IMH Financial Corp - FORM 10-Q - August 11, 2016

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
 

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

For the quarterly period ended June 30, 2016
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______
 
Commission File number 000-52611

IMH FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
27-1537126
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
7001 N. Scottsdale Rd #2050
Scottsdale, Arizona 85253
(Address of principal executive offices and zip code)

(480) 840-8400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑︎ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑︎ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
 
Accelerated filer
☐
Non-accelerated filer
☐
 
Smaller reporting company
☑︎
(Do not check if a smaller reporting company)
 
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑︎
The registrant had 728,259 shares of Common Stock, 3,491,758 shares of Class B-1 Common Stock, 3,492,954 shares of Class B-2 Common Stock, 7,159,759 shares of Class B-3 Common Stock, 313,790 shares of Class B-4 Common Stock, 735,801 shares of Class C Common Stock, 2,604,852 shares of Series B-1 Preferred Stock and 5,595,148 shares of Series B-2 Preferred Stock, all of which were collectively convertible into 24,122,321 outstanding common shares as of August 11, 2016.



IMH FINANCIAL CORPORATION
INDEX
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2


PART I
FINANCIAL INFORMATION


F-1


Item 1. Financial Statements.
IMH FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) 
 
 
June 30, 2016
 
December 31, 2015
Assets
 
(Unaudited)

 
 
Cash and Cash Equivalents
 
$
9,541

 
$
7,603

Restricted Cash and Cash Equivalents
 
2,107

 
3,541

Mortgage Loans Held for Sale, Net
 
362

 
11,147

Real Estate Held for Sale
 
50,460

 
5,346

Real Estate Held for Development
 
—

 
3,664

Operating Properties, Net
 
89,688

 
116,156

Other Real Estate Owned
 
15,577

 
27,701

Other Receivables
 
2,053

 
1,889

Investment in Unconsolidated Entities
 
6,483

 
6,537

Other Assets
 
1,682

 
1,773

Property and Equipment, Net
 
379

 
459

Total Assets
 
$
178,332

 
$
185,816

Liabilities
 
 

 
 

Accounts Payable and Accrued Expenses
 
$
8,367

 
$
8,846

Accrued Property Taxes
 
199

 
287

Dividends Payable
 
534

 
539

Accrued Interest Payable
 
785

 
654

Customer Deposits and Funds Held for Others
 
3,063

 
2,385

Notes Payable, Net
 
63,012

 
85,014

Notes Payable and Special Assessment Obligations, Assets Held for Sale, Net
 
25,297

 
—

Notes Payable to Related Party, Net
 
7,356

 
4,969

Capital Lease Obligation
 
1,164

 
1,175

Special Assessment Obligations, Net
 
—

 
4,134

Total Liabilities
 
109,777

 
108,003

Redeemable Convertible Preferred Stock, $.01 par value; 100,000,000 shares authorized; 8,200,000 outstanding; liquidation preference of $39,570
 
30,865

 
29,638

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Stockholders’ Equity
 
 

 
 

Common stock, $.01 par value; 200,000,000 shares authorized; 17,552,139 and 17,166,997 shares issued at June 30, 2016 and December 31, 2015, respectively; 15,922,321 and 15,537,179 shares outstanding at June 30, 2016 and December 31, 2015, respectively
 
176

 
172

Less: Treasury stock, 1,629,818 shares at June 30, 2016 and December 31, 2015
 
(5,948
)
 
(5,948
)
Paid-in Capital
 
720,891

 
722,764

Accumulated Deficit
 
(680,397
)
 
(671,178
)
Total IMH Financial Corporation Stockholders' Equity
 
34,722

 
45,810

Noncontrolling Interests
 
2,968

 
2,365

Total Stockholders' Equity
 
37,690

 
48,175

 
 
 
 
 
Total Liabilities and Stockholders’ Equity
 
$
178,332

 
$
185,816

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

F-2


IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Operating Property Revenue
$
9,021

 
$
8,894

 
$
15,592

 
$
16,078

Investment and Other Income
77

 
304

 
171

 
2,154

Mortgage Loan Income, Net
96

 
175

 
313

 
673

Total Revenue
9,194

 
9,373

 
16,076

 
18,905

Operating Expenses:
 
 
 
 
 
 
 
Operating Property Direct Expenses (Exclusive of Interest and Depreciation)
6,724

 
6,573

 
12,343

 
12,217

Expenses for Non-Operating Real Estate Owned
133

 
325

 
291

 
613

Professional Fees
1,262

 
1,045

 
2,223

 
2,291

General and Administrative Expenses
1,947

 
2,547

 
3,862

 
4,740

Interest Expense
2,304

 
2,417

 
4,360

 
5,231

Depreciation and Amortization Expense
1,197

 
651

 
2,239

 
1,282

Total Operating Expenses
13,567

 
13,558

 
25,318

 
26,374

Recovery of Credit Losses, (Gain) Loss on Disposal of Assets, Impairment of Real Estate Owned and Loss of Unconsolidated Subsidiaries
 
