||||
| Interest expense | 3,000 | 3,000 | -- | -- | ||||||||||||
|
Recovery from settlement with loan guarantor
|
79,000 | 78,000 | 1,000 | 1 | % | |||||||||||
|
Gain (loss) on marketable securities
|
2,000 | 42,000 | (40,000 | ) | (95 | %) | ||||||||||
|
Loss on marketable securities – related party
|
(324,000 | ) | (120,000 | ) | (204,000 | ) | (170 | %) | ||||||||
|
Income (loss) on investment in equity method investee
|
-- | 66,000 | (66,000 | ) | (100 | %) | ||||||||||
|
Total
|
$ | (220,000 | ) | $ | 1,837,000 | $ | (2,057,000 | ) | (111 | %) | ||||||
During the year ended December 31, 2014, we received payments on balances owed from MVP REIT which resulted in a recovery of allowance on note receivable of approximately $1.8 million. The purchase and subsequent sale of marketable securities occurred during the year ended December 31, 2015 and 2014, resulting in a gain of approximately $2,000 and $42,000, respectively. During December 2015 and 2014, management recognized a loss of approximately $324,000 and $120,000 on VRM I’s common stock. For additional information see Note G – Investment in Marketable Securities of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
|
Discontinued operations, net of income taxes:
|
2015
|
2014
|
$ Change
|
% Change
|
||||||||||||
|
Net gain on sale of real estate owned held for sale
|
$ | -- | $ | 837,000 | $ | (837,000 | ) | (100 | %) | |||||||
|
Expenses related to real estate owned held for sale
|
(328,000 | ) | (654,000 | ) | 326,000 | (49 | %) | |||||||||
|
Recovery from fully impaired real estate held for sale
|
396,000 | 2,259,000 | (1,863,000 | ) | (82 | %) | ||||||||||
|
Income from investment in equity method investee – held for sale
|
-- | 20,000 | (20,000 | ) | (100 | %) | ||||||||||
|
Impairment of assets held for sale
|
(10,800,000 | ) | -- | (10,800,00 | ) | 100 | % | |||||||||
|
Income from assets held for sale, net of income taxes
|
1,454,000 | 778,000 | 676,000 | 86 | % | |||||||||||
|
Total
|
$ | (9,278,000 | ) | $ | 3,240,000 | $ | 12,518,000 | (386 | %) | |||||||
Discontinued operations related to properties that have been foreclosed on and are recorded as assets held for sale. During 2014, we recorded a net loss of approximately $0.1 million on the sale of Baltimore. In 2014, MVP REIT exercised its Purchase Right to acquire our and VRM I’s interest in the five parking facilities and our interest in a storage facility. Under the agreement between us, VRM I and MVP REIT, MVP REIT agreed that we and VRM I would receive a 7.5% return on our joint venture investments with MVP REIT. With this return, along with reimbursements of the loss on Baltimore and the incurred acquisition fees, we and VRM I received a greater amount of consideration than what was transferred to MVP REIT. This transaction resulted in our net gain on sale of real estate owned held for sale of approximately $0.8 million. During 2015 there were no similar transaction. Income of approximately $1.5 million is from assets held for sale during the year ended December 31, 2015 which are related to the six office buildings currently held for sale. During the years ended December 31, 2015 and 2014 we received settlements related to 1701 Commerce for $0.4 million and $2.3 million, respectively. Impairment of assets held for sale of $10.8 million recorded in 2015 per purchase agreement. For additional information see Note F – Assets Held for Sale of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
CAPITAL AND LIQUIDITY
Liquidity is a measure of a company’s ability to meet potential cash requirements, including ongoing commitments to fund lending activities and general operating purposes. Subject to a 3% reserve, we generally seek to use all of our available funds to invest in real estate assets. Distributable cash flow generated from such loans is paid out to our stockholders, in the form of a dividend. We do not anticipate the need for hiring any employees, acquiring fixed assets such as office equipment or furniture, or incurring material office expenses during the next twelve months. We may pay our manager an annual management fee of up to 0.25% of the aggregate capital received by Fund II and us from the sale of shares or membership units.
During the year ended December 31, 2015, net cash flows used in operating activities were approximately $5.6 million. Operating cash flows were used for the payment of normal operating expenses such as management fees, accounting fees, legal bills and expenses related to real estate owned held for sale. During the year ended December 31, 2015, cash flows related to investing activities consisted of cash used for investments in Delaware Statutory Trust of $1.8 million, investments in new real estate loans of approximately $5.2 million and purchases of real estate loans from third parties of approximately $0.2 million. In addition, cash flows related to investing activities consisted of cash provided by loan payoffs and sale of investments in real estate loans to third parties of approximately $8.4 million. Cash flows used in financing activities consisted of purchase of treasury stock of approximately $0.6 million, cash for payments on notes payable of approximately $0.5 million and distribution to non-controlling interest entity for real estate held for sale of approximately $80,000.
On November 25, 2014, Shustek Investments Inc., a company wholly owned by our CEO Mike Shustek, entered into a loan purchase contract with us to acquire a loan with a book value of approximately $2.4 million. The loan was originated during March 2009 with an original principal balance of $7.45 million earning interest at a rate of 11%. The borrower made principal payments during the life of the loan; however, they also received extensions for the maturity of the note. As of the date of the loan purchase contract, the loan was extended through January 2015. The purchase price of the loan was approximately $3.0 million, which includes the purchase of interest assigned to third parties. As additional consideration we may receive 50% of any amount collected in excess of the purchase price less any expenses incurred by Shustek Investments. After three years the 50% shall be reduced to 33%. This transaction resulted in a gain on sale of loan – related party totaling approximately $0.6 million for the year ended December 31, 2014. During the year ended December 31, 2015 this loan was paid in full and we received approximately $1.6 million.
At December 31, 2015, we had approximately $4.2 million in cash, $0.1 million in marketable securities – related party, and approximately $54.4 million in total assets. We intend to meet short-term working capital needs through a combination of proceeds from loan payoffs, loan sales, rental revenue, sales of real estate owned held for sale and/or borrowings. We believe we have sufficient working capital to meet our operating needs during the next 12 months.
We have no current plans to sell any new shares. Although a small percentage of our shareholders had elected to reinvest their dividends, we suspended payment of dividends in June 2008 and at this time are not able to predict when dividend payments will resume. Accordingly, we do not expect to issue any new shares through our dividend reinvestment program in the foreseeable future.
When economic conditions permit, we may seek to expand our capital resources through borrowings from institutional lenders or through securitization of our loan portfolio or similar arrangements. No assurance can be given that, if we should seek to borrow additional funds or to securitize our assets, we would be able to do so on commercially attractive terms. Our ability to expand our capital resources in this manner is subject to many factors, some of which are beyond our control, including the state of the economy, the state of the capital markets and the perceived quality of our loan and real estate portfolios.
During April 2012, we contributed $1,000 for a 40% interest in MVP Advisors. Mr. Shustek, through a wholly owned company named MVP Capital Partners, LLC (“MVP CP”) contributed $1,500 for a 60% interest in MVP Advisors. In December 2013, we and MVP CP entered into a membership interest transfer agreement (the “Transfer Agreement”), dated as of December 19, 2013, pursuant to which we acquired from MVP CP an additional 20% of the membership interests (the “Acquired Interests”) of MVP Advisor. The Company and VRM I now own 60% and 40%, respectively, of the aggregate membership interests of MVP Advisors.
Pursuant to the Transfer Agreement, we did not pay any up-front consideration for the Acquired Interests, but will be responsible for our proportionate share of future expenses of MVP Advisor. In recognition of MVP CP’s substantial investment in MVP Advisor for which MVP CP received no up-front consideration, the Transfer Agreement and the amended operating agreement of MVP Advisor further provide that once we and VRM I have been repaid in full for any capital contributions to MVP Advisor or for any expenses advanced on MVP Advisor’s behalf (“Capital Investment”), and once we and VRM I have received an annualized return on our Capital Investment of 7.5%, then MVP CP will receive one-third of the net profits of MVP Advisor.
Through our interest in MVP Advisor, we have directed, and may continue to direct, a portion of our cash towards development of the business of MVP REIT. As of June 30, 2013, we and MVP CP had loaned approximately $3.6 million and approximately $1.2 million, respectively, to MVP Advisors related to MVP REIT, Inc. On June 30, 2013, MVP CP decided to forgive the full amount of its $1.2 million loan. We have not forgiven the balance due from MVP Advisors. However the decision by MVP Advisors to forgive the full amount of its loans created uncertainty as to when we will be repaid the amounts loaned to MVP Advisors. Based on this uncertainty, we determined to treat as fully impaired the balance of this investment and note receivable.
During the six months ended June 30, 2014, we provided additional advances to MVP Advisor of $1.0 million. As of December 31, 2015 and 2014, we had notes receivable from MVP Advisor of approximately $12.9 million and $7.7 million, respectively, which amount has been fully allowed for. To further support development of the business of MVP REIT, MVP Advisors also has agreed to waive certain fees and expense reimbursements it otherwise would have been entitled to receive under the terms of its advisory agreement with MVP REIT. MVP Advisors ability to repay the loans and the return on our investment in MVP Advisors will likely depend upon the success of MVP REIT’s public offering and its ability to successfully deploy the offering proceeds. While we expect any such investments to ultimately generate a return through management fees payable by MVP REIT to MVP Advisors, such fees may not be significant in the near term as MVP REIT only recently completed its initial public offering in September 2015, and over the next 12 months, there may be a diminution of our liquid assets. If MVP REIT is unable to deploy the offering proceeds and operate its business successfully, then our return on our investment in MVP Advisors and the ability of MVP Advisors to repay our loans could be adversely impacted.
During May, 2015 our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%. The purpose of MVP CP II is to act as the sponsor of MVP REIT II. MVP REIT II has filed its initial registration statement with the Securities Exchange Commission and all of the states. As of the date of this filing, MVP REIT II has been declared effective on October 23, 2015. MVP REIT II is a proposed $550,000,000 offering with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.
We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to our respective ownership interest. As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II. As part of the advisory agreement, MVP Advisors will receive a 1% annual asset management fee and 2.25% of the purchase price on all acquisitions. MVP Advisors will also receive the lesser of 3% of contract sale price or 50% of the brokerage commission paid on dispositions of MVP REIT II, assets which amount shall accrue until the MVP REIT II investors have a return of their net capital and a 6% annual cumulative non compounded return. In addition once the MVP REIT II investors have received a return of their net capital invested and a 6% annual cumulative, non-compounded return, then MVP Advisors will be entitled to receive 15% of the remaining proceeds. This fee will be payable under only one of the following events: (i) if MVP REIT II shares are listed on a national securities exchange; (ii) if MVP REIT II assets are sold, other than single assets sold in the ordinary course, or liquidated; (iii) upon a merger, share exchange, reorganization or other transaction pursuant to which MVP REIT II investors receive cash or publicly traded securities in exchange for their shares; or (iv) upon termination of the advisory agreement. The operating agreement of the Advisor provides that once we and VRM I have been repaid in full for any capital contributions to the Advisor or for any expenses advanced on the Advisor’s behalf, or capital investment, and once we and VRM I have received an annualized return on our capital investment of 7.5%, then Michael Shustek will receive 40% of the net profits of the Advisor. As of December 31, 2015 we have made loans of approximately $1.1 million to MVP CP II, which have been impaired.
We maintain working capital reserves of approximately 3% in cash and cash equivalents, certificates of deposits and short-term investments or liquid marketable securities. This reserve is available to pay expenses in excess of revenues, satisfy obligations of underlying properties, expend money to satisfy our unforeseen obligations and for other permitted uses of working capital. As of March 30, 2016, we have met our 3% reserve requirement.
Investments in Real Estate Loans Secured by Real Estate Portfolio
We offer five real estate loan products consisting of commercial property, construction, acquisition and development, land, and residential loans. The effective interest rates on all product categories range from 8% to 15%. Revenue by product will fluctuate based upon relative balances during the period. We had investments in eight real estate loans, as of December 31, 2015, with a balance of approximately $4.6 million as compared to investments in 12 real estate loans, as of December 31, 2014, with a balance of approximately $7.6 million.
For additional information on our investments in real estate loans, refer to Note D – Investments In Real Estate Loans of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures and our losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry. Problems in the sub-prime residential mortgage market have adversely affected the general economy and the availability of funds for commercial real estate developers. We believe this lack of available funds has led to an increase in defaults on our loans. Furthermore, problems experienced in U.S. credit markets from 2007 through 2009 reduced the availability of credit for many prospective borrowers. While credit markets have generally improved, the commercial real estate markets in some of our principal areas of operation have not recovered, thereby resulting in continuing constraints on the availability of credit in these markets. These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to pay back our loans. Thus, we have had to work with some of our borrowers to either modify, restructure and/or extend their loans in order to keep or restore the loans to performing status. Our manager will continue to evaluate our loan portfolio in order to minimize risk associated with current market conditions.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are to be designated as “held for sale” on the balance sheet.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2015, we do not have any interests in off-balance sheet special purpose entities nor do we have any interests in non-exchange traded commodity contracts.
RELATED PARTY TRANSACTIONS
From time to time, we may acquire or sell investments in real estate loans from/to our manager or other related parties pursuant to the terms of our Management Agreement without a premium. No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments. The purpose is generally to diversify our portfolio by syndicating loans or investments in real estate, thereby providing us with additional capital to invest in real estate or make additional loans. For further information regarding related party transactions, refer to Note J – Related Party Transactions of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING ESTIMATES
Revenue Recognition
Interest income on loans is accrued by the effective interest method. We do not accrue interest income from loans once they are determined to be non-performing. A loan is considered non-performing when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due.
The following table presents a sensitivity analysis, averaging the balance of our loan portfolio at the end of the last six quarters, to show the impact on our financial condition at December 31, 2015, from fluctuations in weighted average interest rate charged on loans as a percentage of the loan portfolio:
|
Changed Assumption
|
Increase (Decrease) in Interest Income
|
|||
|
Weighted average interest rate assumption increased by 1.0% or 100 basis points
|
$ | 70,000 | ||
|
Weighted average interest rate assumption increased by 5.0% or 500 basis points
|
$ | 382,000 | ||
|
Weighted average interest rate assumption increased by 10.0% or 1,000 basis points
|
$ | 703,000 | ||
|
Weighted average interest rate assumption decreased by 1.0% or 100 basis points
|
$ | (70,000 | ) | |
|
Weighted average interest rate assumption decreased by 5.0% or 500 basis points
|
$ | (382,000 | ) | |
|
Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points
|
$ | (703,000 | ) | |
The purpose of this analysis is to provide an indication of the impact that the weighted average interest rate fluctuations would have on our financial results. It is not intended to imply our expectation of future revenues or to estimate earnings. We believe that the assumptions used above are appropriate to illustrate the possible material impact on the consolidated financial statements.
Allowance for Loan Losses
We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment in our investment in real estate loans portfolio. Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan. Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans. Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses. Subsequent recoveries of amounts previously charged off are added back to the allowance or included as income.
The following table presents a sensitivity analysis to show the impact on our financial condition at December 31, 2015, from increases and decreases to our allowance for loan losses as a percentage of the loan portfolio:
|
Changed Assumption
|
Increase (Decrease) in Allowance for Loan Losses
|
|||
|
Allowance for loan losses assumption increased by 1.0% of loan portfolio
|
$ | 46,000 | ||
|
Allowance for loan losses assumption increased by 5.0% of loan portfolio
|
$ | 231,000 | ||
|
Allowance for loan losses assumption increased by 10.0% of loan portfolio
|
$ | 461,000 | ||
|
Allowance for loan losses assumption decreased by 1.0% of loan portfolio
|
$ | (46,000 | ) | |
|
Allowance for loan losses assumption decreased by 5.0% of loan portfolio
|
$ | (231,000 | ) | |
|
Allowance for loan losses assumption decreased by 10.0% of loan portfolio
|
$ | (461,000 | ) | |
Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property. As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the mortgage lending industry. We, our manager and MVP Mortgage generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.
We may discover additional facts and circumstances as we continue our efforts in the collection and foreclosure processes. This additional information often causes management to reassess its estimates. In recent years, we have revised estimates of our allowance for loan losses. Circumstances that may cause significant changes in our estimated allowance include, but are not limited to:
|
|
·
|
Declines in real estate market conditions that can cause a decrease in expected market value;
|
|
|
·
|
Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;
|
|
|
·
|
Lack of progress on real estate developments after we advance funds. We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;
|
|
|
·
|
Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed upon property; and
|
|
|
·
|
Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.
|
Real Estate Owned Held for Sale
Real estate owned held for sale and other real estate owned includes real estate acquired through foreclosure or deed in lieu and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property’s estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions. The carrying values of real estate owned held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note O– Recent Accounting Pronouncements of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
|
ITEM 8.
|
FINANCIAL STATEMENTS
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Vestin Realty Mortgage II, Inc.