 
 
 
 
 
 
(Gain) Loss on Disposal of Assets, Net
226

 
239

 
(22
)
 
282

Recovery of Credit Losses, Net
(120
)
 
(9,745
)
 
(120
)
 
(10,660
)
Impairment of Real Estate Owned
—

 
140

 
—

 
140

Loss of Unconsolidated Subsidiaries
46

 
—

 
190

 
—

Total Recovery of Credit Losses, (Gain) Loss on Disposal of Assets, Impairment of Real Estate Owned and Loss of Unconsolidated Subsidiaries
152

 
(9,366
)
 
48

 
(10,238
)
Total Costs and Expenses
13,719

 
4,192

 
25,366

 
16,136

Income (Loss) before Income Taxes
(4,525
)
 
5,181

 
(9,290
)
 
2,769

Provision for Income Taxes
—

 
—

 
2

 
—

Net Income (Loss)
(4,525
)
 
5,181

 
(9,292
)
 
2,769

Net (Income) Loss Attributable to Noncontrolling Interests
18

 
(586
)
 
73

 
(586
)
Cash Dividend on Redeemable Convertible Preferred Stock
(533
)
 
(533
)
 
(1,067
)
 
(1,061
)
Deemed Dividend on Redeemable Convertible Preferred Stock
(620
)
 
(571
)
 
(1,227
)
 
(1,131
)
Net Income (Loss) Attributable to Common Shareholders
$
(5,660
)
 
$
3,491

 
$
(11,513
)
 
$
(9
)
Net Income (Loss) per common share
 
 
 
 
 
 
 
Basic
$
(0.36
)
 
$
0.23

 
$
(0.72
)
 
$
—

Diluted
$
(0.36
)
 
$
0.13

 
$
(0.72
)
 
$
—

Basic Weighted Average Common Shares Outstanding
15,922,321

 
15,279,062

 
15,910,197

 
15,264,946

Dilutive Effect of Common Share Equivalents
—

 
12,411,209

 
—

 
—

Diluted Weighted Average Common Shares Outstanding
15,922,321

 
27,690,271

 
15,910,197

 
15,264,946

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

F-3


IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2016
(In thousands, except share data)
 
 
 
Common Stock
 
Treasury Stock
 
 
 
Accumulated Deficit
 
Total IMH Financial Corporation Stockholders' Equity
 
Noncontrolling Interest
 
Total Stockholders' Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid-in Capital
 
 
 
Balance, December 31, 2015
 
17,166,997

 
$
172

 
1,629,818

 
$
(5,948
)
 
$
722,764

 
$
(671,178
)
 
$
45,810

 
$
2,365

 
$
48,175

Net Loss
 
—

 
—

 
—

 
—

 
—

 
(9,219
)
 
(9,219
)
 
(73
)
 
(9,292
)
Increase in Noncontrolling Interest due to Profit Participation
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
676

 
676

Cash Dividends on Redeemable Convertible Preferred Stock
 
—

 
—

 
—

 
—

 
(1,067
)
 
—

 
(1,067
)
 
—

 
(1,067
)
Deemed Dividends on Redeemable Convertible Preferred Stock
 
—

 
—

 
—

 
—

 
(1,227
)
 
—

 
(1,227
)
 
—

 
(1,227
)
Stock-Based Compensation
 
385,142

 
4

 
—

 
—

 
421

 
—

 
425

 
—

 
425

Balance, June 30, 2016
 
17,552,139

 
$
176

 
1,629,818

 
$
(5,948
)
 
$
720,891

 
$
(680,397
)
 
$
34,722

 
$
2,968

 
$
37,690

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


F-4

IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Six Months Ended June 30,
 
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
 
Net Income (Loss)
 
$
(9,292
)
 
$
2,769

Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
 
Non-cash Investment in Unconsolidated Entities
 
—

 
(3,064
)
Equity in Net Loss of Unconsolidated Ventures
 
190

 
—

Non-cash Recovery of Real Estate Owned
 
—

 
(6,824
)
Other Non-cash Recovery of Credit Losses
 
—

 
(501
)
Impairment of Real Estate Owned
 
—

 
140

Stock-Based Compensation and Option Amortization
 
425

 
357

Loss (Gain) on Disposal of Assets
 
(22
)
 
282

Amortization of Deferred Financing Costs
 
749

 
923

Depreciation and Amortization Expense
 
2,239

 
1,282

Accretion of Mortgage Income
 
—

 
(138
)
Accretion of Discount on Notes Payable
 
345

 
297

Increase (decrease) in cash resulting from changes in:
 
 
 
 
Accrued Interest Receivable
 
5

 
(344
)
Other Receivables
 
(164
)
 
(458
)
Other Assets
 
(116
)
 
416

Accrued Property Taxes
 
(88
)
 
(262
)
Accounts Payable and Accrued Expenses
 
489

 
4,561

Customer Deposits and Funds Held For Others
 
678

 
900

Accrued Interest Payable
 
131

 
(911
)
Decrease in Restricted Cash
 
918

 
—

Total adjustments, net
 
5,779

 
(3,344
)
Net cash used in operating activities
 
(3,513
)
 
(575
)
INVESTING ACTIVITIES
 
 
 
 
Proceeds from Sales of Mortgage Loans
 
3,044

 
13,674

Proceeds from Sale/Recovery of Real Estate Owned
 
3,292

 
11,592

Proceeds from Mortgage Payoffs
 
7,632

 
—

Purchases of Property and Equipment
 
(18
)
 
(34
)
Mortgage Loan Fundings and Protective Advances
 
—

 
(289
)
Mortgage Loan Repayments
 
—

 
183

Investment in Unconsolidated Entities
 
(135
)
 
—

Investment in Real Estate Owned
 
(8,250
)
 
(16,196
)
Decrease in Restricted Cash
 
516

 
—

Net cash provided by investing activities
 
6,081

 
8,930

FINANCING ACTIVITIES
 
 
 
 
Proceeds from Notes Payable
 
6,574

 
82,373

Debt Issuance Costs Paid
 
(504
)
 
(2,960
)
Increase in Restricted Cash
 
—

 
(17,082
)
Repayments of Notes Payable
 
(5,616
)
 
(61,721
)
Repayments of Capital Leases
 
(11
)
 
(13
)
Dividends Paid
 
(1,073
)
 
(1,061
)
Net cash used in financing activities
 
(630
)
 
(464
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
 
1,938

 
7,891


F-5


 
 
Six Months Ended June 30,
 
 
2016
 
2015
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
7,603

 
1,915

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
9,541

 
$
9,806

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Interest paid
 
$
1,891

 
$
4,196

Real Estate Acquired Through Guarantor Settlement
 
$
—

 
$
6,824

Capital Expenditures in Accounts Payable and Accrued Expenses
 
$
2,916

 
$
3,153

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


F-6
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1- BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY
 
Our Company
 
IMH Financial Corporation (the “Company”) is a real estate investment and finance company based in the southwestern United States engaged in various and diverse facets of the real estate lending and investment process, including origination, acquisition, underwriting, servicing, enforcement, development, marketing, and disposition. The Company’s focus is to invest in, manage and dispose of commercial real estate mortgage investments or other real estate assets, and to perform all functions reasonably related thereto, including developing, managing and either holding for investment or disposing of real property acquired through acquisition, foreclosure or other means.

In the last few years, we acquired certain operating properties through deed-in-lieu of foreclosure which have contributed significantly to our operating revenues and expenses. Our operating properties currently consist of two operating hotels and restaurants located in Sedona, Arizona, a golf course and restaurant operation located in Bullhead City, Arizona, and a multi-family housing campus in Apple Valley, Minnesota, which commenced leasing operations in the fourth quarter of 2015. A commercial office building located in Stafford, Texas, which also contributed to operating property revenues and expenses during 2015, was sold in the third quarter of 2015. Due to our limited lending and investment activities since 2008 and our declining loan portfolio, these operating properties currently contribute the majority of our operating revenue.

Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete set of financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results for the periods presented have been made. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2015.

The accompanying unaudited condensed consolidated financial statements include the accounts of IMH Financial Corporation and the following wholly-owned operating subsidiaries: 11333, Inc. (formerly known as Investors Mortgage Holdings, Inc.), an Arizona corporation, Investors Mortgage Holdings California, Inc., a California corporation, IMH Holdings, LLC, a Delaware limited liability company (“Holdings”), and numerous other wholly owned subsidiaries established in connection with the acquisition of real estate either through foreclosure or purchase and/or for borrowing purposes, as well as its majority owned or controlled real estate entities and its interests in variable interest entities (“VIEs”) in which the Company is determined to be the primary beneficiary. Holdings is a holding company for IMH Management Services, LLC, an Arizona limited liability company, which provides us and our affiliates with human resources and administrative services, including the supply of employees. Other entities in which we have invested and have the ability to exercise significant influence over operating and financial policies of the investee, but upon which we do not possess control, are accounted for by the equity method of accounting within the financial statements and they are therefore not consolidated. See Note 5 for a discussion on our equity investments and VIEs.

During the second quarter of 2015, the Company, through certain subsidiaries, obtained certain real estate assets and equity interests in a number of limited liability companies and limited partnerships with various real estate holdings and related assets as a result of certain loan and guarantor enforcement and collection efforts. Certain of these entities have been consolidated in the accompanying condensed consolidated financial statements while others have been accounted for under the equity method of accounting based on the extent of the Company’s controlling financial interest in each such entity. See Note 5 for a discussion of our equity investments.