We have audited the accompanying consolidated balance sheets of Vestin Realty Mortgage II, Inc. and subsidiaries (“the Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, other comprehensive loss, equity and other comprehensive loss, and cash flows for each of the two years in the period ended December 31, 2015. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vestin Realty Mortgage II, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ RBSM LLP
New York, New York
March 30, 2016
|
VESTIN REALTY MORTGAGE II, INC.
|
||||||||
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
||||||||
|
ASSETS
|
||||||||
|
December 31, 2015
|
December 31, 2014
|
|||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 4,228,000 | $ | 7,541,000 | ||||
|
Prepaid expenses
|
323,000 | 205,000 | ||||||
|
Prepaid expense – related party
|
-- | 91,000 | ||||||
|
Investment in marketable securities - related party
|
262,000 | 461,000 | ||||||
|
Interest and other receivables
|
42,000 | 3,000 | ||||||
|
Investment in MVP REIT II
|
200,000 | -- | ||||||
|
Investments in Delaware Statutory Trusts
|
1,800,000 | -- | ||||||
|
Notes receivable, net of allowance of $1,099,000 and $6,543,000 at December 31, 2015 and 2014, respectively
|
-- | -- | ||||||
|
Investment in real estate loans, net of allowance for loan losses of $2,450,000 at December 31, 2015 and 2014
|
2,161,000 | 5,187,000 | ||||||
|
Fixed assets, net of accumulated depreciation of $1,000 and $0 at December 31, 2015 and 2014, respectively
|
21,000 | -- | ||||||
|
Due from related parties
|
408,000 | 301,000 | ||||||
|
Assets held for sale
|
44,923,000 | 55,427,000 | ||||||
|
Total assets
|
$ | 54,368,000 | $ | 69,216,000 | ||||
|
LIABILITIES AND EQUITY
|
||||||||
|
Liabilities
|
||||||||
|
Accounts payable and accrued liabilities
|
$ | 928,000 | $ | 618,000 | ||||
|
Note payable
|
-- | 23,000 | ||||||
|
Due to related parties
|
5,265,000 | 1,437,000 | ||||||
|
Liabilities related to assets held for sale
|
30,684,000 | 31,056,000 | ||||||
|
Total liabilities
|
36,877,000 | 33,134,000 | ||||||
|
Commitments and contingencies
|
||||||||
|
Equity
|
||||||||
|
Vestin Realty Mortgage II, Inc. stockholders’ equity:
|
||||||||
|
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding
|
-- | -- | ||||||
|
Treasury stock, at cost, 0 shares at December 31, 2015 and 2014
|
-- | -- | ||||||
|
Common stock, $0.0001 par value; 100,000,000 shares authorized; 2,490,514 and 2,578,420 shares issued and outstanding at December 31, 2015 and 2014, respectively.
|
-- | -- | ||||||
|
Additional paid-in capital
|
266,576,000 | 267,081,000 | ||||||
|
Accumulated deficit
|
(252,997,000 | ) | (238,165,000 | ) | ||||
|
Accumulated other comprehensive income
|
-- | -- | ||||||
|
Total Vestin Realty Mortgage II, Inc. stockholders’ equity
|
13,579,000 | 28,916,000 | ||||||
|
Non-controlling interest
|
3,912,000 | 7,166,000 | ||||||
|
Total equity
|
17,491,000 | 36,082,000 | ||||||
|
Total liabilities and equity
|
$ | 54,368,000 | $ | 69,216,000 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
-23-
|
VESTIN REALTY MORTGAGE II, INC.
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| For the Years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
|
Revenues
|
||||||||
|
Interest income from investment in real estate loans
|
$ | 645,000 | $ | 979,000 | ||||
|
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
|
1,623,000 | 560,000 | ||||||
|
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
|
552,000 | 198,000 | ||||||
| Acquisition fee income | 1,830,000 | -- | ||||||
| Advisor fee | 566,000 | 379,000 | ||||||
| Total revenues | 5,216,000 | 2,116,000 | ||||||
|
Operating expenses
|
||||||||
|
Management fees - related party
|
1,096,000 | 1,098,000 | ||||||
|
MVP REIT II organization and offering costs
|
1,329,000 | -- | ||||||
|
Wages and benefits
|
3,330,000 | 1,784,000 | ||||||
|
Acquisition expense
|
1,000 | 29,000 | ||||||
|
Depreciation
|
2,000 | -- | ||||||
|
Forgiveness of debt – related party
|
-- | 533,000 | ||||||
|
Professional fees
|
1,073,000 | 1,237,000 | ||||||
|
Seminars
|
1,175,000 | 308,000 | ||||||
|
Consulting fees
|
221,000 | 413,000 | ||||||
|
Insurance
|
259,000 | 267,000 | ||||||
|
Commissions
|
3,162,000 | 722,000 | ||||||
|
Travel
|
867,000 | 686,000 | ||||||
|
Other
|
1,209,000 | 766,000 | ||||||
|
Total operating expenses
|
13,724,000 | 7,843,000 | ||||||
|
Loss from operations
|
(8,508,000 | ) | (5,727,000 | ) | ||||
|
Non-operating income (loss)
|
||||||||
|
Gain related to recovery of allowance on note payable – related party
|
24,000 | 1,774,000 | ||||||
|
Interest expense
|
(3,000 | ) | (3,000 | ) | ||||
|
Other income
|
2,000 | -- | ||||||
|
Recovery from settlement with loan guarantor
|
79,000 | 78,000 | ||||||
|
Income on investment in equity method investee
|
-- | 66,000 | ||||||
|
Gain on sale of marketable securities
|
2,000 | 42,000 | ||||||
|
Loss on sale of marketable securities – related party
|
(324,000 | ) | (120,000 | ) | ||||
|
Total other non-operating income (loss), net
|
(220,000 | ) | 1,837,000 | |||||
|
Provision for income taxes
|
-- | -- | ||||||
|
Loss from continuing operations
|
(8,728,000 | ) | (3,890,000 | ) | ||||
|
Discontinued operations, net of income taxes
|
||||||||
|
Net gain on sale of real estate owned held for sale
|
-- | 837,000 | ||||||
|
Expenses related to real estate owned held for sale
|
(328,000 | ) | (654,000 | ) | ||||
|
Impairment of assets held for sale
|
(10,800,000 | ) | -- | |||||
|
Income from investment in equity method investee
|
-- | 20,000 | ||||||
|
Recovery from fully impaired real estate held for sale
|
396,000 | 2,259,000 | ||||||
|
Income from assets held for sale, net of income taxes
|
1,454,000 | 778,000 | ||||||
|
Total income (loss) from discontinued operations
|
(9,278,000 | ) | 3,240,000 | |||||
| Net loss | $ | (18,006,000 | ) | $ |
(650,000
|
) | ||
| Allocation of income (loss) to non-controlling interest - related party | (3,174,000 | ) |
455,000
|
|||||
| Net loss attributable to common stockholders | $ | (14,832,000 | ) | $ |
(1,105,000
|
) | ||
| Basic and diluted income (loss) per weighted average common share | ||||||||
| Continuing operations | $ | (3.44 | ) | $ | (1.41 | ) | ||
| Discontinued operations | $ | (3.65 | ) | $ | 1.21 | |||
| Total basic and diluted loss per weighted average common share | $ | (5.84 | ) | $ | (0.42 | ) | ||
| Weighted average common shares outstanding | 2,538,774 | 2,670,143 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
-24-
|
VESTIN REALTY MORTGAGE II, INC.
|
|
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
|
|
For The Years
Ended December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Net loss
|
$ | (18,006,000 | ) | $ | (650,000 | ) | ||
|
Unrealized holding loss on available-for-sale securities – related party
|
-- | (341,000 | ) | |||||
|
Unrealized holding gain on available-for-sale securities
|
-- | 10,000 | ||||||
|
Comprehensive loss
|
(18,006,000 | ) | (981,000 | ) | ||||
|
Less: net income (loss) attributable to noncontrolling interest
|
(3,174,000 | ) | 455,000 | |||||
|
Comprehensive loss attributable to Vestin Realty Mortgage II, Inc.
|
$ | (14,832,000 | ) | $ | (1,436,000 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
-25-
|
VESTIN REALTY MORTGAGE II, INC.
|
||||||||||||||||||||||||||||||||||||
|
CONSOLIDATED STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE LOSS
|
||||||||||||||||||||||||||||||||||||
|
Treasury Stock
|
Common Stock
|
|||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares (1)
|
Amount
|
Additional
Paid-in-Capital
|
Accumulated Deficit
|
Accumulated Other Comprehensive Income
|
Noncontrolling Interest – Related Party
|
Total
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Stockholders' Equity at December 31, 2013
|
-- | $ | -- | 2,709,174 | $ | -- | $ | 267,745,000 | $ | (237,060,000 | ) | $ | 331,000 | $ | 6,127,000 | $ | 37,144,000 | |||||||||||||||||||
|
Net Income (Loss)
|
-- | -- | -- | -- | -- | (1,105,000 | ) | -- | 455,000 | (650,000 | ) | |||||||||||||||||||||||||
|
Unrealized (loss) on Marketable Securities - Related Party
|
-- | -- | -- | -- | -- | -- | (331,000 | ) | -- | (331,000 | ) | |||||||||||||||||||||||||
|
Comprehensive Income
|
-- | -- | -- | -- | -- | -- | -- | -- | (981,000 | ) | ||||||||||||||||||||||||||
|
Distributions to non controlling interest
|
-- | -- | -- | -- | -- | -- | -- | (62,000 | ) | (62,000 | ) | |||||||||||||||||||||||||
|
Reverse split
|
-- | -- | -- | -- | (2,000 | ) | -- | -- | -- | (2,000 | ) | |||||||||||||||||||||||||
|
Non-controlling interest
|
-- | -- | -- | -- | -- | -- | -- | 646,000 | 646,000 | |||||||||||||||||||||||||||
|
Retire Treasury Stock
|
(130,754 | ) | 663,000 | -- | -- | (662,000 | ) | -- | -- | -- | -- | |||||||||||||||||||||||||
|
Purchase of Treasury Stock
|
130,754 | (663,000 | ) | (130,754 | ) | -- | -- | -- | -- | -- | (663,000 | ) | ||||||||||||||||||||||||
|
Stockholders' Equity at December 31, 2014
|
-- | $ | -- | 2,578,420 | $ | -- | $ | 267,081,000 | $ | (238,165,000) | $ | -- | $ | 7,166,000 | $ | 36,082,000 | ||||||||||||||||||||
|
Net Income (Loss)
|
-- | -- | -- | -- | -- | (14,832,000 | ) | -- | (3,174,000 | ) | (18,006,000 | ) | ||||||||||||||||||||||||
|
Unrealized Gain on Marketable Securities - Related Party
|
-- | -- | -- | -- | -- | -- | -- | -- | -- | |||||||||||||||||||||||||||
|
Comprehensive Income
|
-- | -- | -- | -- | -- | -- | -- | -- | (18,006,000 | ) | ||||||||||||||||||||||||||
|
Distributions to non controlling interest
|
-- | -- | -- | -- | -- | -- | -- | (80,000 | ) | (80,000 | ) | |||||||||||||||||||||||||
|
Reverse split
|
-- | -- | -- | -- | -- | -- | -- | -- | -- | |||||||||||||||||||||||||||
|
Non-controlling interest
|
-- | -- | -- | -- | -- | -- | -- | -- | -- | |||||||||||||||||||||||||||
|
Retire Treasury Stock
|
(87,906 | ) | 505,000 | -- | -- | (505,000 | ) | -- | -- | -- | -- | |||||||||||||||||||||||||
|
Purchase of Treasury Stock
|
87,906 | (505,000 | ) | (87,906 | ) | -- | -- | -- | -- | -- | (505,000 | ) | ||||||||||||||||||||||||
|
Stockholders' Equity at December 31, 2015
|
-- | $ | -- | 2,490,514 | $ | -- | $ | 266,576,000 | $ | (252,997,000 | ) | $ | -- | $ | 3,912,000 | $ | 17,491,000 | |||||||||||||||||||
|
|
(1)
|
Per share data is based on the average number of shares outstanding during the periods, except for the book value and market price which are based on the information at the end of the periods. All per share data has been adjusted to retroactively reflect the 1for 4 reverse stock split effected in January 2014.
|
The accompanying notes are an integral part of these consolidated financial statements.
-26-
VESTIN REALTY MORTGAGE II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$ | (18,006,000 | ) | $ | (650,000 | ) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Depreciation
|
2,000 | 10,000 | ||||||
|
Recovery of allowance for doubtful notes receivable
|
(552,000 | ) | (198,000 | ) | ||||
|
Gain on sale of marketable securities
|
(2,000 | ) | (42,000 | ) | ||||
|
Loss on marketable securities – related party
|
324,000 | 120,000 | ||||||
|
Income on investment in equity method investee – held for sale
|
-- | (86,000 | ) | |||||
|
Forgiveness of debt-related party
|
-- | 533,000 | ||||||
|
Gain on sale of real estate owned held for sale
|
-- | (837,000 | ) | |||||
|
Gain related to recovery of allowance for notes receivable – related party
|
(24,000 | ) | (1,774,000 | ) | ||||
|
Gain related to recovery from settlement with loan guarantor
|
(79,000 | ) | (78,000 | ) | ||||
|
Gain related to recovery of allowance for loan loss
|
(1,623,000 | ) | (560,000 | ) | ||||
|
Recovery from fully impaired real estate held for sale
|
(396,000 | ) | (2,259,000 | ) | ||||
|
Impairment of assets held for sale
|
10,800,000 | -- | ||||||
|
Change in operating assets and liabilities:
|
||||||||
|
Interest and other receivables
|
(39,000 | ) | 2,000 | |||||
|
Assets held for sale, net of liabilities
|
24,000 | 447,000 | ||||||
|
Due to/from related parties, net
|
3,721,000 | 846,000 | ||||||
|
Prepaid expenses – related party
|
(323,000 | ) | -- | |||||
|
Other assets
|
296,000 | 126,000 | ||||||
|
Accounts payable and accrued liabilities
|
312,000 | (311,000 | ) | |||||
|
Net cash used in operating activities
|
(5,565,000 | ) | (4,711,000 | ) | ||||
|
Cash flows from investing activities:
|
||||||||
|
Investments in real estate loans
|
(5,217,000 | ) | (14,269,000 | ) | ||||
|
Purchase of investments in real estate loans from third parties
|
(200,000 | ) | (468,000 | ) | ||||
|
Proceeds from loan payoffs
|
5,971,000 | 6,546,000 | ||||||
|
Sale of investments in real estate loans to:
|
||||||||
|
VRM I
|
-- | 2,823,000 | ||||||
|
Third parties
|
2,472,000 | 8,060,000 | ||||||
|
Investment in Delaware Statutory Trust
|
(8,200,000 | ) | -- | |||||
|
Payments on Delaware Statutory Trust
|
6,400,000 | -- | ||||||
|
Proceeds from notes receivable
|
552,000 | 198,000 | ||||||
|
Proceeds from notes receivable – related party
|
24,000 | 1,774,000 | ||||||
|
Proceeds from recovery from settlement with loan guarantor
|
79,000 | 78,000 | ||||||
|
Proceeds related to real estate held for sale
|
-- | 2,552,000 | ||||||
|
Collection from recovery of loan loss
|
1,623,000 | 560,000 | ||||||
|
Proceeds from recovery of fully impaired real estate held for sale
|
396,000 | 2,259,000 | ||||||
|
Payment of noncontrolling interest portion of proceeds related to real estate held for sale
|
-- | (764,000 | ) | |||||
|
Payments on assets transferred, net
|
-- | (958,000 | ) | |||||
|
Purchase of investments in real estate
|
-- | (6,263,000 | ) | |||||
|
Payments on purchase of assets
|
-- | (212,000 | ) | |||||
|
Purchase of marketable securities
|
(109,000 | ) | (1,946,000 | ) | ||||
|
Purchase of marketable securities – related party
|
(125,000 | ) | -- | |||||
|
Purchase of fixed assets
|
(23,000 | ) | -- | |||||
|
Investment in MVP REIT II
|
(200,000 | ) | -- | |||||
|
Investment in and note receivable from MVP Realty Advisors, LLC
|
-- | (1,365,000 | ) | |||||
|
Investment in equity method investee
|
-- | (3,000,000 | ) | |||||
|
Additional investment from noncontrolling interest investors
|
-- | 84,000 | ||||||
|
Proceeds from sale of VREO XXV, LLC
|
-- | 39,000 | ||||||
|
Asset purchase – assets held for sale
|
(115,000 | ) | -- | |||||
|
Proceeds from sale of marketable securities
|
109,000 | 7,675,000 | ||||||
|
Net cash provided by investing activities
|
3,437,000 | 3,373,000 | ||||||
|
Cash flows from financing activities:
|
||||||||
|
Principal payments on notes payable
|
(189,000 | ) | (8,190,000 | ) | ||||
|
Purchase of treasury stock
|
(505,000 | ) | (662,000 | ) | ||||
|
Distribution to noncontrolling interest entity held for sale
|
(80,000 | ) | (62,000 | ) | ||||
|
Proceeds from note payable
|
166,000 | 7,750,000 | ||||||
|
Proceeds from note payable on assets held for sale
|
-- | 4,143,000 | ||||||
|
Payments on note payable on assets held for sale
|
(577,000 | ) | -- | |||||
|
Payment of noncontrolling interest portion of proceeds from note payable held for sale
|
-- | (1,763,000 | ) | |||||
|
Net cash (used in) provided by financing activities
|
(1,185,000 | ) | 1,216,000 | |||||
|
NET CHANGE IN CASH
|
(3,313,000 | ) | (122,000 | ) | ||||
|
Cash, beginning of period
|
7,541,000 | 7,663,000 | ||||||
|
Cash, end of period
|
$ | 4,228,000 | $ | 7,541,000 | ||||
|
Supplemental disclosures of cash flows information:
|
||||||||
|
Interest paid
|
$ | 3,000 | $ | 400,000 | ||||
|
Non-cash investing and financing activities:
|
||||||||
|
Note payable related to prepaid D&O insurance
|
$ | 166,000 | $ | 262,000 | ||||
|
Unrealized loss on marketable securities - related party
|
$ | (324,000 | ) | $ | (341,000 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
-27-
VESTIN REALTY MORTGAGE II, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
NOTE A — ORGANIZATION
Vestin Realty Mortgage II, Inc. (“VRM II”, the “Company”, “we”, “us” or “our”), formerly Vestin Fund II, LLC (“Fund II”), invests in loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our management agreement (“Management Agreement”) as mortgage assets (“Mortgage Assets”).) In addition, we invest in, acquire, manage or sell real property and acquire entities involved in the ownership or management of real property. We commenced operations in June 2001. References in this report to the “Company,” “we,” “us,” or “our” refer to Fund II with respect to the period prior to April 1, 2006 and to VRM II with respect to the period commencing on April 1, 2006.