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


F-7
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


Liquidity
 
As of June 30, 2016, our accumulated deficit aggregated $680.4 million primarily as a result of previous impairment charges recorded relating to the decrease in the fair value of our mortgage assets and real estate owned (“REO”) assets, as well as on-going net operating losses resulting from the lack of income-producing assets, the high cost of our previous debt financing and a debt restructuring which resulted in significant debt termination charges. Beginning in 2008, we experienced significant defaults and foreclosures in our mortgage loan portfolio due primarily to the erosion of the U.S. and global real estate and credit markets during those periods. As a result, since that time we have been focused on enforcing our rights under our loan documents, working to repossess the collateral properties underlying those loans for purposes of disposing of or developing such assets, and pursuing recovery from guarantors under such loans.

Our liquidity plan has included obtaining additional financing, selling mortgage loans, and selling the majority of our legacy real estate assets. We secured various financings between 2011 and 2015 which, along with proceeds from asset sales, have been our primary sources of working capital.

During the fourth quarter of 2015, a wholly-owned subsidiary of the Company borrowed $5.4 million pursuant to a non-revolving credit facility with the Banc of California, National Association (the “BOC Facility”), which was repaid during the six months ended June 30, 2016 upon collection of the mortgage receivable that served as collateral for that loan. During the six months ended June 30, 2016, we also secured a revolving line of credit (“SRE Revolver”) for up to $4.0 million and obtained an initial advance on the SRE Revolver in the amount of $2.5 million. The SRE Revolver is secured by certain REO assets and guaranteed by the Company and has a maturity date in September 2016. At June 30, 2016, we had cash and cash equivalents of $9.5 million and restricted cash of approximately $2.1 million.

As of June 30, 2016, our mortgage loan portfolio with an aggregate carrying value of $0.4 million and REO assets with a carrying value of $50.5 million were held for sale. We continue to evaluate potential disposition strategies for our other real estate owned and certain operating properties. During the six months ended June 30, 2016, we collected mortgage payments totaling $7.6 million and sold certain mortgage loans and REO assets that generated approximately $6.3 million in cash.

In 2014, IMH Gabella, LLC (“IMH Gabella”), a subsidiary of the Company, secured a construction loan in connection with the development of a multi-family project in Apple Valley, Minnesota. Funding under this loan commenced during the second quarter of 2015. The construction loan is subject to a completion and repayment carve-out guarantee by the Company and requires the Company to maintain a minimum liquidity balance of $7.5 million. During March 2016 and again subsequent to June 30, 2016, we fell below the $7.5 million liquidity threshold resulting in a non-compliance event under the terms of the guarantor agreement relating to the construction loan, which resulted further in a non-compliance event under the terms of our Certificate of Designation of Series B-1 Cumulative Convertible Preferred Stock and Series B-2 Cumulative Convertible Preferred Stock (“Certificate of Designation”). While the lender has not taken any enforcement action regarding this non-compliance event, and we have obtained a waiver from our preferred shareholders for this non-compliance event under the Certificate of Designation, the non-compliance event could have a material adverse effect on our business, results of operations and financial position. We also are subject to a $5.0 million minimum liquidity balance for the calendar year 2016 in connection with a loan secured by our Sedona hospitality assets. The lender requires the hotel operations to meet certain debt service coverage ratio (“DSCR”) and minimum 12-month rolling net operating income (“NOI”) requirements measured on a quarterly basis. During the first quarter of 2016, the hotel operations did not meet these DSCR and NOI requirements during the quarterly measurement period, for which the lender provided a one-time forbearance. While the hotel operations met the DSCR and NOI requirements during the second quarterly reporting period, there is no assurance that the hotel operations will meet the DSCR and/or NOI requirements in future quarterly reporting periods.  In the event that they do not meet such requirements, we would seek a supplemental forbearance from the lender, although there is no assurance that such a forbearance would be granted.

While we have been successful in securing financing through June 30, 2016 to provide adequate funding for working capital purposes and have generated liquidity through asset sales and mortgage receivable collections, there is no assurance that we will be successful in selling our remaining loan and REO assets in a timely manner or in obtaining additional or replacement financing, if needed, to sufficiently fund future operations, repay existing debt, or to implement our investment strategy. Our failure to generate sustainable earning assets, and successfully liquidate a sufficient number of our loans and REO assets, may have a material adverse effect on our business, results of operations and financial position.

F-8
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
 
Use of Estimates
 
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of consolidated revenues and expenses during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company uses historical experience and various other assumptions that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates and assumptions used in preparation of the condensed consolidated financial statements.

Comprehensive Income

Comprehensive income includes items that impact changes in shareholders’ equity but are not recorded in earnings. The Company did not have any such items during the three and six months ended June 30, 2016 and 2015. Accordingly, comprehensive income (loss) is equal to net income (loss) for those periods.
 
Restricted Cash
 
At June 30, 2016 and December 31, 2015, restricted cash and cash equivalents were comprised of the following:
 
 
June 30, 2016
 
December 31, 2015
Senior lender controlled accounts
 
$
1,962

 
$
3,036

Escrows and other restricted accounts
 
145

 
505

Total restricted cash and cash equivalents
 
$
2,107

 
$
3,541


Restricted cash includes cash items that are legally or contractually restricted as to usage or withdrawal, which include amounts maintained in escrow or other restricted accounts for contractually specified purposes, such as property taxes, insurance, interest and capital reserves needed to complete the scheduled improvements at our hotel assets.