We operated as a real estate investment trust (“REIT”) through December 31, 2011. We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder. As a REIT, we were required to have a December 31 fiscal year end. We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012. Under the Code, we will not be able to make a new election to be taxed as a REIT during the four years following December 31, 2012. Pursuant to our charter, upon the determination by the Board of Directors that we should no longer qualify as a REIT, the restrictions on transfer and ownership of shares set forth in Article VII of our charter ceased to be in effect and, accordingly, shares of the Company’s stock will no longer be subject to such restrictions. In connection with the termination of our REIT status, we also amended our stockholders’ rights plan to provide that a stockholder, other than Michael Shustek, may own up to 20% of outstanding shares of common stock, and that Michael Shustek may own up to 35% of outstanding shares of common stock.
Michael Shustek owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, which is our manager (the “manager” or “Vestin Mortgage”). The business of brokerage and placement of real estate loans have been performed by affiliated or non-affiliated mortgage brokers, including Advant Mortgage, LLC (“MVP Mortgage”), a licensed Nevada mortgage broker, which is indirectly wholly owned by Mr. Shustek.
Pursuant to a management agreement, our manager is responsible for managing our operations and implementing our business strategies on a day-to-day basis. Consequently, our operating results are dependent to a significant extent upon our manager’s ability and performance in managing our operations and servicing our loans.
Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC (“Fund I”) and Vestin Fund III, LLC (“Fund III”). VRM I has investment objectives similar to ours, and Fund III is in the process of an orderly liquidation of its assets.
The consolidated financial statements include the accounts of VRM II; Building A, LLC, Building C, LLC, Wolfpack Properties, LLC; Devonshire, LLC; SE Properties, LLC; ExecuSuites, LLC; MVP Realty Advisors, LLC (“MVP Advisors”) and MVP Capital Partners II, LLC (“MVP CP II”). All significant intercompany transactions and balances have been eliminated in consolidation.
In April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services. Strategix Solutions also provides accounting and financial reporting services to VRM I and Fund III. Our CFO and other members of our accounting staff are employees of Strategix Solutions. Strategix Solutions is owned by our CFO, Ms. Gress. As used herein, “management” means our manager, its executive officers and the individuals at Strategix Solutions who perform accounting and financial reporting services on our behalf.
In December 2013, we entered into a membership interest transfer agreement with MVP Capital Partners, LLC (“MVP Capital”) pursuant to which we increased our ownership interest from 40% to 60% in MVP Advisors, the manager of MVP REIT, Inc. (“MVP REIT”). At the same time, VRM I acquired from MVP Capital the remaining 40% interest in MVP Advisors. Pursuant to the transfer agreement, we and VRM I did not pay any up-front consideration for the acquired interest but will be responsible for our proportionate share of future expenses of MVP Advisors. In recognition of MVP Capital’s substantial investment in MVP Advisors for which MVP Capital received no up-front consideration, the transfer agreement further provides that once we and VRM I have been repaid in full for any capital contributions to MVP Advisors or for any expenses advanced on MVP Advisors’ behalf (“Capital Investment”), and once we and VRM I have received an annualized return on our Capital Investment of 7.5%, then MVP Capital will receive one-third of the net profits of MVP Advisors. MVP REIT is a SEC-registered, non-traded REIT that seeks to invest predominantly in parking facilities located throughout the United States and loans secured by real estate as its core assets.
During May 2015, our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%. The purpose of MVP CP II is to act as the sponsor of MVP REIT II, a Maryland corporation, which was formed as a publicly registered non traded REIT (“MVP REIT II”). MVP REIT II has been declared effective on October 23, 2015. MVP REIT II is a proposed $550,000,000 offering with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.
We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to our respective ownership interest. As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II. As part of the advisory agreement, MVP Advisors will receive a 1% annual asset management fee and 2.25% of purchase price on all acquisitions. MVP Advisors will also receive the lesser of 3% of contract sale price or 50% of the brokerage commission paid on dispositions of MVP REIT II assets, which amount shall accrue until the MVP REIT II investors have a return of their net capital and a 6% annual cumulative non compounded return. In addition once the MVP REIT II investors have received a return of their net capital invested and a 6% annual cumulative, non-compounded return, then MVP Advisors will be entitled to receive 15% of the remaining proceeds. This fee will be payable under only one of the following events: (i) if MVP REIT II shares are listed on a national securities exchange; (ii) if MVP REIT II assets are sold, other than single assets sold in the ordinary course, or liquidated; (iii) upon a merger, share exchange, reorganization or other transaction pursuant to which MVP REIT II investors receive cash or publicly traded securities in exchange for their shares; or (iv) upon termination of the advisory agreement. The operating agreement of the Advisor provides that once we and VRM I have been repaid in full for any capital contributions to the Advisor or for any expenses advanced on the Advisor’s behalf, or capital investment, and once we and VRM I have received an annualized return on our capital investment of 7.5%, then Michael Shustek will receive 40% of the net profits of the Advisor.
NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included.
Management Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
We may, from time to time, acquire or sell investments in real estate loans from or to our manager or other related parties pursuant to the terms of our Management Agreement without a premium. The primary purpose is to either free up capital to provide liquidity for various reasons, such as loan diversification, or place excess capital in investments to maximize the use of our capital. Selling or buying loans allows us to diversify our loan portfolio within these parameters. Due to the short-term nature of the loans we make and the similarity of interest rates in loans we normally would invest in, the fair value of a loan typically approximates its carrying value. Accordingly, discounts or premiums typically do not apply upon sales of loans and therefore, generally no gain or loss is recorded on these transactions, regardless of whether to a related or unrelated party.
Investments in real estate loans are secured by deeds of trust or mortgages. Generally, our real estate loans require interest only payments with a balloon payment of the principal at maturity. We have both the intent and ability to hold real estate loans until maturity and therefore, real estate loans are classified and accounted for as held for investment and are carried at amortized cost. Loans sold to or purchased from affiliates are accounted for at the principal balance and no gain or loss is recognized by us or any affiliate. Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and are updated, when new appraisals are received or when management’s assessment of the value has changed, to reflect subsequent changes in value estimates. Such appraisals are generally dated within 12 months of the date of loan origination and may be commissioned by the borrower.
The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company’s impaired loans include troubled debt restructuring, and performing and non-performing loans in which full payment of principal or interest is not expected. The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of its collateral.
Loans that have been modified from their original terms are evaluated to determine if the loan meets the definition of a Troubled Debt Restructuring (“TDR”) as defined by ASC 310-40. When the Company modifies the terms of an existing loan that is considered a TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement. If the modification calls for deferred interest, it is recorded as interest income as cash is collected.
Allowance for Loan Losses
We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment. Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan. Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans. Actual losses on loans are recorded first as a reduction to the allowance for loan losses. Generally, subsequent recoveries of amounts previously charged off are recognized as income.
Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property. As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the real estate lending industry. We and our manager generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process; there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.
Additional facts and circumstances may be discovered as we continue our efforts in the collection and foreclosure processes. This additional information often causes management to reassess its estimates. In recent years, we have revised estimates of our allowance for loan losses. Circumstances that have and may continue to cause significant changes in our estimated allowance include, but are not limited to:
|
|
·
|
Declines in real estate market conditions, which can cause a decrease in expected market value;
|
|
|
·
|
Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;
|
|
|
·
|
Lack of progress on real estate developments after we advance funds. We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;
|
|
|
·
|
Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed property; and
|
|
|
·
|
Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.
|
Discontinued Operations
We have reclassified for all periods presented in the accompanying consolidated statements of operations, the amounts related to discontinued operations and real estate held for sale, in accordance with the applicable accounting criteria. In addition, the assets and liabilities related to the discontinued operations are reported separately in the accompanying consolidated balance sheets as real estate held for sale, assets held for sale, and liabilities related to assets held for sale.
Generally, operating results and cash flows from long-lived assets held for sale are to be classified as discontinued operations as a separately stated component of net income. Our operations related to REO are separately identified in the accompanying consolidated statements of operations.
Real Estate Owned Held for Sale
Real estate owned held for sale (“REO”) includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions. While pursuing foreclosure actions, we seek to identify potential purchasers of such property. We generally seek to sell properties acquired through foreclosure as quickly as circumstances permit, taking into account current economic conditions. The carrying values of REO are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.
Management classifies real estate as REO when the following criteria are met:
|
|
·
|
Management commits to a plan to sell the properties;
|
|
|
·
|
The property is available for immediate sale in its present condition subject only to terms that are usual and customary;
|
|
|
·
|
An active program to locate a buyer and other actions required to complete a sale have been initiated;
|
|
|
·
|
The sale of the property is probable;
|
|
|
·
|
The property is being actively marketed for sale at a reasonable price; and
|
|
|
·
|
Withdrawal or significant modification of the sale is not likely.
|
Acquisitions
The Company records the acquired tangible and intangible assets and assumed liabilities of acquisitions of all operating properties and those development and redevelopment opportunities that meet the accounting criteria to be accounted for as business combinations at fair value at the acquisition date. The Company assesses and considers fair value based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates that the Company deems appropriate. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The acquired assets and assumed liabilities for an operating property acquisition generally include but are not limited to: land, buildings and improvements, construction in progress and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market operating leases and ground leases, acquired in-place lease values and tenant relationships, if any.
The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings and improvements, tenant improvements, and leasing costs are based upon current market replacement costs and other relevant market rate information.
The fair value of the above-market or below-market component of an acquired in-place operating lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) management's estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease for above-market operating leases and the initial non-cancellable term plus the term of any below-market fixed rate renewal options, if applicable, for below-market operating leases. The amounts recorded for above-market operating leases are included in deferred leasing costs and acquisition-related intangibles, net on the balance sheet and are amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable leases. The amounts recorded for below-market operating leases are included in deferred revenue and acquisition-related liabilities, net on the balance sheet and are amortized on a straight-line basis as an increase to rental income over the remaining term of the applicable leases plus the term of any below-market fixed rate renewal options, if applicable. Our below-market operating leases generally do not include fixed rate or below-market renewal options.
The fair value of acquired in-place leases is derived based on management's assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Factors considered by us in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, current market conditions, and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand at market rates. In estimating costs to execute similar leases, the Company considers leasing commissions, legal and other related expenses. The amount recorded for acquired in-place leases is included in deferred leasing costs and acquisition-related intangibles, net on the balance sheet and amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases. If a lease were to be terminated or if termination were determined to be likely prior to its contractual expiration (for example resulting from bankruptcy), amortization of the related unamortized in-place lease intangible would be accelerated.
The determination of the fair value of any debt assumed in connection with a property acquisition is estimated by discounting the future cash flows using interest rates available for the issuance of debt with similar terms and remaining maturities.
The determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of operating property acquisitions requires us to make significant judgments and assumptions about the numerous inputs discussed above. The use of different assumptions in these fair value calculations could significantly affect the reported amounts of the allocation of our acquisition related assets and liabilities and the related amortization and depreciation expense recorded for such assets and liabilities. In addition, because the value of above and below market leases are amortized as either a reduction or increase to rental income, respectively, our judgments for these intangibles could have a significant impact on our reported rental revenues and results of operations.
Costs directly associated with all operating property acquisitions and those development and redevelopment acquisitions that meet the accounting criteria to be accounted for as business combinations are expensed as incurred. Our acquisition expenses are directly related to our acquisition activity and if our acquisition activity was to increase or decrease, so would our acquisition costs. Costs directly associated with development acquisitions accounted for as asset acquisitions are capitalized as part of the cost of the acquisition. During the year ended December 31, 2015, the Company did not capitalize any such acquisition costs.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Cash and Cash Equivalents
Cash and cash equivalents include interest-bearing and non-interest bearing bank deposits, money market accounts, short-term certificates of deposit with original maturities of three months or less, and short-term instruments with a liquidation provision of one month or less.
The Company recognizes interest income from loans on an accrual basis over the expected terms of the loans using the effective interest method. The Company may recognize fees, discounts, premiums, anticipated exit fees and direct cost over the terms of the loans as an adjustment to the yield. The Company may recognize fees on commitments that expire unused at expiration. The Company may recognize interest income from available-for-sale securities on an accrual basis over the life of the investment on a yield-to-maturity basis. Interest is fully allowed for on impaired loans and is recognized on a cash basis method. The receipt of previous loan or note receivable allowances or impairments are recognized as revenue.
Advertising Costs
Advertising costs incurred in the normal course of operations are expensed as incurred. The Company had no advertising expense for the years ended December 31, 2015 and 2014.
Investments in Real Estate and Fixed Assets
Investments in real estate and fixed assets are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 40 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Investment in Marketable Securities
Investment in marketable securities consists of stock in VRM I and MVP REIT II, related parties. The securities are stated at fair value as determined by the closing market prices as of December 31, 2015 and 2014. All securities are classified as available-for-sale.
We are required to evaluate our available-for-sale investment for other-than-temporary impairment charges. We will determine when an investment is considered impaired (i.e., decline in fair value below its amortized cost), and evaluate whether the impairment is other than temporary (i.e., investment value will not be recovered over its remaining life). If the impairment is considered other than temporary, we will recognize an impairment loss equal to the difference between the investment’s cost and its fair value.
Basic and Diluted Earnings Per Common Share
Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been exercised. We had no outstanding common share equivalents during the periods ended December 31, 2015 and 2014.
Common Stock Dividends
During June 2008, our Board of Directors decided to suspend the payment of dividends. Our Board of Directors will closely monitor our operating results in order to determine when dividends should be reinstated; however, we do not expect our Board of Directors to reinstate dividends in the foreseeable future.
On March 21, 2007, our Board of Directors authorized the repurchase of up to $10 million worth of our common stock. On November 17, 2014, our Board of Directors authorized the repurchase of an additional $500,000 in common stock. Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions. We are not obligated to purchase any shares. Subject to applicable securities laws, including SEC rule 10b-18, repurchases may be made at such times and in such amounts, as our management deems appropriate. The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program. The repurchases will be funded from our available cash.
We record our treasury stock using the cost method. Under the Maryland General Corporation Law, shares of its own stock acquired by a corporation constitute authorized but unissued shares.
Segments
We currently are authorized to operate three reportable segments, investments in real estate loans, investments in real property and investment in a real estate management company. As of December 31, 2015, the Company operates in all segments.
Our objective is to invest approximately 97% of our assets in real estate loans and real estate related investments, while maintaining approximately 3% as a working capital cash reserve.
Reclassifications
Amounts listed in connection with assets held for sale, including liabilities related to assets held for sale, in the 2014 consolidated financial statements have been reclassified to conform to the December 31, 2015 presentation. This reclassification resulted in no net effect on the 2014 consolidated financial statements.
Principles of Consolidation
Our consolidated financial statements include the accounts of VRM II; Building A, LLC, Building C, LLC, Wolfpack Properties, LLC; Devonshire, LLC; SE Properties, LLC; ExecuSuites, LLC; MVP Advisors; and MVP Capital Partners II, LLC. All significant intercompany transactions and balances have been eliminated in consolidation.
Business Combinations
In December 2007, the Financial Accounting Standards Board (FASB) revised the authoritative guidance for business combinations, establishing principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired (including goodwill), the liabilities assumed, and any noncontrolling interest in the acquiree. Subsequently, on April 1, 2009, the FASB amended and clarified certain aspects of its authoritative guidance on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. We apply the FASB authoritative guidance to all business combinations for which the acquisition date is on or after January 1, 2009, and to certain future income tax effects related to our prior business combinations, should they arise.
The FASB issued authoritative guidance for non-controlling interests in December 2007, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as an unconsolidated investment, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income to be reported at amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest.
Income Taxes
The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company was to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also, included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments consist of cash, interest and other receivables, notes receivable, accounts payable and accrued liabilities, due to/from related parties and notes payable. The carrying values of these instruments approximate their fair values due to their short-term nature. Marketable securities – related party and investment in real estate loans are further described in Note L – Fair Value.
Financial instruments with concentration of credit and market risk include cash, interest and other receivables, marketable securities - related party, notes receivable, accounts payable and accrued liabilities, due to/from related parties, notes payable, and loans secured by deeds of trust.
We maintain cash deposit accounts and certificates of deposit that, at times, may exceed federally-insured limits. To date, we have not experienced any losses. As of December 31, 2015 and 2014 we had approximately $3.9 and $5.5 million of funds, respectively, in excess of the federally-insured limits.
As of December 31, 2015, 100% of our loans were loans in which we participated with other lenders, most of whom are our affiliates.
As of December 31, 2015, 93% of our loans were in Nevada compared to 69% and 27% in Nevada and California, respectively, at December 31, 2014.
At December 31, 2015 and 2014, the loan to our largest borrower represented approximately 53% and 32%, respectively, of our total investment in real estate loans. This real estate loan is a commercial loan secured by property located in Nevada, with a first lien position. The interest rate is 15%, the outstanding balance is approximately $2.5 million and the loan is considered a non-performing loan.
The success of a borrower’s ability to repay its real estate loan obligation in a large lump-sum payment may be dependent upon the borrower’s ability to refinance the obligation or otherwise raise a substantial amount of cash. With the weakened economy, credit continues to be difficult to obtain and as such, many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have been otherwise adversely impacted. In addition, an increase in interest rates over the loan rate applicable at origination of the loan may have an adverse effect on our borrower’s ability to refinance.
Common Guarantors
As of December 31, 2014, two loans totaling approximately $0.5 million, representing approximately 6.8% of our portfolio’s total value, had a common guarantor. At December 31, 2014, these loans were considered performing. As of December 31, 2015, these loans were paid in full.
As of December 31, 2014, there were two loans, totaling approximately $1.1 million, representing approximately 14.3% of our portfolio’s total value, which had a common guarantor. At December 31, 2014, these loans were considered performing. As of December 31, 2015, these loans were paid in full.
As of December 31, 2015, two loans totaling approximately $1.7 million, representing approximately 38% of our portfolio’s total value, have a common guarantor. These loans were originated in 2015.
As of December 31, 2015, three loans totaling approximately $0.3 million, representing approximately 7% of our portfolio’s total value, have a common guarantor. At December 31, 2014 these loans represented less than 5% of our portfolio.
NOTE D — INVESTMENTS IN REAL ESTATE LOANS
As of December 31, 2015 and 2014, most of our loans provided for interest only payments with a “balloon” payment of principal payable and any accrued interest payable in full at the end of the term. As of December 31, 2015 and 2014, three loans had variable interest rates adjusted quarterly at a rate of prime plus 3.30% (6.55% as of December 31, 2015 and 2014). The balance on these loans was approximately $0.3 million as of December 31, 2015 and 2014.
In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time. At December 31, 2015 and 2014, we had one investment in real estate loans that had interest reserves.
Loan Portfolio
As of December 31, 2015, we had five available real estate loan products consisting of commercial, construction, acquisition and development, land and residential. The effective interest rates on all product categories range from 8% to 15% which includes performing loans that are being fully or partially accrued and will be payable at maturity. Revenue by product will fluctuate based upon relative balances during the period.
|
Loan Type
|
Number of Loans
|
Balance *
|
Weighted Average Interest Rate
|
Portfolio Percentage
|
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
|
|||||||||||||||
|
Commercial
|
7 | $ | 4,541,000 | 11.85 | % | 98.48 | % | 60.14 | % | |||||||||||
|
Construction
|
1 | 70,000 | 0.12 | % | 1.52 | % | 0.44 | % | ||||||||||||
|
Total
|
8 | $ | 4,611,000 | 11.79 | % | 100.00 | % | 58.61 | % | |||||||||||
Investments in real estate loans as of December 31, 2014, were as follows:
|
Loan Type
|
Number of Loans
|
Balance *
|
Weighted Average Interest Rate
|
Portfolio Percentage
|
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
|
|||||||||||||||
|
Commercial
|
11 | $ | 5,579,000 | 10.88 | % | 73.04 | % | 43.43 | % | |||||||||||
|
Construction
|
1 | 2,058,000 | 9.00 | % | 26.96 | % | 67.63 | % | ||||||||||||
|
Total
|
12 | $ | 7,637,000 | 10.37 | % | 100.00 | % | 53.03 | % | |||||||||||
|
*
|
Please see Balance Sheet Reconciliation below.
|
The “Weighted Average Interest Rate” as shown above is based on the contractual terms of the loans for the entire portfolio including non-performing loans. The weighted average interest rate on performing loans only, as of December 31, 2015 and 2014, was 11.79% and 10.37%, respectively. Please see “Non-Performing Loans” and “Asset Quality and Loan Reserves” below for further information regarding performing and non-performing loans.
Loan-to-value ratios are generally based on the most recent appraisals and may not reflect subsequent changes in value and include allowances for loan losses. Recognition of allowance for loan losses will result in a maximum loan-to-value ratio of 100% per loan.
The following is a schedule of priority of real estate loans as of December 31, 2015 and 2014:
|
Loan Type
|
Number of Loans
|
December 31 2015 Balance*
|
Portfolio Percentage
|
Number of Loans
|
December 31, 2014 Balance*
|
Portfolio Percentage
|
||||||||||||||||||
|
First deeds of trust
|
8 | 4,611,000 | 100.00 | % | 11 | 7,342,000 | 96.14 | % | ||||||||||||||||
|
Second deeds of trust
|
-- | -- | -- | 1 | 295,000 | 3.86 | % | |||||||||||||||||
|
Total
|
8 | 4,611,000 | 100.00 | % | 12 | 7,637,000 | 100.00 | % | ||||||||||||||||
|
*
|
Please see Balance Sheet Reconciliation below.
|
The following is a schedule of contractual maturities of investments in real estate loans as of December 31, 2015:
|
Non-performing and past due loans
|
$ | 2,450,000 | ||
|
January 2016 –March 2016
|
-- | |||
|
April 2016 – June 2016
|
-- | |||
|
July 2016 – September 2016
|
-- | |||
|
October 2016 – December 2016
|
-- | |||
|
Thereafter
|
2,161,000 | |||
|
Total
|
$ | 4,611,000 |
The following is a schedule by geographic location of investments in real estate loans as of December 31, 2015 and 2014:
|
December 31, 2015 Balance *
|
Portfolio Percentage
|
December 31, 2014 Balance *
|
Portfolio Percentage
|
|||||||||||||
|
Nevada
|
$ | 4,295,000 | 93.15 | % | $ | 5,264,000 | 68.93 | % | ||||||||
|
California
|
-- | -- | 2,059,000 | 26.96 | % | |||||||||||
|
Ohio
|
310,000 | 6.72 | % | 314,000 | 4.11 | % | ||||||||||
|
Arizona
|
6,000 | 0.13 | % | -- | -- | |||||||||||
|
Total
|
$ | 4,611,000 | 100.00 | % | $ | 7,637,000 | 100.00 | % | ||||||||
|
*
|
Please see Balance Sheet Reconciliation below.
|
Balance Sheet Reconciliation
The following table reconciles the balance of the loan portfolio to the amount shown on the accompanying Consolidated Balance Sheets.
|
December 31, 2015
|
December 31, 2014
|
|||||||
|
Balance per loan portfolio
|
$ | 4,611,000 | $ | 7,637,000 | ||||
|
Less:
|
||||||||
|
Allowance for loan losses (a)
|
(2,450,000 | ) | (2,450,000 | ) | ||||
|
Balance per consolidated balance sheets
|
$ | 2,161,000 | $ | 5,187,000 | ||||
|
|
(a)
|
Please refer to Specific Reserve Allowance below.
|
Non-Performing Loans
As of December 31, 2015 and 2014, we had one loan considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due). This loan is currently carried on our books at a value of $0, net of allowance for loan losses of approximately $2.5 million. This loan has been placed on non-accrual of interest status.
|
Loan Type
|
Number Of Non-Performing Loans
|
Balance
|
Allowance for Loan Losses
|
Net Balance
|
||||||||||||
|
Commercial
|
1 | $ | 2,450,000 | $ | (2,450,000 | ) | $ | -- | ||||||||
|
Total
|
1 | $ | 2,450,000 | $ | (2,450,000 | ) | $ | -- | ||||||||
Asset Quality and Loan Reserves
Losses may occur from investing in real estate loans. The amount of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.
The conclusion that a real estate loan is uncollectible or that collectability is doubtful is a matter of judgment. On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment. The fact that a loan is temporarily past due does not necessarily mean that the loan is non-performing. Rather, all relevant circumstances are considered by our manager to determine impairment and the need for specific reserves. Such evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters:
|
|
·
|
Prevailing economic conditions;
|
|
|
·
|
Historical experience;
|
|
|
·
|
The nature and volume of the loan portfolio;
|
|
|
·
|
The borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;
|
|
|
·
|
Evaluation of industry trends; and
|
|
|
·
|
Estimated net realizable value of any underlying collateral in relation to the loan amount.
|
Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses on an individual loan basis; we do not have a general allowance for loan losses. Additions to the allowance for loan losses are made by charges to the provision for loan loss. As of December 31, 2015, our ratio of total allowance for loan losses to total loans with an allowance for loan loss was 100%.
The following is a breakdown of allowance for loan losses related to performing loans and non-performing loans as of December 31, 2015 and 2014:
|
As of December 31, 2015
|
||||||||||||
|
Balance
|
Allowance for loan losses **
|
Balance, net of allowance
|
||||||||||
|
Non-performing loans – no related allowance
|
$ | -- | $ | -- | $ | -- | ||||||
|
Non-performing loans – related allowance
|
2,450,000 | (2,450,000 | ) | -- | ||||||||
|
Subtotal non-performing loans
|
2,450,000 | (2,450,000 | ) | -- | ||||||||
|
Performing loans – no related allowance
|
2,161,000 | -- | 2,161,000 | |||||||||
|
Performing loans – related allowance
|
-- | -- | -- | |||||||||
|
Subtotal performing loans
|
2,161,000 | -- | 2,161,000 | |||||||||
|
Total
|
$ | 4,611,000 | $ | (2,450,000 | ) | $ | 2,161,000 | |||||
|
As of December 31, 2014
|
||||||||||||
|
Balance
|
Allowance for loan losses **
|
Balance, net of allowance
|
||||||||||
|
Non-performing loans – no related allowance
|
$ | -- | $ | -- | $ | -- | ||||||
|
Non-performing loans – related allowance
|
2,450,000 | (2,450,000 | ) | -- | ||||||||
|
Subtotal non-performing loans
|
2,450,000 | (2,450,000 | ) | -- | ||||||||
|
Performing loans – no related allowance
|
5,187,000 | -- | 5,187,000 | |||||||||
|
Performing loans – related allowance
|
-- | -- | -- | |||||||||
|
Subtotal performing loans
|
5,187,000 | -- | 5,187,000 | |||||||||
|
Total
|
$ | 7,637,000 | $ | (2,450,000 | ) | $ | 5,187,000 | |||||
|
**
|
Please refer to Specific Reserve Allowances below.
|
Our manager evaluated our loans and, based on current estimates with respect to the value of the underlying collateral, believes that such collateral is sufficient to protect us against further losses of principal. However, such estimates could change or the value of the underlying real estate could decline. Our manager will continue to evaluate our loans in order to determine if any other allowance for loan losses should be recorded.
|
|
Specific Reserve Allowances
|
As of December 31, 2015 and 2014, we have provided a specific reserve allowance for one non-performing loan based on updated appraisals of the underlying collateral and/or our evaluation of the borrower.
The following table is a roll-forward of the allowance for loan losses for the periods ended December 31, 2015 and 2014 by loan type. We will continue to evaluate our position in this loan.
|
Loan Type
|
Balance at
12/31/2014
|
Specific Reserve Allocation
|
Loan Pay Downs
|
Write-off
|
Transfers to REO or Notes Receivable
|
Balance at
12/31/15
|
||||||||||||||||||
|
Commercial
|
$ | 2,450,000 | $ | -- | $ | -- | $ | -- | $ | -- | $ | 2,450,000 | ||||||||||||
|
Total
|
$ | 2,450,000 | $ | -- | $ | -- | $ | -- | $ | -- | $ | 2,450,000 | ||||||||||||
|
Loan Type
|
Balance at
12/31/2013
|
Specific Reserve Allocation
|
Loan Pay Downs
|
Write-off
|
Transfers to REO or Notes Receivable
|
Balance at
12/31/14
|
||||||||||||||||||
|
Commercial
|
$ | 2,500,000 | -- | $ | (50,000 | ) | $ | -- | $ | -- | $ | 2,450,000 | ||||||||||||
|
Total
|
$ | 2,500,000 | $ | -- | $ | (50,000 | ) | $ | -- | $ | -- | $ | 2,450,000 | |||||||||||
Extensions
As of December 31, 2015 and 2014, our manager had granted extensions on one and five outstanding loans, respectively, totaling approximately $2.5 million and $13.6 million, respectively, of which our portion was approximately $45,000 and $5.1 million, respectively, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent, or as part of a TDR. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing. Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan. In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal. As of December 31, 2015 and 2014, one and five of the loans, respectively, that have been granted extensions were performing.
NOTE E —INVESTMENTS IN DELAWARE STATUTORY TRUST
As of December 31, 2015, we have an investment in one Delaware Statutory Trusts (“DST”) for $1.8 million which has a mandatory repurchase agreement which, for accounting purposes, is accounted for in a manner similar to a loan. The DSTs holds commercial property located in Illinois, which we consider to be the collateral on this loan. Additionally, the DST is guaranteed by a third party Broker Dealer who has a selling agreement with MVP REIT. Certain members of the Broker Dealer’s management also guaranteed this loan. During the year ended, we received approximately $0.5 million in interest payments.
NOTE F —ASSETS HELD FOR SALE
During April 2015, we committed to a plan to sell all interests in our six office buildings, at which point we began classifying the related assets as assets held for sale, and the related liabilities as liabilities related to assets held for sale. Additionally, we have classified the six office building’s operating results of operations as discontinued operations.
Assets and groups of assets and liabilities which comprise disposal groups are classified as “held for sale” when all of the following criteria are met: a decision has been made to sell, the assets are available for sale immediately, the assets are being actively marketed at a reasonable price in relation to the current fair value, a sale has been or is expected to be concluded within twelve months of the balance sheet date, and significant changes to the plan to sell are not expected. Assets held for sale are not depreciated.
Additionally, the operating results and cash flows related to these assets and liabilities are included in discontinued operations in the consolidated statements of operations and consolidated statements of cash flows for the year ended December 31, 2015.
The following is summary of net assets held for sale through December 31, 2015:
|
December 31, 2015
|
||||
|
Assets:
|
||||
|
Current assets
|
$ | 971,000 | ||
|
Property and equipment
|
43,952,000 | |||
|
Total assets
|
$ | 44,923,000 | ||
|
Liabilities:
|
||||
|
Accounts payable and accrued liabilities
|
$ | 289,000 | ||
|
Notes payable
|
30,395,000 | |||
|
Total liabilities
|
30,684,000 | |||
|
Net assets held for sale
|
$ | 14,239,000 | ||
The following is a summary of the results of operations related to the assets held for sale for the year ended December 31, 2015:
|
For The
Year Ended
December 31, 2015
|
||||
|
Revenue
|
$ | 4,832,000 | ||
|
Revenue eliminated through consolidation
|
(169,000 | ) | ||
|
Expenses
|
(14,009,000 | ) | ||
|
Net income
|
$ | (9,346,000 | ) | |
2014
The following is summary of net assets held for sale through December 31, 2014:
|
December 31, 2014
|
||||
|
Assets:
|
||||
|
Current assets
|
$ | 833,000 | ||
|
Property and equipment
|
54,594,000 | |||
|
Total assets
|
$ | 55,427,000 | ||
|
Liabilities:
|
||||
|
Accounts payable and accrued liabilities
|
$ | 84,000 | ||
|
Notes payable
|
30,972,000 | |||
|
Total liabilities
|
31,056,000 | |||
|
Net assets held for sale
|
$ | 24,371,000 | ||
The following is a summary of the results of operations related to the assets held for sale for the year ended December 31, 2014:
|
For The
Year Ended
December 31, 2014
|
||||
|
Revenue
|
$ | 2,727,000 | ||
|
Expenses
|
(2,020,000 | ) | ||
|
Net Income
|
$ | 708,000 | ||
NOTE G — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY
In December 2014, VRM I effected a 1 for 4 reverse split of its common stock. All share and per share information in VRM I’s consolidated financial statements and its accompanying notes have been adjusted to retroactively reflect the 1 for 4 reverse stock split.