Real Estate Ventures
 
The Company, through various subsidiaries, holds interests in its properties through interests in both consolidated and unconsolidated real estate ventures. The Company assesses its investments in real estate ventures to determine if a venture is a variable interest entity (“VIE”). Generally, an entity is determined to be a VIE when either (i) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support or (iii) the equity investors have voting rights that are not proportionate to their economic interests and substantially all of the activities of the entity involve or are conducted on behalf of an investor that has disproportionately fewer voting rights. The Company consolidates entities that are VIEs for which the Company is determined to be the primary beneficiary. In instances where the Company is not the primary beneficiary, the Company does not consolidate the entity for financial reporting purposes. The primary beneficiary is the entity that has both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Entities that are not defined as VIEs are consolidated where the Company is the general partner (or the equivalent) and the limited partners (or the equivalent) in such investments do not have rights which would preclude control.
 
For entities where the Company is the general partner (or the equivalent), but does not control the real estate venture, and the other partners (or the equivalent) hold substantive participating rights, the Company uses the equity method of accounting. For entities where the Company is a limited partner (or the equivalent), management considers factors such as ownership interest, voting control, authority to make decisions and contractual and substantive participating rights of the partners (or the equivalent) to determine if the presumption that the general partner controls the entity is overcome. In instances where these factors indicate the

F-9
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES- continued



Company controls the entity, the Company would consolidate the entity; otherwise the Company accounts for its investments using the equity method of accounting.
 
Under the equity method of accounting, investments are initially recognized in the consolidated balance sheet at cost, or fair value in the case of legal assignments of such interests, and are subsequently adjusted to reflect the Company’s proportionate share of net earnings or losses of the entity, distributions received, contributions and certain other adjustments, as appropriate. Any difference between the carrying amount of these investments on the Company’s balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings (loss) of unconsolidated entities. When circumstances indicate there may have been a loss in value of an equity method investment, and the Company determines the loss in value is other than temporary, the Company recognizes an impairment charge to reflect the investment at fair value.
 
Noncontrolling Interests
 
Noncontrolling interests represent the portion of equity in the Company’s consolidated subsidiaries which is not attributable to the Company’s stockholders. Accordingly, noncontrolling interests are reported as a component of equity, separate from stockholders’ equity, in the accompanying condensed consolidated balance sheets. On the condensed consolidated statements of operations, operating results are reported at their consolidated amounts, including both the amount attributable to the Company and to noncontrolling interests.

Reclassifications

Certain reclassifications have been made to 2015 amounts to conform to the current year presentation. See “Note 8 – Segment Information” in the accompanying condensed consolidated financial statements for additional information regarding these reclassifications.

Recent Accounting Pronouncements
 
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This update applies to entities that enter into contracts with customers to transfer goods or services or for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with customers.
In 2015, the FASB voted to defer ASU 2014-09. Under the new guidance, companies will recognize revenue when the seller satisfies a performance obligation, which would be when the buyer takes control of the good or service. This new guidance could result in different amounts of revenue being recognized and could result in revenue being recognized in different reporting periods than under the current guidance. The standard specifically excludes revenue associated with lease contracts. The guidance is effective for periods beginning after December 15, 2017, with early adoption permitted for periods beginning after December 15, 2016. We expect to adopt this guidance effective January 1, 2018, and we are currently assessing the potential impact of adopting the new guidance.
In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718):  Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires an entity to treat performance targets that can be met after the requisite service period of a share-based award has ended, as a performance condition that affects vesting. The ASU is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015. The adoption of this update did not have a material impact on the Company’s operating results or financial position.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 introduces an explicit requirement for management to assess and provide certain disclosures if there is

F-10
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES- continued



substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 is effective for the annual period ending after December 15, 2016. The Company does not expect the adoption of ASU 2014-15 to have a material impact on the Company’s operating results, or financial position or disclosures.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which amends current consolidation guidance by modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminating the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with variable interest entities. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. All legal entities are subject to reevaluation under the revised consolidation model. The adoption of this update did not have a material impact on the Company’s operating results or financial position.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. This update amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. ASU 2016-01 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2016-01 on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, Investments-Equity Method and Joint Ventures. This update eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2016-07 on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation Improvements to Employee Share-Based Payment Accounting. The amendments in this topic are intended to simplify several aspects of the accounting for share-based payment award transactions and are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2016-09 on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. We have not yet determined the impact the adoption of ASU 2016-13 will have on our consolidated financial statements.


F-11
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 — MORTGAGE INVESTMENTS AND LOAN SALES
 
Lending Activities

The Company did not originate any loans during the six months ended June 30, 2016 or 2015. During the six months ended June 30, 2016, the Company collected mortgage loan payoffs for two loans and sold one loan.