As of December 31, 2015, we owned 134,545 shares of VRM I’s common stock, representing approximately 10.4% of the total outstanding shares. The closing price of VRM I’s common stock on December 31, 2015, was $1.02 per share.
During the year ended December 31, 2015, the trading price for VRM I’s common stock ranged from $1.02 to $5.87 per share. At December 31, 2015, our manager evaluated the near-term prospects of VRM I in relation to the severity and duration of the unrealized loss. Based on that evaluation and current market conditions, we have determined there was an other-than-temporary impairment on our investment in VRM I as of December 31, 2015, totaling approximately $0.3 million and recognized the impairment.
As of December 31, 2015, VRM II purchased 5,000 shares of MVP REIT II’s outstanding common stock for $125,000.
NOTE H — INVESTMENT IN MVP REIT II
During May 2015, our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%. The purpose of MVP CP II is to act as the sponsor of MVP REIT II, a Maryland corporation, which was formed as a publicly registered non traded REIT (“MVP REIT II”). MVP REIT II’s registration statement has been declared effective by the SEC on October 23, 2015. MVP REIT II is a proposed $550,000,000 offering with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.
We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to our respective ownership interest. As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II. As part of the advisory agreement, MVP Advisors will receive a 1% annual asset management fee and 2.25% of the purchase price on all acquisitions. MVP Advisors will also receive the lesser of 3% of contract sale price or 50% of the brokerage commission paid on dispositions of MVP REIT II assets, which amount shall accrue until the MVP REIT II investors have a return of their net capital and a 6% annual cumulative non compounded return. In addition once the MVP REIT II investors have received a return of their net capital invested and a 6% annual cumulative, non-compounded return, then MVP Advisors will be entitled to receive 15% of the remaining proceeds. This fee will be payable under only one of the following events: (i) if MVP REIT II shares are listed on a national securities exchange; (ii) if MVP REIT II assets are sold, other than single assets sold in the ordinary course, or liquidated; (iii) upon a merger, share exchange, reorganization or other transaction pursuant to which MVP REIT II investors receive cash or publicly traded securities in exchange for their shares; or (iv) upon termination of the advisory agreement. The operating agreement of the Advisor provides that once we and VRM I have been repaid in full for any capital contributions to the Advisor or for any expenses advanced on the Advisor’s behalf, or capital investment, and once we and VRM I have received an annualized return on our capital investment of 7.5%, then Michael Shustek will receive 40% of the net profits of the Advisor.
NOTE I — RELATED PARTY TRANSACTIONS
Transactions with the Manager
Our manager is entitled to receive from us an annual management fee of up to 0.25% of our aggregate capital contributions received by us and Fund II from the sale of shares or membership units, paid monthly. The amount of management fees earned by our manager for the years ended December 31, 2015 and 2014 were approximately $1.1 million for each period.
As of December 31, 2015 and 2014, our manager owned 23,175 of our common shares, representing approximately 0.9% of our total outstanding common stock at the respective dates.
As of December 31, 2015 and 2014, we had receivables from our manager of approximately $20,000 related to consulting and accounting fees.
During September 2015, we and VRM I paid the manager approximately $0.3 million in fees, of which our portion was approximately $0.2 million, related to the investment in Delaware Statutory Trust.
Transactions with Other Related Parties
During the year ended December 31, 2015, the trading price for VRM I’s common stock ranged from $1.02 to $5.87 per share. At December 31, 2015, our manager evaluated the near-term prospects of VRM I in relation to the severity and duration of the unrealized loss. Based on that evaluation and current market conditions, we have determined there was an other-than-temporary impairment on our investment in VRM I as of December 31, 2015, totaling approximately $0.3 million and recognized the impairment. For the years ended December 31, 2015 and 2014, we recognized no dividend income from VRM I.
As of December 31, 2015 and 2014, VRM I owned 134,270 of our common shares, representing approximately 5.4% of our total outstanding common stock for both periods.
As of December 31, 2015, we had a receivable from VRM I of approximately $4,000. As of December 31, 2014 we had a receivable from VRM I of approximately $30,000, primarily related to asset transfer and legal fees.
As of December 31, 2015, we owed Fund III approximately $1,000. As of December 31, 2014 we had a receivable from Fund III of approximately $4,000.
As of December 31, 2015 and 2014 we had a receivable from Vestin Mortgage of approximately $0.3 million and $0.1 million, respectively, related to payroll expenses paid by MVP Advisors.
As of December 31, 2015 and 2014, MVP Advisors owed VRM I approximately $4.5 million and $1.4 million, respectively.
As of December 31, 2015 and 2014, we owned a 60% interest in MVP Advisors, the advisor of MVP REIT and MVP REIT II, Inc.
MVP Advisors is entitled to receive a monthly asset management fee at an annual rate equal to 0.85% of the fair market value of (i) all assets then held by MVP REIT or (ii) MVP REIT’s proportionate share thereof in the case of an investment made through a joint venture or other co-ownership arrangement, excluding (only for clause (ii)) debt financing obtained by MVP REIT or made available to MVP REIT. The fair market value of real property shall be based on annual “AS-IS”, “WHERE-IS” appraisals, and the fair market value of real estate-related secured loans shall be equal to the face value of such loan, unless it is non-performing, in which case the fair market value shall be equal to the book value of such loan. The asset management fee will be reduced to 0.75% if MVP REIT is listed on a national securities exchange. Asset management fees for the years ended December 31, 2015 and 2014 were approximately $0.5 million and $0.4 million, respectively.
MVP Advisors receives a monthly debt financing fee at an annual rate equal to 0.25% of the aggregate debt financing obtained by MVP REIT or made available to MVP REIT, such as mortgage debt, lines of credit, and other term indebtedness, including refinancing’s. In the case of a joint venture, MVP REIT pays this fee only on MVP REIT’s pro rata share. Debt financing fees for the years ended December 31, 2015 and 2014 were approximately $66,000, and $29,000, respectively.
MVP Advisors receives a 3% acquisition fee for all acquisition s of MVP REIT. MVP Advisors received approximately $1.8 million in acquisition fee income from MVP REIT during the year ending December 31, 2015.
As of December 31, 2015 we have made loans of approximately $12.9 million to MVP Advisors, the manager of MVP REIT. We believe MVP Advisors has the opportunity to generate fees for the services it will render to MVP REIT. However, such fees may not be significant in the near term as MVP REIT only recently commenced operations in December 2012, and over the next 12 months, there may be a diminution of our liquid assets. If MVP REIT is unable to deploy the capital and operate its business successfully, then our return on our investment in MVP Advisor and the ability of MVP Advisor to repay our loans could be adversely impacted. We have not forgiven the balance due from MVP Advisor; however the decision by MVP Advisor to forgive certain amounts creates additional uncertainty as to when we will be repaid the amounts loaned to MVP Advisor. Based on these uncertainties, we have determined to fully impair the balance of this investment and note receivable.
As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II. As of December 31, 2015 we have made loans of approximately $1.1 million to MVP CP II. Similar to our investments in MVP Advisors in connection with MVP REIT, the return on our investment in MVP CP II in connection with MVP REIT II, including the ability of MVP CP II to repay its loans, will likely depend upon the success of the pending public offering of MVP REIT II and the ability of MVP CP II and MVP Advisor to successfully deploy the offering proceeds. Based on uncertainties regarding repayment, during the year ended December 31, 2015, we have determined to fully impair the entire balance of this loan.
From time to time, we may also jointly invest in real property or real estate loans with our affiliates, including VRM I and MVP REIT, Inc. These investments are described elsewhere in this report and incorporated herein by reference.
From time to time, we may also acquire or sell investments in real estate or in real estate loans from/to our manager or other related parties. Pursuant to the terms of our Management Agreement, such acquisitions and sales are made without any mark up or mark down. No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments. The purpose is generally to diversify our portfolio by syndicating loans and real estate investments, thereby providing us with additional capital to make additional loans and investments in real estate.
On November 25, 2014, Shustek Investments Inc., a company wholly owned by our CEO Mike Shustek, entered into a loan purchase contract with us to acquire a loan with a book value of approximately $2.4 million. The loan was originated during March 2009 with an original principal balance of $7.45 million earning interest at a rate of 11% per annum. The borrower made principal payments during the life of the loan; however, they also received extensions for the maturity of the note. As of the date of the loan purchase contract, the loan was extended through January 2015. The purchase price of the loan was approximately $3.0 million, which includes the purchase of interest assigned to third parties. As additional consideration we may receive 50% of any amount collected in excess of the purchase price less any expenses incurred by Shustek Investments. After three years the 50% shall be reduced to 33%. This transaction resulted in a gain on sale of loan – related party totaling approximately $0.6 million for the year ended December 31, 2014. During the quarter ended March 31, 2015, this loan was paid in full and we received approximately $1.6 million.
Accounting services
During the years ended December 31, 2015 and 2014, Strategix Solutions, an entity owned by Ms. Gress, the Company’s Chief Financial Officer, received fees of approximately $237,000 and $135,000, respectively, for accounting services.
2015
During December 2006, we and VRM I entered into a settlement agreement in the amount of $1.5 million with the guarantors of a loan collateralized by a 126 unit (207 bed) assisted living facility in Phoenix, AZ, which we had foreclosed on. Our portion was approximately $1.3 million. The promissory note is payable in seven annual installments of $100,000 with an accruing interest rate of 7%, with the remaining note balance due in April 2013. During 2011, we had received $88,000 in regularly scheduled principal payments. Also during 2011, an agreement which would accept approximately $0.4 million as a final payment for the note was approved, of which approximately $0.3 million was received. No payments were received in 2015. The balance of this agreement of approximately $50,000 was fully reserved as of December 31, 2015. Payments will be recognized as income when received.
During March 2011, we were awarded a deficiency judgment totaling $5.0 million related to a REO sold in a prior period. The balance accrues interest at the rate of 9% until paid in full. Provided all payments of approximately $3.0 million as outlined in the judgment are received, the remaining balance of judgment shall be forgiven. Annual payments of $0.5 million are accrued when due. The balance of approximately $3.9 million was fully reserved as of December 31, 2014. On September 15, 2015, we entered into a settlement agreement, wherein we received payment in the amount of $ 1.0 million in exchange for a full satisfaction of the judgement.
During March 2011, we were awarded a deficiency judgment totaling $2.8 million related to a REO sold in a prior period. The balance accrues interest at the rate of 9% until paid in full. Provided all payments of approximately $1.2 million as outlined in the judgment are received, the remaining balance of judgment shall be forgiven. Annual payments of $0.2 million are accrued when due. The balance of approximately $1.5 million was fully reserved as of December 31, 2014. On September 15, 2015, we entered into a settlement agreement, wherein we received payment in the amount of $0.6 million in exchange for a full satisfaction of the judgement.
During February 2012, we, VRM I and Fund III received a payment in full satisfaction of an investment in real estate loan secured by a first deed of trust and a partial payment of an investment in real estate loan secured by a second deed of trust on the same real estate. The remaining balance due on the second deed of trust, which was previously fully allowed for, of approximately $1.3 million was moved to notes receivable and remains fully allowed for. We receive quarterly payments of $24,000. As of December 31, 2015 the balance is approximately $1.0 million.
2014
During December 2006, we and VRM I entered into a settlement agreement in the amount of $1.5 million with the guarantors of a loan collateralized by a 126 unit (207 bed) assisted living facility in Phoenix, AZ, which we had foreclosed on. Our portion was approximately $1.3 million. The promissory note is payable in seven annual installments of $100,000 with an accruing interest rate of 7%, with the remaining note balance due in April 2013. During 2011, we had received $88,000 in regularly scheduled principal payments. Also during 2011, an agreement which would accept approximately $0.4 million as a final payment for the note was approved, of which approximately $0.3 million was received. No payments were received in 2014. The balance of this agreement of approximately $50,000 was fully reserved as of December 31, 2014. Payments will be recognized as income when received.
During March 2011, we were awarded a deficiency judgment totaling $5.0 million related to a REO sold in a prior period. The balance accrues interest at the rate of 9% until paid in full. Provided all payments of approximately $3.0 million as outlined in the judgment are received, the remaining balance of judgment shall be forgiven. Annual payments of $0.5 million are accrued when due. The balance of approximately $3.9 million was fully reserved as of December 31, 2014.
During March 2011, we were awarded a deficiency judgment totaling $2.8 million related to a REO sold in a prior period. The balance accrues interest at the rate of 9% until paid in full. Provided all payments of approximately $1.2 million as outlined in the judgment are received, the remaining balance of judgment shall be forgiven. Annual payments of $0.2 million are accrued when due. The balance of approximately $1.5 million was fully reserved as of December 31, 2014.
During April 2012, we, VRM I and Fund III received a payment in full satisfaction of an investment in real estate loan secured by a first deed of trust. The remaining balance due on the second deed of trust, which was previously fully allowed for, of approximately $0.7 million was moved to notes receivable and remains fully allowed for. We received monthly payments of approximately $33,000. The balance has been paid in full as of December 31, 2014.
During February 2012, we, VRM I and Fund III received a payment in full satisfaction of an investment in real estate loan secured by a first deed of trust and a partial payment of an investment in real estate loan secured by a second deed of trust on the same real estate. The remaining balance due on the second deed of trust, which was previously fully allowed for, of approximately $1.3 million was moved to notes receivable and remains fully allowed for. We receive quarterly payments of $24,000. As of December 31, 2014 the balance is approximately $1.1 million.
NOTE K — NOTES PAYABLE
2015
In April 2014, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 2.99%. The agreement required a down payment of $39,000 and nine monthly payments of $23,000 beginning on May 27, 2014. As of December 31, 2014, the outstanding balance of the note was approximately $23,000. During January 2015, the outstanding balance of the note was paid in full.
In April 2015, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 2.9%. The agreement required a down payment of $39,000 and nine monthly payments of $25,000 beginning on May 27, 2015. As of December 31, 2015, the note was paid in full.
At December 31, 2015 and 2014, the following loans are reported as liabilities related to assets held for sale:
On May 16, 2014 Wolfpack, LLC and Devonshire, LLC entered into a loan agreement with a financial institution in the amount of $7.8 million, collateralized by real property held in Las Vegas, Nevada. The loan bears an annual interest rate of 4.6% and is payable in monthly installment payments of principal and interest totaling approximately $50,000, with a lump sum payment of approximately $6.3 million due at maturity in June of 2024. This loan agreement replaces their previous loans which held balances of approximately $3.9 million and $3.9 million, respectively, at payoff.
During April 2014, through the acquisition of SE Properties, the Company assumed the liability on a loan with a balance of approximately $3.4 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 6.625%, and payable in monthly installment payments of principal and interest totaling approximately $25,000 maturing in January 2036.
During April 2014, through the acquisition of ExecuSuites, the Company assumed the liability on a loan with a balance of approximately $3.1 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 5.875%, and payable in monthly installment payments of principal and interest totaling approximately $21,000 maturing in May 2037.
During July 2014, through the acquisition of Building C, the Company assumed the liability on a loan with a balance of approximately $8.4 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 4.81%, and payable in monthly installment payments of principal and interest totaling approximately $49,000, with a lump sum payment of approximately $7.0 million due at maturity in April of 2021.
During August 2014, through the acquisition of Building A, the Company assumed the liability on a loan with a balance of approximately $8.4 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 4.969%, and payable in monthly installment payments of principal and interest totaling approximately $46,000, with a lump sum payment of approximately $7.8 million due at maturity in April of 2019.
As of December 31, 2015, future principal payments on the notes payable are as follows:
|
2016
|
$ | 584,000 | ||
|
2017
|
648,000 | |||
|
2018
|
683,000 | |||
|
2019
|
8,431,000 | |||
|
2020
|
591,000 | |||
|
Thereafter
|
19,458,000 | |||
|
Total
|
$ | 30,395,000 |
2014
In April 2013, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 4.25%. The agreement required a down payment of $69,000 and nine monthly payments of $24,000 beginning on May 27, 2013. As of December 31, 2013, the outstanding balance of the note was approximately $23,000. During January 2014, the outstanding balance of the note was paid in full.
In April 2014, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 2.99%. The agreement required a down payment of $39,000 and nine monthly payments of $23,000 beginning on May 27, 2014. As of December 31, 2014, the outstanding balance of the note was approximately $23,000. During January 2015, the outstanding balance of the note was paid in full.
On May 16, 2014 Wolfpack, LLC and Devonshire, LLC entered into a loan agreement with a financial institution in the amount of $7.8 million, collateralized by real property held in Las Vegas, Nevada. The loan bears an annual interest rate of 4.6% and is payable in monthly installment payments of principal and interest totaling approximately $50,000, with a lump sum payment of approximately $6.3 million due at maturity in June of 2024. This loan agreement replaces their previous loans which held balances of approximately $3.9 million and $3.9 million, respectively, at payoff.
During April 2014, through the acquisition of SE Properties, the Company assumed the liability on a loan with a balance of approximately $3.4 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 6.625%, and payable in monthly installment payments of principal and interest totaling approximately $25,000 maturing in January 2036.
During April 2014, through the acquisition of ExecuSuites, the Company assumed the liability on a loan with a balance of approximately $3.1 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 5.875%, and payable in monthly installment payments of principal and interest totaling approximately $21,000 maturing in May 2037.
During July 2014, through the acquisition of Building C, the Company assumed the liability on a loan with a balance of approximately $8.4 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 4.81%, and payable in monthly installment payments of principal and interest totaling approximately $49,000, with a lump sum payment of approximately $7.0 million due at maturity in April of 2021.
During August 2014, through the acquisition of Building A, the Company assumed the liability on a loan with a balance of approximately $8.4 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 4.969%, and payable in monthly installment payments of principal and interest totaling approximately $46,000, with a lump sum payment of approximately $7.8 million due at maturity in April of 2019.
As of December 31, 2014, future principal payments on the notes payable are as follows:
|
2015
|
$ | 557,000 | ||
|
2016
|
616,000 | |||
|
2017
|
648,000 | |||
|
2018
|
683,000 | |||
|
2019
|
8,431,000 | |||
|
Thereafter
|
20,059,000 | |||
|
Total
|
$ | 30,994,000 |
NOTE L— FAIR VALUE
As of December 31, 2015 and 2014, financial assets and liabilities utilizing Level 1 inputs included investment in marketable securities - related party and third party. We had no assets or liabilities utilizing Level 2 inputs, and assets and liabilities utilizing Level 3 inputs included investments in real estate loans and investments in equity method investees, both held for sale and not held for sale.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, our degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability will be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that are current as of the measurement date, including during periods of market dislocation, such as the recent illiquidity in the auction rate securities market. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition may cause our financial instruments to be reclassified from Level 1 to Level 2 or Level 3 and/or vice versa.
Our valuation techniques will be consistent with at least one of the three possible approaches: the market approach, income approach and/or cost approach. Our Level 1 inputs are based on the market approach and consist primarily of quoted prices for identical items on active securities exchanges. Our Level 2 inputs are primarily based on the market approach of quoted prices in active markets or current transactions in inactive markets for the same or similar collateral that do not require significant adjustment based on unobservable inputs. Our Level 3 inputs are primarily based on the income and cost approaches, specifically, discounted cash flow analyses, which utilize significant inputs based on our estimates and assumptions.
The following table presents the valuation of our financial assets and liabilities as of December 31, 2015 and 2014, measured at fair value on a recurring basis by input levels:
|
Fair Value Measurements at Reporting Date Using
|
||||||||||||||||||||
|
Quoted Prices in Active Markets For Identical Assets (Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
Balance at 12/31/15
|
Carrying Value on Balance Sheet at 12/31/15
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Investment in marketable securities - related party
|
$ | 262,000 | $ | -- | $ | -- | $ | 262,000 | $ | 262,000 | ||||||||||
|
Investment in real estate loans
|
$ | -- | $ | -- | $ | 2,148,000 | $ | 2,148,000 | $ | 2,161,000 | ||||||||||
|
Fair Value Measurements at Reporting Date Using
|
||||||||||||||||||||
|
Quoted Prices in Active Markets For Identical Assets (Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
Balance at 12/31/14
|
Carrying Value on Balance Sheet at 12/31/14
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Investment in marketable securities - related party
|
$ | 461,000 | $ | -- | $ | -- | $ | 461,000 | $ | 461,000 | ||||||||||
|
Investment in real estate loans
|
$ | -- | $ | -- | $ | 5,167,000 | $ | 5,167,000 | $ | 5,187,000 | ||||||||||
The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2015 to December 31, 2015:
|
Investment in
real estate loans
|
||||
|
Balance on January 1, 2015
|
$ | 5,167,000 | ||
|
Purchase and additions of assets
|
||||
|
New mortgage loans and mortgage loans acquired
|
5,217,000 | |||
|
Purchase from third parties
|
200,000 | |||
|
Sales, pay downs and reduction of assets
|
||||
|
Collections and settlements of principal and sales of investment in real estate loans
|
(5,971,000 | ) | ||
|
Sale of assets to third parties
|
(2,472,000 | ) | ||
|
Temporary change in estimated fair value based on future cash flows
|
7,000 | |||
|
Balance on December 31, 2015, net of temporary valuation adjustment
|
$ | 2,148,000 | ||
The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2014 to December 31, 2014:
|
Investment in
real estate loans
|
||||
|
Balance on January 1, 2014
|
$ | 7,867,000 | ||
|
Purchase and additions of assets
|
||||
|
New mortgage loans and mortgage loans acquired
|
14,269,000 | |||
|
Purchase from third parties
|
498,000 | |||
|
Sales, pay downs and reduction of assets
|
||||
|
Collections and settlements of principal and sales of investment in real estate loans
|
(6,546,000 | ) | ||
|
Sale of assets to VRM I
|
(2,823,000 | ) | ||
|
Sale of assets to third parties
|
(8,060,000 | ) | ||
|
Temporary change in estimated fair value based on future cash flows
|
(38,000 | ) | ||
|
Balance on December 31, 2014, net of temporary valuation adjustment
|
$ | 5,167,000 | ||
NOTE M— EMPLOYEE BENEFIT PLAN
MVP Advisors maintains a 401(k) Plan (the “Plan”), which is a defined contribution plan covering all eligible employees. Under the provisions of the Plan, participants may direct the Company to defer a portion of their compensation to the Plan, subject to Internal Revenue Code limitations. The Company provides for an employer matching contribution equal to 100% of the first 3% of eligible compensation and 50% of the next 2% of eligible compensation contributed by each employee, which is funded in cash. All contributions vest immediately.
Total expense recorded for the matching 401(k) contribution in the year ended December 31, 2015 was approximately $39,000. The Plan started in 2015 so there is no similar expense in 2014.
NOTE N — SEGMENT INFORMATION
Company management reviews financial and operating performance in the following three separate operating segments: (1) investment in real estate loans, (2) investments in real property and (3) investment in a real estate management company. Selling, general and administrative expenses, primarily consisting of compensation of employees, seminar expense, professional fees and overhead costs not directly related to a specific operating segment, are reflected in the table below as corporate activities.
Assets related to investments in real property are currently listed as held for sale. Revenue, net of expenses for this segment are reported in discontinued operations.
The following are certain financial data for the Company’s operating segments for the periods:
| For the Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
|
Revenues
|
||||||||
|
Investment in real estate loans
|
$ | 2,820,000 | $ | 1,737,000 | ||||
|
Investment in real property held for sale
|
1,830,000 | -- | ||||||
|
Investment in real estate management
|
566,000 | 379,000 | ||||||
|
Total revenues
|
5,216,000 | 2,116,000 | ||||||
|
Operating expenses
|
||||||||
|
Investment in real estate loans
|
$ | 1,096,000 | $ | 1,098,000 | ||||
|
Investment in real property held for sale
|
4,000 | 32,000 | ||||||
|
Investment in real estate management
|
4,659,000 | 2,317,000 | ||||||
|
Corporate activities
|
7,968,000 | 4,399,000 | ||||||
|
Total expenses
|
13,727,000 | 7,846,000 |
|
Total Assets
|
December 31, 2015
|
December 31, 2014
|
||||||
|
Investment in real estate loans
|
$ | 4,203,000 | $ | 5,190,000 | ||||
|
Investment in real property held for sale
|
44,923,000 | 55,427,000 | ||||||
|
Corporate assets
|
5,242,000 | 8,298,000 | ||||||
|
Total assets
|
$ | 54,368,000 | $ | 68,915,000 | ||||
NOTE O — RECENT ACCOUNTING PRONOUNCEMENTS
In February 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In accordance with the guidance, all legal entities are subject to reevaluation under the revised consolidation model. The guidance is effective in the first quarter of 2016, and early adoption is permitted. We are currently evaluating the potential impact of the adoption of ASU 2015-02 on our consolidated financial statements.
On April 17, 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. Currently, debt issuance costs are recorded as an asset and amortization of these deferred financing costs is recorded in interest expense. Under the new standard, debt issuance costs will continue to be amortized over the life of the debt instrument and amortization will continue to be recorded in interest expense. The new standard is effective for the Company on January 1, 2016 and will be applied on a retrospective basis. The Company is currently evaluating ASU 2015-03, and anticipates a change in our presentation only since the standard does not alter the accounting for debt issuance costs.
NOTE P — LEGAL MATTERS INVOLVING THE MANAGER
The United States Securities and Exchange Commission (the “Commission”), conducted an investigation of certain matters related to us, our manager, Vestin Capital, VRM I, and Fund III. We fully cooperated during the course of the investigation. On September 27, 2006, the investigation was resolved through the entry of an Administrative Order by the Commission (the “Order”). Our manager, Vestin Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin Capital (collectively, the “Respondents”), consented to the entry of the Order without admitting or denying the findings therein.
In the Order, the Commission found that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 through the use of certain slide presentations in connection with the sale of units in Fund III and in our predecessor, Vestin Fund II, LLC. The Respondents consented to the entry of a cease and desist order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from association with any broker or dealer for a period of six months, which expired in March 2007. In addition, the Respondents agreed to implement certain undertakings with respect to future sales of securities. We are not a party to the Order.
Other than the matters described above, our manager believes that it is not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our manager’s financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our manager’s net income in any particular period.
NOTE Q — LEGAL MATTERS INVOLVING THE COMPANY
On February 7, 2012, we, VRM I and Fund III entered into a Deed in Lieu Agreement with a borrower in lieu of the foreclosure of our subordinated secured loan which had matured on December 31, 2011, with a principal balance, net of allowance for loan loss, of approximately $9.9 million, of which our portion was approximately $9.0 million. Pursuant to the Deed in Lieu Agreement, our subsidiary 1701 Commerce, LLC (“1701 Commerce”) received a deed to the secured property operated as the Sheraton Hotel and Spa Fort Worth, Texas (the “Hotel”). On March 26, 2012, 1701 Commerce filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of Texas, Ft. Worth Division, to seek relief from a pending foreclosure of the Hotel by the senior mortgage lien holder and to preserve and protect 1701 Commerce’s equity and the interests of other Hotel creditors. Due to the uncertainty and disputes involving the Hotel, we recorded this investment as Other Real Estate Owned on our balance sheet until August 23, 2012. On July 17, 2013 the Hotel was sold to a third party for the sum of $49.3 million. The net proceeds of the sale and the cash on hand as of the date of the sale were used to pay all 1701 Commerce creditors 100% of their claim plus interest, with the balance distributed to us and our two partners, VRM I and Fund III. On February 4, 2015, the court entered its final decree closing the case.
We hold an interest of approximately 90%, VRM I holds an interest of approximately 8% and Fund III holds an interest of approximately 2% in 1701 Commerce.
In addition to the matters described above, we are involved in a number of other legal proceedings concerning matters arising in the ordinary course of our business activities. We believe we have meritorious defenses to each of these actions and intend to defend them vigorously. Other than the matters described above, we believe that we are not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our operations in any particular period.
NOTE R — INCOME TAXES
We operated as a REIT through December 31, 2011. We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012.
The components of the provision for income tax benefit are as follows for the years ended:
|
December 31, 2015
|
December 31, 2014
|
|||||||
|
Current Taxes
|
||||||||
|
Federal
|
$ | -- | $ | -- | ||||
|
State
|
-- | -- | ||||||
|
Total Current Taxes
|
-- | -- | ||||||
|
Change in Deferred Taxes
|
(5,042,900 | ) | (375,700 | ) | ||||
|
Change in Valuation Allowance
|
5,042,900 | 375,700 | ||||||
|
Provision for income tax expense (benefit)
|
$ | -- | $ | -- | ||||
The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at years end:
|
December 31, 2015
|
December 31, 2014
|
|||||||||
|
Deferred Tax Assets:
|
||||||||||
|
Provision for Loan Losses
|
$ | 834,000 | $ | 834,000 | ||||||
|
Impairment on asset held for sale
|
3,672,000 | -- | ||||||||
|
Impairment on investment in MVP Advisors
|
2,095,000 | 2,095,000 | ||||||||
|
Impairment on investment in marketable securities – related party
|
41,000 | 41,000 | ||||||||
|
Recovery of allowance for doubtful notes receivable
|
204,000 | 391,000 | ||||||||
|
Conversion from straight line rental revenue to actual
|
48,000 | 48,000 | ||||||||
|
Net operating loss carryforward
|
75,372,000 | 76,942,000 | ||||||||
|
Total Deferred Tax Assets
|
82,266,000 | 80,351,000 | ||||||||
|
Valuation allowance
|
(82,266,000 | ) | (80,351,000 | ) | ||||||
|
Deferred Tax Assets, net of valuation allowance
|
-- | -- | ||||||||
|
Non-current portion
|
-- | -- | ||||||||
|
Current portion
|
$ | -- | $ | -- | ||||||
The effective tax rate used for calculation of the deferred taxes as of December 31, 2015 was 34%. The Company has established a valuation allowance against deferred tax assets of $82,266,000 due to the uncertainty regarding realization, comprised primarily of a reserve against the deferred tax assets attributable to the net operating loss carryforward timing differences.
As of December 31, 2011 we were organized and conducted our operations to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”) and to comply with the provisions of the Internal Revenue Code with respect thereto. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income (“Taxable Income”) which is distributed to its stockholders, provided that at least 90% of Taxable Income is distributed and provided that certain other requirements are met. Our Taxable Income may substantially exceed or be less than our net income as determined based on GAAP, because, differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write-downs on real estate owned held for sale, amortization of deferred financing cost, capital gains and losses, and deferred income.
The following subsequent events have been evaluated through the date of this filing with the SEC.
On January 29, 2016, we closed on the sale of our interest in three office buildings that we owned with VRM I through various subsidiaries. The first building was owned by Building C, LLC and is located at 8930 West Sunset Road, Las Vegas, Nevada (the “8930 Building”). The second building was owned by SE Property Investments, LLC and is located at 8905 West Post Road, Las Vegas, Nevada (the “8905 Building”) and the third building was owned by ExecuSuite Properties, LLC and is located at 8945 West Post Road, Las Vegas, Nevada (the “8945 Building”).
The sales price for the 8930 Building is $12.1 million less the current debt on the property of approximately $8.1 million, which was assumed by the purchaser for a net of approximately $4.0 million of which our share was approximately $2.9 million. The sales price for the 8905 Building is $5.6 million less the current debt on the property of approximately $3.3 million, which was assumed by the purchaser for a net of approximately $2.3 million of which our share was approximately $1.6 million. The sales price for the 8945 Building is $5.0 million less the current debt on the property of approximately $3.0 million, which was assumed by the purchaser for a net of approximately $2.0 of which our share was approximately $1.4 million.
We and VRM I, through its subsidiaries, have the right, for a period of one year from the Closing Date, to repurchase one or more of the buildings at a price equal to (i) the sales price for each building, plus (ii) $65,000 for the 8930 Building, $30,000 for the 8905 Building and $30,000 for the 8945 Building, plus (iii) twelve percent less any profit realized by the purchaser of the building being repurchased. Stable Development, LLC, a limited liability company is the manager of and owns a 15% interest in each of the purchasers. Lance Bradford, the former President of MVP REIT is the owner of Stable Development, LLC.
On February 19, 2016, the Board of Directors of Vestin Realty Mortgage II, Inc. accepted the resignation of Fredrick Leavitt as a director.
On February 19, 2016, the Board of Directors appointed Daryl C. Idler, Jr. to fill the vacancy created by Mr. Leavitt. Mr. Idler has been President and Managing General Partner of Premier Golf Properties, LP, dba Cottonwood Golf Club in Rancho San Diego, California, since 2002. Mr. Idler, since 2012 has served as a director of MVP REIT, Inc. and was a director for Vestin Realty Mortgage I, Inc. from 2008 until 2012. From 2000 to 2002, Mr. Idler was Executive Vice President and General Counsel to Global Axcess Corp. (GAXC). From 1973 to 2000, Mr. Idler practiced corporate and real estate law in California.
Mr. Idler has significant experience with real estate related transactions. In 2001, Mr. Idler served as President and Managing Partner of the entity that acquired approximately 300 acres in San Diego County, home to the Cottonwood Golf Club, a 36-hole golf course and related facility. In 2005, Mr. Idler was involved in the acquisition of the neighboring historic Ivanhoe Ranch. During the past 10 years, Mr. Idler has been in charge of all aspects of the golf operations at the Cottonwood Golf Club, including acquisition and financing and real estate developments at the golf course, including processing entitlements for 646 active adult units and 150 single family units, the remodeling of 18 of the 36 holes and construction of a new clubhouse, restoration of riverine habitat, along with pursuing 50-75 estate-size home sites and vineyards at Ivanhoe Ranch.