A roll-forward of loan activity for the six months ended June 30, 2016 is as follows (in thousands):
 
 
Principal
Outstanding
 
Interest
Receivable
 
Valuation
Allowance
 
Carrying
Value
Balance, December 31, 2015
 
$
23,592

 
$
447

 
$
(12,892
)
 
$
11,147

Additions:
 
 

 
 

 
 

 
 

Accrued interest revenue
 
—

 
249

 
—

 
249

Reductions:
 
 
 
 
 
 
 
 
Mortgage loan payoffs
 
(7,843
)
 
(114
)
 
210

 
(7,747
)
Sale of mortgage loans
 
(3,148
)
 
(139
)
 
—

 
(3,287
)
Balance, June 30, 2016
 
$
12,601

 
$
443

 
$
(12,682
)
 
$
362

 
As of June 30, 2016, the Company had three loans outstanding with an average principal and interest balance of $4.3 million, as compared to $3.9 million for six loans at December 31, 2015. Of the three outstanding loans at June 30, 2016, one of the loans was performing with an outstanding principal and interest balance of $0.3 million and an interest rate of 11.0%. Of the six outstanding loans at December 31, 2015, there were four performing loans with an average outstanding principal and interest balance of $2.8 million and a weighted average interest rate of 10.5%. As of June 30, 2016 and December 31, 2015, the valuation allowance represented 97.2% and 53.6%, respectively, of the total outstanding loan principal and interest balances. The majority of the valuation allowance at June 30, 2016 and December 31, 2015 relates to two legacy loans which have been fully reserved and have a zero carrying value.

Loan Sales

During the six months ended June 30, 2016, the Company sold one loan with a carrying value of $3.1 million for a net loss of $0.1 million. During the three months ended June 30, 2015, we sold two loans with a carrying value of $13.7 million for a net loss of $0.1 million.

Scheduled Loan Maturities
 
The outstanding principal and interest balance of mortgage investments, net of the valuation allowance, as of June 30, 2016, have scheduled maturity dates within the next several quarters as follows (in thousands):
Quarter
 
Outstanding Balance
 
Percent
 
#
Matured
 
$
12,682

 
97.2
%
 
2

Thereafter
 
362

 
2.8
%
 
1

Total Principal and Interest
 
13,044

 
100.0
%
 
3

Less: Valuation Allowance
 
(12,682
)
 
 

 
 

Net Carrying Value
 
$
362

 
 

 
 


From time to time, the Company may extend a mortgage loan’s maturity date in the normal course of business. In this regard, the Company has modified certain loans, extending maturity dates in some cases by two or more years, and the Company may modify additional loans in the future in an effort to preserve collateral. Accordingly, repayment dates of the loans may vary from their currently scheduled maturity date. If the maturity date of a loan is not extended, the loans are classified and reported as matured and in default.


F-12
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 — MORTGAGE INVESTMENTS AND LOAN SALES- continued


During the six months ended June 30, 2016, we collected mortgage loan payoffs totaling $7.6 million. This amount represented the negotiated payoffs of two of our performing loans at a collective discount of $0.2 million. The discounted payoffs on these loans did not represent troubled debt restructuring because the loans were fully performing and the Company initiated the discounted payoffs in order to generate liquidity. We recorded an adjustment as of December 31, 2015 to provide for this discount.

Given the non-performing status of our legacy loans, we do not expect to receive any loan payoffs on loans that are past their respective maturity dates. We may find it necessary to foreclose, modify, extend, make protective advances or sell such loans in order to protect collateral, maximize return or generate additional liquidity.

Summary of Loans in Default
 
The Company’s portfolio loan defaults were attributed to, among other reasons, loan balances that exceeded the fair value of the underlying collateral and the absence of takeout financing in the marketplace. The two loans that were in default and in non-accrual status at December 31, 2015, remained in default status as of June 30, 2016 with an aggregate principal balance of $12.3 million and an aggregate interest balance of $0.4 million, both of which have been fully reserved. The completion and/or timing of foreclosure on the Company’s remaining portfolio loans is dependent on several factors, including, but not limited to, applicable state statutes, potential bankruptcy filings by the borrowers, the nature and extent of other liens secured by the underlying real estate.

No interest income was recognized on any non-accrual loans on a cash or accrual basis during the periods ended June 30, 2016 or 2015. Borrower concentrations, geographic concentrations of our loan portfolio, related loan classifications and end-user categories have not materially changed since December 31, 2015, except as a result of loan payoffs.

F-13
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Operating properties and REO assets consist primarily of properties acquired as a result of foreclosure or purchase and were initially recorded at the lower of cost or fair value, less estimated costs to sell the property. Our fair value assessment procedures are more fully described in Note 6. At June 30, 2016, we held total operating properties and REO assets of $155.7 million, of which $50.5 million were held for sale, $89.7 million were held as operating properties, and $15.6 million were classified as other real estate owned. At December 31, 2015, we held total operating properties and REO assets of $152.9 million, of which $3.7 million were held for development, $5.3 million were held for sale, $116.2 million were held as operating properties, and $27.7 million were classified as other real estate owned.