Between 1973 and 2000, Mr. Idler was involved as a lawyer representing various clients involved in the purchase, acquisition, development and sale of commercial and industrial properties and buildings. Representative projects include small strip-shopping center, large portions of the Otay Mesa, California industrial part, high-rise building in downtown San Diego and light industrial properties in Rancho Bernardo. During the same period, Mr. Idler was a co-investor in seven buildings in downtown San Diego and was involved in all aspects with these acquisitions, including structuring the transactions, preparing documents, conducting due diligence and closing the transactions. Four of the buildings were restored and remain as landmark properties in the historic Gaslamp Quarter of San Diego.
Mr. Idler received his Bachelor’s Degree from the University of Redlands, California and his Juris Doctor from the University of San Diego School of Law. Mr. Idler has been an active member of the California Bar since 1973. Mr. Idler is a member of the Board of Sonshine Haven in El Cajon, California. In addition, Mr. Idler sits on the Board of Trustees and Board of Administration for Skyline Wesleyan Church in La Mesa, California. Mr. Idler served in the United States Navy Reserve from 1966 to 1973, with active service from 1967 to 1969.
Mr. Idler will serve until his successor is elected and qualified.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
|
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure. In connection with the preparation of this Report on Form 10-K, management carried out an evaluation, under the supervision and with the participation of our CEO and CFO, as of December 31, 2015, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Exchange Act. Based upon management’s evaluation, our CEO and CFO concluded that, as of December 31, 2015, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within our company have been or will be detected. Even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation. Furthermore, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. Our management, including our CEO and CFO, does not expect that our controls and procedures will prevent all errors.
The certifications of our CEO and CFO required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of our Company are being made only in accordance with authorizations of management and directors of our Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our Company's assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management has conducted an assessment, including testing, of the effectiveness of our internal control over financial reporting as of December 31, 2015. In making its assessment of internal control over financial reporting, management used the criteria in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management, with the participation of the Chief Executive and Chief Financial Officers, believes that, as of December 31, 2015, the Company’s internal control over financial reporting is effective based on those criteria.
Changes in Internal Control Over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, our management, including our CEO and CFO, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the fourth fiscal quarter of 2015.
|
ITEM 9B.
|
OTHER INFORMATION
|
None.
PART III
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
We are managed on a day-to-day basis by Vestin Mortgage.
Directors and Executive Officers
The following table sets forth the names, ages as of March 30, 2016 and positions of the individuals who serve as our directors and executive officers as of March 30, 2016.
|
Name
|
Age
|
Title
|
|
Michael V. Shustek
|
57
|
President, Chief Executive Officer and Director
|
|
Tracee Gress(4)
|
45
|
Chief Financial Officer
|
|
Donovan Jacobs (1)(2)(3)
|
59
|
Director
|
|
Roland M. Sansone(1)(2)(3)
|
61
|
Director
|
|
Daryl C. Idler, Jr. (1)(2)(3)
|
71
|
Director
|
|
|
(1)
|
Member of the audit committee.
|
|
|
(2)
|
Member of the nominating committee.
|
|
|
(3)
|
Member of the compensation committee.
|
(4) During April 2009, we entered into an accounting services agreement with Strategix Solutions, a Nevada limited liability company, for the provision of accounting and financial reporting services. Strategix Solutions also provides accounting and financial reporting services to VRM II and Fund III. Our CFO and other members of our accounting staff are employees of Strategix Solutions. Strategix Solutions is owned by our CFO, Ms. Gress. As used herein, “management” means our manager, its executive officers and the individuals at Strategix Solutions who perform accounting and financial reporting services on our behalf. As of December 31, 2015, Strategix Solutions dedicated to us a total of three employees, including our CFO.
The following table sets forth the names, ages as of March 30, 2016 and positions of the individuals who serve as directors, executive officers and certain significant employees of Vestin Mortgage (our manager) or our affiliates:
|
Name
|
Age
|
Title
|
|
|
Michael V. Shustek
|
57
|
President, Chief Executive Officer and Chairman
|
|
|
Tracee Gress
|
45
|
Chief Financial Officer
|
|
|
Michael J. Whiteaker
|
66
|
Vice President of Regulatory Affairs
|
|
Directors, Executive Officers and certain significant employees of Vestin Realty Mortgage II, Vestin Mortgage (our manager), Vestin Group, Vestin Originations or our affiliates.
Michael V. Shustek has been a director of our manager, Vestin Mortgage, LLC, and Chairman of the board of directors, Chief Executive Officer and a director of Vestin Group since April 1999 and a Director and CEO of us and Vestin Realty Mortgage I, Inc. (“VRM I”) since January 2006. In February 2004, Mr. Shustek became the President of Vestin Group. Mr. Shustek also serves on the loan committee of Vestin Mortgage, LLC, and its affiliates. In 2003, Mr. Shustek became the Chief Executive Officer of Vestin Mortgage, LLC. In 1995, Mr. Shustek founded Del Mar Mortgage, and has been involved in various aspects of the real estate industry in Nevada since 1990. In 1993, he founded Foreclosures of Nevada, Inc., a company specializing in non-judicial foreclosures. In 1993, Mr. Shustek also started Shustek Investments, a company that originally specialized in property valuations for third-party lenders or investors. In 2012, Mr. Shustek became a Director and the CEO of MVP REIT, Inc.
In 1997, Mr. Shustek was involved in the initial founding of Nevada First Bank, with the largest initial capital base of any new state charter in Nevada’s history. Mr. Shustek has co-authored two books, entitled “Trust Deed Investments,” on the topic of private mortgage lending, and “If I Can Do It, So Can You.” Mr. Shustek is a guest lecturer at the University of Nevada, Las Vegas, where he also has taught a course in Real Estate Law and Ethics. Mr. Shustek received a Bachelor of Science degree in Finance at the University of Nevada, Las Vegas. Mr. Shustek is also Chairman of our Board of Directors as VRM II’s founder and CEO, Mr. Shustek is highly knowledgeable with regard to VRM II’s business operations and loan portfolio. In addition, his participation on the Board of Directors is essential to ensure efficient communication between the Board and management.
Tracee Gress was appointed as our Chief Financial Officer (CFO) on January 14, 2013. In addition, Ms. Gress was appointed as the Chief Financial Officer of VRM II and the equivalent of our Chief Financial Officer of Fund III. Ms. Gress’ services are furnished to us pursuant to an accounting services agreement entered into by our manager and Strategix Solutions. Ms. Gress has been with Strategix Solutions since January 2013 and, prior to January 2013, Ms. Gress was an accountant with L.L. Bradford & Company, LLC from August 2008 to January 2013. Ms. Gress is a Certified Public Accountant and has audited various public and private companies. Additionally, she has also acted as Chief Financial Officer for various private companies. She received a Bachelor of Business Administration degree in Accounting from the University of Nevada, Las Vegas.
Michael J. Whiteaker has been Vice President of Regulatory Affairs since May 1999. Mr. Whiteaker is experienced in the banking and finance regulatory fields, having served with the State of Nevada, Financial Institution Division from 1982 to 1999 as its Supervisory Examiner, responsible for the financial and regulatory compliance audits of all financial institutions in Nevada. Mr. Whiteaker has worked extensively on matters pertaining to both state and federal statutes, examination procedures, policy determination and credit administration for commercial and real estate loans. From 1973 to 1982, Mr. Whiteaker was Assistant Vice President of Nevada National Bank, responsible for a variety of matters including loan review. Mr. Whiteaker has previously served on the Nevada Association of Mortgage Brokers, Legislative Committee and is a past member of the State of Nevada, Mortgage Advisory Council.
Daryl C. Idler, Jr. has been a director of the Company since its inception. He has been President and Managing General Partner of Premier Golf Properties, LP, dba Cottonwood Golf Club in Rancho San Diego, California, since 2002 and a director of Vestin Realty Mortgage I, Inc. from January 2008 until he resigned in November 2013. From 2000 to 2002, Mr. Idler was Executive Vice President and General Counsel to Global Axcess Corp. (GAXC). From 1973 to 2000, Mr. Idler practiced corporate and real estate law in California, including both transactional aspects and litigation.
Mr. Idler has significant experience with real estate related transactions. In 2001, Mr. Idler served as President and Managing Partner of the entity that acquired approximately 300 acres in San Diego County, home to the Cottonwood Golf Club, a 36-hole golf course and related facility. In 2005, Mr. Idler was involved in the acquisition of the neighboring historic Ivanhoe Ranch, comprised of 160 acres. During the past 14 years, Mr. Idler have been in charge of all aspects of the golf operations at the Cottonwood Golf Club, including acquisition and financing and real estate developments at the golf course. Most recently he has directed the commencement of processing entitlements for 1272 active adult/age restricted units, to be followed by entitlement of 180 single family units, construction of a new clubhouse, restoration of riverine habitat and creation of a 100+ acre wetland mitigation bank, and upon conclusion, the reduction of the operating golf facility from 36 holes to 18 holes. In addition, Mr. Idler is in the process of pursuing 100-120 estate-size home sites, stables, open space and vineyards at Ivanhoe Ranch.
Between 1973 and 2000, Mr. Idler was involved as a lawyer representing various clients involved in the purchase, acquisition, development and sale of commercial and industrial properties and buildings. Representative projects include small strip-shopping centers, portions of the Otay Mesa industrial park, high-rise building in downtown San Diego and light industrial properties in Rancho Bernardo. During the same period, Mr. Idler was a co-investor in five buildings in downtown San Diego and was involved in all aspects with these acquisitions, including structuring the transactions, preparing documents, conducting due diligence and closing the transactions. Four of the buildings were restored and remain as landmark properties in the historic Gaslamp Quarter of San Diego.
Mr. Idler received his Bachelor’s Degree from the University of Redlands, California [1967] and his Juris Doctor from the University of San Diego School of Law [1973]. Mr. Idler has been an active member of the California Bar since 1973. Mr. Idler is a founding member of the Board of Sonshine Haven in El Cajon, California, and co-founder and Chairman of Youth Choir San Diego. In addition, Mr. Idler sits on the Board of Trustees and Board of Administration for Skyline Wesleyan Church in La Mesa, California, is Legal Advisor and Board Member of Navy Seal Veterans Network, Legal Advisor to Fraternal Order of Police, Lodge 10. Past community affiliations include former Chairman of the Board and member, finance and staff parish board of Foothills United Methodist Church, Board Member and Chairman of Youth For Christ, San Diego County, and Legal Advisor to the Chief of Police, Los Coyotes Indian Tribe. Mr. Idler served in the United States Navy Reserve from 1966 to 1973, with active service from 1967 to 1969, including security clearance designation of Top Secret.
Donovan J. Jacobs was an employee of Vestin Group from 2000 to 2004 and from September 2005 to October 2006 and has been a member of our board since he was appointed in December 2013. At Vestin Group, he was responsible for opening and managing three Vestin Mortgage branch offices. He is also a director of VRM I since 2008. Since 1992, Mr. Jacobs has been practicing law in San Diego, California where he represents police officers in both administrative and civil actions. Mr. Jacobs is a retired San Diego Police Officer, where he served for 13 years. Mr. Jacobs holds a lifetime teaching credential from the State of California and has taught law and police science at Miramar College, Southwestern College and Central Texas College. Mr. Jacobs has authored two books on narcotics investigations, “Street Crime Investigations” and “Street Cop.” Mr. Jacobs received his Bachelor’s Degree from San Diego State and his Juris Doctor from Thomas Jefferson School of Law. Mr. Jacobs was admitted to the California Bar in 1992. Mr. Jacobs’s legal knowledge, and his familiarity with the business and legal communities in California, provide an important perspective as the Board addresses issues related to the management of our loan portfolio and REO.
Roland M. Sansone was a director for Vestin Group from December 2004 to December 2005. He has been a member of our board of directors since January 2006 and was a director for VRM I from January 2006 until he resigned in January 2008. In addition, he has served as President of Sansone Development, Inc. since 2002. Sansone Development, Inc. is a real estate development company. Mr. Sansone has been self-employed as a Manager and developer of real estate since 1980. Mr. Sansone is currently the president of several companies that develop, own and manage commercial and residential property. Mr. Sansone attended Mt. San Antonio College. Mr. Sansone has extensive experience and familiarity with real estate markets that is invaluable to our Board’s oversight of our lending operations.
CORPORATE GOVERNANCE
Board Composition
Our board of directors is authorized to have up to 15 directors. Our board of directors is currently comprised of four directors. In accordance with our articles of charter and bylaws, our board of directors is divided into three classes, class I, class II and class III, with each class serving staggered three-year terms. The members of the classes are divided as follows:
|
|
·
|
The class I director is Mr. Idler, and his term will expire at the 2016 annual meeting of stockholders;
|
|
|
·
|
The class II director is Mr. Sansone, and their terms will expire at the 2017 annual meeting of stockholders; and
|
|
|
·
|
The class III directors are Messrs. Jacobs and Shustek, and their terms will expire at the 2018 annual meeting of stockholders.
|
The authorized number of directors may be changed only by resolution of the board of directors. Any additional directors resulting from an increase in the number of directors will be distributed between the three classes so that, as nearly as possible, each class will consist of one third of the directors. This classification of our board of directors may have the effect of delaying or preventing changes in our control or management. Our directors will hold office until their successors have been elected and qualified or until their earlier death, resignation, disqualification or removal for cause by the affirmative vote of the holders of at least a majority of our outstanding stock entitled to vote on election of directors.
Board Leadership
Michael V. Shustek serves as our CEO and as the Chairman of our Board of Directors. Mr. Shustek was the founder of our Company and has served as its CEO since inception. Our Board of Directors believes that Mr. Shustek is best situated to serve as Chairman of the Board because he is the director most familiar with our business and loan portfolio and is therefore best positioned to lead Board discussions relating to strategic priorities and opportunities. In this regard, the Board noted Mr. Shustek’s extensive experience in secured real estate lending and his familiarity with our assets and operations. The Board of Directors believes that under these circumstances, the combined role of CEO and Chairman promotes effective strategy development and execution.
We have not appointed a lead independent director, viewing this position as unnecessary given the small size of our Board of Directors. However, Mr. Idler generally chairs executive sessions of our independent directors.
Our board of directors has appointed an audit committee, a nominating committee and a compensation committee. There are no family relationships among any of our directors or executive officers.
Audit Committee
Daryl C. Idler, Jr. (Chairman
Donovan Jacobs
Roland M. Sansone
Compensation Committee
Donovan Jacobs (Chairman)
Roland M. Sansone
Daryl C. Idler, Jr.
Nominating Committee
Roland M. Sansone (Chairman)
Donovan Jacobs
Daryl C. Idler, Jr.
Audit committee – The Audit Committee is responsible for the appointment, compensation, retention and oversight of the Company’s independent accountants. In addition, the Audit Committee reviews with the Company’s management and its independent accountants financial information that will be provided to stockholders and others, the systems of internal controls which management and our board of directors have established and our audit and financial reporting processes. The Audit Committee operates under a written Audit Committee Charter adopted by our board of directors, which is available at http://www.vestinrealtymortgage2.com/VRT_About/CommitteeCharters.aspx. Our Audit Committee, consisting of Mr. Idler (chair), Mr. Jacobs and Mr. Sansone, met in March 2016 in connection with the audit of our 2015 financial statements, and held a total of four meetings in fiscal 2015. Our Audit Committee oversees our accounting and financial reporting processes, internal systems of control, independent auditor relationships and the audits of our financial statements. This committee’s responsibilities include, among other things:
|
|
·
|
Selecting and hiring our independent auditors;
|
|
|
·
|
Evaluating the qualifications, independence and performance of our independent auditors;
|
|
|
·
|
Approving the audit and non-audit services to be performed by our independent auditors;
|
|
|
·
|
Reviewing the design, implementation, adequacy and effectiveness of our internal controls and our critical accounting policies;
|
|
|
·
|
Overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters; and
|
|
|
·
|
Reviewing with management and our auditors any earnings announcements and other public announcements regarding our results of operations.
|
Our independent auditors and internal financial personnel regularly meet privately with our audit committee and have unrestricted access to this committee. Our board of directors has determined that each of these directors meet the independence standards for audit committee members and that Mr. Leavitt meets the financial expertise requirements set forth in Section 407 of the Sarbanes Oxley Act of 2002.
Nominating Committee – Our Nominating Committee was formed to assist our board of directors by identifying individuals qualified to become directors. During fiscal 2015, the Nominating Committee, consisting of Mr. Sansone (chair), Mr. Leavitt and Mr. Jacobs, held no meetings.
The Nominating Committee operates under a charter adopted by our board of directors, which is available at http://www.vestinrealtymortgage2.com/VRT_About/CommitteeCharters.aspx. Responsibilities of the Nominating Committee include, among other things:
|
|
·
|
Evaluating the composition, size, operations and governance of our board of directors and making recommendations regarding future planning and the appointment of directors;
|
|
|
·
|
Evaluating the independence of our directors and candidates for election to the Board; and
|
|
|
·
|
Evaluating and recommending candidates for election to our board of directors.
|
Compensation Committee – Our Compensation Committee operates under a charter adopted by our board of directors, which is available at http://www.vestinrealtymortgage2.com/VRT_About/CommitteeCharters.aspx. It was established to assist our board of directors relating to compensation of the Company’s directors and its sole manager Vestin Mortgage and to produce as may be required an annual report on executive officer compensation. Subject to applicable provisions of our bylaws and the Management Agreement with our manager, the compensation committee is responsible for reviewing and approving compensation paid by us to our manager. During fiscal 2015 the Compensation Committee, consisting of Mr. Jacobs (chair), Mr. Leavitt and Mr. Sansone, held no meetings. No member of the Compensation Committee had a relationship that requires disclosure as a compensation committee interlock.
Our board of directors may establish other committees to facilitate the management of our business.
Criteria for Selecting Directors
In evaluating candidates, the Nominating Committee will consider an individual’s business and professional experience, the potential contributions they could make to our Board and their familiarity with our business. The Nominating Committee will consider candidates recommended by our directors, members of our management team and third parties. The Nominating Committee will also consider candidates suggested by our stockholders. We do not have a formal process established for this purpose.
We do not have a formal diversity policy with respect to the composition of our Board of Directors. However, the Nominating Committee seeks to ensure that the Board of Directors is composed of directors whose diverse backgrounds, experience and expertise will provide the Board with a range of perspectives on matters coming before the Board.
Stockholders are encouraged to contact the Chair of the Nominating Committee if they wish the Committee to consider a proposed candidate. Stockholders should submit the names of any candidates in writing, together with background information about the candidate, and send the materials to the attention of Mr. Roland Sansone at the following address: 8880 W. Sunset Road, Suite 200, Las Vegas, NV 89148. Stockholders wishing to directly nominate candidates for election to the Board must provide timely notice in accordance with the requirements of our Bylaws, between the 150th and 120th days prior to the anniversary of the date of mailing of the notice for the preceding year’s annual meeting of stockholders.
Code of Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees of our manager. The Code of Business Conduct and Ethics may be found on our web site at http://www.vestinrealtymortgage2.com/VRT_About/GovernanceDocuments.aspx.
|
ITEM 11.
|
EXECUTIVE COMPENSATION
|
We currently have no employees. Our day-to-day management functions are performed by our manager and related affiliates. Our executive officers are all employees of our manager or its affiliates and are utilized by our manager to provide management, acquisition, advisory and certain administrative services for us. We do not pay any of these individuals for serving in their respective positions, and we do not pay any compensation to our executive officers.
We pay our manager a management fee of up to 0.25% of the amounts raised by us and Fund II through the sale of shares or units. Payment of the management fee is reviewed by and subject to approval of our Compensation Committee. For the year ended December 31, 2015, we paid our manager approximately $1.1 million for its management services, which represented approximately 38% of the revenues received by our manager and its affiliates in 2015.
Pursuant to our management agreement, we pay our manager a fee which is calculated as a percentage of our original capital contributions. In addition, we may pay our manager or its affiliates for services rendered in selling properties acquired through foreclosure. We also pay a fee to Strategix Solutions which is based upon the wages of the employees providing the services. We have evaluated the risks entailed in these fee arrangements and we do not believe that such risks are reasonably likely to have a material adverse effect upon the Company.
Our manager and our affiliates also receive various fees from borrowers. Such fees may include origination fees as well as charges for servicing, extending or modifying their loans. We are not a party to such fee arrangements and have no control over them. Many of these fees are paid on an up-front basis and, as a result, could create an incentive for our manager and our affiliates to make or extend riskier loans. Funding risky loans could have a material adverse effect upon our operating results and financial condition.
Except as specified above, our independent directors receive $500 for each board meeting and committee meeting they attend, whether in person or by phone, and are reimbursed for travel expenses and other out-of-pocket costs of attending board and committee meetings.
The following table sets forth information with respect to our director compensation during the fiscal year ended December 31, 2015:
|
Name
|
Fees Earned
or Paid in
Cash
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
|
All Other
Compensation
(1)($)
|
Total ($)
|
|||||||||||||||
|
Michael V. Shustek
|
--
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
$
|
--
|
|
$ |
--
|
|||||
|
Donovan Jacobs
|
$5,000
|
--
|
|
--
|
|
--
|
|
--
|
|
-- |
|
$ |
5,000
|
|||||||||
|
Roland M. Sansone
|
$5,000
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
$ |
5,000
|
|||||||||
|
Fredrick J. Leavitt (2)
|
$5,000
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
$ |
5,000
|
|||||||||
|
(1)
|
Amount represents reimbursement of travel and other expenses incurred by directors to attend various director meetings.
|
|
(2)
|
On February 19, 2016, the Board of Directors of MVP REIT, Inc. accepted the resignation of Fredrick Leavitt as a director.
|
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
Shown below is certain information as of March 30, 2016, with respect to beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of shares of common stock by the only persons or entities known to us to be a beneficial owner of more than 5% of the outstanding shares of common stock. Unless otherwise noted, the percentage ownership is calculated based on 2,490,514 shares of our common stock as of March 30, 2016.
|
Name and Address of
Beneficial Owner
|
Amount and Nature of
Beneficial Ownership
|
Percent of Class
|
||
|
Michael V. Shustek
8880 West Sunset Rd Ste 200
Las Vegas, NV 89148
|
Sole voting and investment power of 478,032 shares and shared voting and investment power of 18,774 shares
|
19%
|
The following table sets forth the total number and percentage of our common stock beneficially owned as of March 30, 2016, by:
|
|
·
|
Each director;
|
|
|
·
|
Our chief executive officer, chief financial officer and the officers of our manager who function as the equivalent of our executive officers; and
|
|
|
·
|
All executive officers and directors as a group.
|
Unless otherwise noted, the percentage ownership is calculated based on 2,490,514 shares of our total outstanding common stock as of March 30, 2016.
|
Common Shares Beneficially Owned
|
||||||
|
Beneficial Owner
|
Address
|
Number
|
Percent
|
|||
|
Michael V. Shustek(1)
|
8880 West Sunset Rd. Ste 200
Las Vegas, NV 89148
|
478,032
|
19%
|
|||
|
Donovan Jacobs
|
1347 Tavern Rd. #18 PMVB201 Alpine, CA 91901
|
**
|
**
|
|||
|
Roland M. Sansone
|
2310 E. Sunset Rd #8015
Las Vegas, NV 89119
|
--
|
--
|
|||
|
All directors and executive officers as a group (5 persons)
|
478,032
|
19%
|
||||
** Less than one percent of our total outstanding common stock.
|
(1)
|
Mr. Shustek is the Manager of Vestin Mortgage. Mr. Shustek is the beneficial owner of 496,806 shares of our common stock, representing approximately 19% of our outstanding common stock (based upon 2,490,514 shares of common stock outstanding at March 30, 2016). Mr. Shustek, directly owns 454,857 shares of our common stock (totaling 18%) and indirectly owns and has economic benefit of 23,175 shares of our common stock (totaling 0.9%) through his ownership of Vestin Mortgage. Mr. Shustek has economic benefit of and shares voting and dispositive power of 18,774 shares of our common stock (totaling 0.8%) owned by his spouse, of which 6,327 shares were acquired by her prior to their marriage.
|
Mr. Shustek has sole voting and dispositive power with respect to shares owned directly by himself and with respect to shares owned by Vestin Mortgage.
|
(3)
|
Except as otherwise indicated, and subject to applicable community property and similar laws, the persons listed as beneficial owners of the shares have sole voting and investment power with respect to such shares.
|
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
From time to time, we may acquire or sell investments in real estate loans or real estate from/to our manager or other related parties pursuant to the terms of our Management Agreement without a premium. No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments. The purpose is generally to diversify our portfolio by syndicating loans or real estate investments, thereby providing us with additional capital to make additional other investments.
Please refer to Note J – Related Party Transactions in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K, for information regarding our related party transactions, which are incorporated herein by reference.
Director Independence. The Board of Directors has determined that each of the current non-employee Directors (i.e., Messrs. Leavitt, Jacobs and Sansone are “independent,” as that term is defined in Rule 4200(a)(15) of The Nasdaq Stock Market, Inc.’s listing requirements. In making these determinations, the Board of Directors did not rely on any exemptions to The Nasdaq Stock Market, Inc.’s requirements.
|
ITEM 14.
|
PRINCIPAL ACCOUNTING FEES AND SERVICES
|
During the year ended December 31, 2015 and 2014, RBSMLLP (“RBSM”) rendered services to us as follows:
|
2015
|
2014
|
|||||||
|
Audit Fees
|
$ | 60,000 | $ | -- | ||||
|
Audit Related Fees
|
$ | -- | $ | -- | ||||
|
Tax Fees
|
$ | -- | $ | -- | ||||
|
All Other Fees
|
$ | -- | $ | -- | ||||
RBSM did not perform any non-audit services for us in the years ended December 31, 2015 and 2014.
The Audit Committee has direct responsibility to review and approve the engagement of the independent auditors to perform audit services or any permissible non-audit services. All audit and non-audit services to be provided by the independent auditors must be approved in advance by the Audit Committee. The Audit Committee may not engage the independent auditors to perform specific non-audit services proscribed by law or regulation. All services performed by our independent auditors under engagements entered into from May 6, 2003 to April 1, 2006, were approved by the Audit Committee of Vestin Group, all services performed after April 1, 2006, were approved by our Audit Committee, pursuant to our pre-approval policy, and none was approved pursuant to the de minimis exception to the rules and regulations of the Securities Exchange Act of 1934, Section 10A(i)(1)(B), on pre-approval.
PART IV
|
ITEM 15.
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
The following are filed as part of this Report:
(a) 1. Financial Statements
The list of the financial statements contained herein are contained in Part II, Item 8 Financial Statements on this Annual Report on Form 10-K, which is hereby incorporated by reference.
|
|
(a)
|
3. Exhibits
|
Reference is made to the Exhibit Index appearing immediately after the signature page to this report for a list of exhibits filed as part of this report.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Vestin Realty Mortgage II, Inc.
|
||
|
By:
|
/s/ Michael V. Shustek
|
|
|
Michael V. Shustek
|
||
|
President and Chief Executive Officer
|
||
|
Date:
|
March 30, 2016
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Signature
|
Capacity
|
Date
|
||
|
/s/ Michael V. Shustek
|
President and Chief Executive Officer and Director
|
March 30, 2016
|
||
|
Michael V. Shustek
|
(Principal Executive Officer)
|
|||
|
/s/ Tracee Gress
|
Chief Financial Officer
|
March 30, 2016
|
||
|
Tracee Gress
|
(Principal Financial and Accounting Officer)
|
|||
|
/s/ Donovan Jacobs
|
Director
|
March 30, 2016
|
||
|
Donovan Jacobs
|
||||
|
/s/ Daryl C. Idler, Jr.
|
Director
|
March 30, 2016
|
||
|
Daryl C. Idler, Jr.
|
||||
|
/s/ Roland M. Sansone
|
Director
|
March 30, 2016
|
||
|
Roland M. Sansone
|
EXHIBIT INDEX
|
Exhibit No.
|
Description of Exhibits
|
|
|
2.1 (2)
|
Agreement and Plan of Merger between Vestin Fund II, LLC and the Registrant
|
|
|
2.2(12)
|
Membership Interest Purchase Agreement between VRM I, VRM II and NorthStar Hawaii, LLC
|
|
|
3.1 (1)
|
Articles of Incorporation of the Registrant
|
|
|
3.2 (1)
|
Bylaws of the Registrant
|
|
|
3.3 (1)
|
Form of Articles Supplementary of the Registrant
|
|
|
3.4 (5)
|
Amendment to Vestin Realty Mortgage II’s Articles of Incorporation, effective December 31, 2007.
|
|
|
3.5 (6)
|
Amended Articles of Incorporation of the Registrant
|
|
|
4.1 (1)
|
Reference is made to Exhibits 3.1, 3.2 and 3.3
|
|
|
4.2 (2)
|
Specimen Common Stock Certificate
|
|
|
4.3 (1)
|
Form of Rights Certificate
|
|
|
4.4(14)
|
First Amendment to Rights Agreement, dated as of July 9, 2012, between Registrant and the rights agent
|
|
|
4.5(14)
|
Second Amendment to Rights Agreement, dated as of July 9, 2012, between Registrant and the rights agent
|
|
|
10.1 (1)
|
Form of Management Agreement between Vestin Mortgage, LLC and the Registrant
|
|
|
10.2 (1)
|
Form of Rights Agreement between the Registrant and the rights agent
|
|
|
10.3 (4)
|
Form of Purchase Agreement
|
|
|
10.4 (4)
|
Amended and Restated Trust Agreement
|
|
|
10.5 (7)
|
Intercreditor Agreement, dated June 16, 2008, by and between Vestin Originations, Inc., Vestin Mortgage, LLC, Vestin Realty Mortgage II, Inc., and Owens Mortgage Investment Fund
|
|
|
10.6 (10)
|
Agreement between Strategix Solutions, LLC and Vestin Realty Mortgage II, Inc. for accounting services.
|
|
|
10.7 (11)
|
Second Supplemental Indenture, dated as of May 27, 2009 pertaining to Junior Subordinated Indenture
|
|
|
10.8 (11)
|
First Amendment to Amended and Restated Trust Agreement, dated as of May 27, 2009
|
|
|
10.9 (13)
|
Deed in Lieu
|
|
|
10.10 (15)
|
Purchase and Sale Agreement, dated August 2013, for the acquisition of the parking facilities
|
|
|
10.11 (16)
|
Membership Interest Transfer Agreement, dated as of December 19, 2013, between Registrant and MVP Capital Partners, LLC.
|
|
|
10.12(17)
|
Membership Purchase Agreement, dated March 26, 2014, for purchase of Building C, LLC.
|
|
|
10.13(18)
|
Separation and Release Agreement, dated August 11, 2014, among Steven Reed, MVP Realty Advisors, LLC, MVP American Securities, LLC and MVP REIT, Inc
|
|
|
14 (3)
|
Vestin Realty Mortgage II, Inc. Code of Business Conduct and Ethics
|
|
|
21.1*
|
List of subsidiaries of the Registrant
|
|
|
31.1*
|
Section 302 Certification of Michael V. Shustek
|
|
|
31.2*
|
Section 302 Certification of Tracee Gress
|
|
|
32*
|
Certification Pursuant to 18 U.S.C. Sec. 1350
|
|
|
101*
|
The following material from the Company's quarterly report on Form 10-K for the year ended December 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2015 and 2014, (ii) Consolidated Statements of Operations for the years ended December 31, 2015 and 2014 (iii) Cosolidated Statements of Other Comprehensive Income for the years ended December 31, 2015 and 2014 (iv) Consolidated Statement of Equity for the years ended December 31, 2015 and 2014 (v) Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014 and (vi) Notes to the Consolidated Financial Statements.
|
|
*
|
Filed concurrently herewith.
|
|
|
(1)
|
Incorporated herein by reference to Post-Effective Amendment No. 6 to our Form S-4 Registration Statement filed on January 4, 2006 (File No. 333-125121)
|
|
|
(2)
|
Incorporated herein by reference to Post-Effective Amendment No. 7 to our Form S-4 Registration Statement filed on January 13, 2006 (File No. 333-125121)
|
|
|
(3)
|
Incorporated herein by reference to the Transition Report on Form 10-K for the nine month transition period ended March 31, 2006 filed on September 7, 2006 (File No. 000-51892)
|
|
|
(5)
|
Incorporated herein by reference to the Current Report on Form 8-K filed on January 4, 2008 (File No. 000-51892)
|
|
|
(6)
|
Incorporated herein by reference to the Annual Report on Form 10-K filed on March 14, 2008 (File No. 000-51892)
|
|
|
(7)
|
Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on August 11, 2008 (File No. 000-51892)
|
|
|
(10)
|
Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on May 8, 2009 (File No. 000-51892)
|
|
|
(11)
|
Incorporated herein by reference to the Current Report on Form 8-K filed on June 10, 2009 (File No. 000-51892)
|
|
|
(12)
|
Incorporated herein by reference to the Current Report on Form 8-K/A filed on November 14, 2011 (File No. 000-51892)
|
|
|
(13)
|
Incorporated herein by reference to the Current Report on Form 8-K filed on March 16, 2012 (File No. 000-51892)
|
|
|
(14)
|
Incorporated herein by reference to the Current Report on Form 8-K filed on July 13, 2012 (File No. 000-51892)
|
|
|
(15)
|
Incorporated herein by reference to the Current Report on Form 8-K filed on August 1, 2013 (File No. 000-51892)
|
|
|
(16)
|
Incorporated herein by reference to the Current Report on Form 8-K filed on December 26, 2013 (File No. 000-51892)
|
|
|
(17)
|
Incorporated herein by reference to the Current Report on Form 10-Q filed on May 14, 2013 (File No. 000-51892)
|
|
|
(18)
|
Incorporated herein by reference to the Current Report on Form 10-Q filed on August 13, 2014 (File No. 000-51892)
|