A summary of operating properties and REO assets owned as of June 30, 2016 and December 31, 2015, respectively, by method of acquisition, is as follows (dollars in thousands):
 
 
Acquired Through Foreclosure and/or Guarantor Settlement
 
Acquired Through Purchase and Costs Incurred
 
Accumulated Depreciation
 
Total
 
 
2016
2015
 
2016
2015
 
2016
2015
 
2016
2015
Operating Properties, net
 
$
83,652

$
87,965

 
$
13,331

$
34,746

 
$
(7,295
)
$
(6,555
)
 
$
89,688

$
116,156

Real Estate Held for Sale
 
21,729

4,919

 
30,034

427

 
(1,303
)
—

 
50,460

5,346

Real Estate Held for Development
 
—

3,661

 
—

3

 
—

—

 
—

3,664

Other Real Estate Owned
 
2,102

13,626

 
13,475

14,075

 
—

—

 
15,577

27,701

  Total
 
$
107,483

$
110,171

 
$
56,840

$
49,251

 
$
(8,598
)
$
(6,555
)
 
$
155,725

$
152,867


A roll-forward of REO activity from December 31, 2015 to June 30, 2016 is as follows (dollars in thousands):
 
 
 
Operating
Properties
 
# of
Projects
 
Held for
Development
 
# of
Projects
 
Held for
Sale
 
# of
Projects
 
Other Real Estate Owned
 
# of
Projects
 
Total Net
Carrying Value
Balance, December 31, 2015
 
$
116,156

 
4

 
$
3,664

 
2

 
$
5,346

 
8

 
$
27,701

 
14

 
$
152,867

Additions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital cost additions
 
7,829

 
—

 
45

 
—

 
—

 
—

 
87

 
—

 
7,961

Reductions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of properties sold
 
—

 
—

 
—

 


 
(2,825
)
 
(4
)
 
(137
)
 
(1
)
 
(2,962
)
Depreciation and amortization
 
(2,141
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,141
)
Transfers, net
 
(32,156
)
 
(2
)
 
(3,709
)
 
(2
)
 
47,939

 
10

 
(12,074
)
 
(6
)
 
—

Balance, June 30, 2016
 
$
89,688

 
2

 
$
—

 
—

 
$
50,460

 
14

 
$
15,577

 
7

 
$
155,725

 
During the six months ended June 30, 2016, we sold five REO assets (or portions thereof) for $3.3 million (net of selling costs), resulting in a total net gain of less than $0.1 million. During the six months ended June 30, 2015, we sold seventeen REO assets (or portions thereof) for $11.6 million (net of selling costs), resulting in a net loss of $0.2 million.

During the six months ended June 30, 2016, we reclassified certain REO assets from operating properties, REO held for development and Other REO to REO held for sale due to management’s decision to dispose of such assets and efforts taken to achieve such disposal. In addition, certain liabilities associated with the REO assets were reclassified to held for sale. See Note 7 for further discussion.

In the second quarter of 2015, we were awarded certain real estate assets and equity interests in a number of limited liability companies and limited partnerships with various real estate holdings and related assets in connection with certain enforcement and collection activities. Certain of these entities have been consolidated in the accompanying condensed consolidated financial statements based on our determination of the Company’s controlling financial interest in each such entity.


F-14
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


Based on our analysis, the consolidated entities in which these equity interests were awarded did not meet the definition of a business under GAAP since the only assets of such entities consist of unimproved real estate holdings, and the entities lack inputs and processes necessary to produce outputs. For this and other reasons, the entities did not qualify under the VIE model, and we instead applied the voting interest model to ascertain the need for consolidation. Because the entities do not qualify as businesses, the acquisition of such interests in these entities was deemed to be an asset acquisition, whereby we recorded our proportionate interest of each entity’s total assets and liabilities at fair value at the date of acquisition. Thereafter, any subsequent income or loss is allocated to controlling and noncontrolling interests based on their respective ownership percentages. The aggregate fair value of our interest in the underlying real estate assets of the consolidated entities, after elimination of intercompany balances, totaled $6.4 million, which is classified in other real estate owned in the accompanying condensed consolidated balance sheets.

REO Development and Operations

Costs related to the development or improvements of the Company’s real estate assets are generally capitalized, and costs relating to operating, holding and maintaining those assets are generally charged to expense. Cash outlays for capitalized development costs totaled $8.3 million during the six months ended June 30, 2016. Costs related to operating, holding and maintaining our real estate assets were $6.9 million and $12.6 million for the three and six months ended June 30, 2016, respectively, and $6.9 million and $12.8 million for the three and six months ended June 30, 2015, respectively.

The Company commenced a capital improvement program at its hotel and restaurants in Sedona, Arizona during the second quarter of 2015 which was substantially completed during the second quarter of 2016. We have incurred total project costs of $11.1 million through June 30, 2016, of which $4.8 million was incurred during the six months ended June 30, 2016.

As further described in Note 5, the Company, through a subsidiary, formed a joint venture with a third party developer, Titan Investments IV, LLC (“Titan”) for the purpose of holding and developing certain real property in Apple Valley, Minnesota for a planned multi-family residential housing and retail development to be known as Parkside Village (the “Apple Valley Project”). The first phase of the Apple Valley Project consists of a 196-unit multi-family residential housing development known as Gabella (“Gabella”). The joint venture created a wholly-owned subsidiary, IMH Gabella, LLC, (“IMH Gabella”) to hold the Gabella assets and enter into related agreements. IMH Gabella commenced leasing operations with respect to the first 98 units (“Phase I”) in the fourth quarter of 2015 and for the remaining 98 units (“Phase II”) during the first quarter of 2016.

The completion of Gabella and the subsequent issuance of the final certificate of occupancy during the second quarter of 2016 gave rise to Titan’s right to receive a certain percentage of the profits, if any, from the sale of Gabella under the terms of the joint venture arrangement and related Development Services Agreement (“DSA”). In accordance with the DSA, Titan is entitled to an initial 7% interest in the profit on the future sale of Gabella plus an additional 3% profit participation on any future sale since the project was completed both ahead of schedule and under-budget. Titan also has certain buy-out rights based on certain occupancy specifications and the passage of time, neither of which have occurred as of June 30, 2016. The Company has recorded the estimated fair value of its future obligation of the sale profit participation of $0.7 million in the accompanying condensed consolidated balance sheet as an increase in the asset basis with an offsetting increase to noncontrolling interests, as IMH Gabella is a consolidated entity, and the amounts attributable to Titan are a noncontrolling interest. During the period ended June 30, 2016, we reclassified Gabella to REO held for sale as a result of management’s decision and actions to market that asset for sale. As a condition to sell the Gabella project, we are required to obtain 1) the consent of the Apple Valley Economic Development Authority (“EDA”), from which the project received various business subsidies to help defray the cost of development of the project under a Development Assistance Agreement and related agreements, and 2) the buyer’s consent to assume any ongoing obligations under these agreements. We have neither sought nor received such consents to date. See Note 8 for further discussion.

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

Reclassification of Assets from Operating Properties to Real Estate Held for Sale

During the period ended June 30, 2016, we reclassified our golf course and restaurant operation in Bullhead City, Arizona and our multi-family housing operation in Apple Valley, Minnesota (Gabella) to REO held for sale as a result of management’s decision

F-15
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


and actions to dispose of such assets in order to provide capital for the Company and undertake certain initiatives. These operations are expected to sell during the third and fourth quarters of 2016, respectively.

Similarly, during the six months ended June 30, 2015, we entered into an agreement to sell our commercial office building and related assets that were included in our Commercial and Residential Real Estate Leasing Operations segment, but have been reclassified to our Mortgage and REO - Legacy Portfolio and Other Operations segment. The sales transaction closed in the third quarter of 2015.

As of June 30, 2016, Gabella’s assets represented 17.7% of the Company’s total assets. As such, Gabella qualified as an individually significant component of the Company. The commercial and residential leasing operations, which for all periods prior to June 30, 2016 were presented in the Commercial and Residential Real Estate Leasing Operations segment, but have since been reclassified to our Mortgage and REO - Legacy Portfolio and Other Operations segment, contributed pretax losses of $0.3 million and $0.7 million for the three and six months ended June 30, 2016, respectively, $0.1 million in pretax losses for the three months ended June 30, 2015, and $20,000 in pretax income for the six months ended June 30, 2015.

Based on management’s analysis, the sales of these business operations do not require separate discontinued operations financial statement presentation since the disposition of these assets represent neither a strategic shift for the Company, nor did they have a major effect on our operations and financial results.

F-16
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - INVESTMENT IN JOINT VENTURES, PARTNERSHIPS AND OTHER RELATED MATTERS
Variable Interest Entities

The determination of whether the assets and liabilities of a variable interest entity (“VIE”) are consolidated on our balance sheet or not consolidated on our balance sheet depends on the terms of the related transaction and our continuing involvement with the VIE. We determine whether we hold a variable interest in a VIE based on a consideration of the nature and form of our involvement with the VIE. We assess whether we are the primary beneficiary of a VIE on an ongoing basis. We are deemed the primary beneficiary and therefore consolidate VIEs for which we have both (a) the power, through voting rights or similar rights, to direct the activities that most significantly impact the VIE's economic performance, and (b) a variable interest (or variable interests) that (i) obligates us to absorb losses that could potentially be significant to the VIE; and/or (ii) provides us the right to receive residual returns of the VIE that could potentially be significant to the VIE.
 
Gabella Multifamily Project

In 2014, IMH Gabella formed a joint venture, Southwest Acquisitions, LLC (“Southwest JV”), with Titan for the purpose of holding and developing certain real property contributed by the Company. IMH Gabella holds the real estate assets and entered into related agreements. A wholly-owned subsidiary of the Company is the managing member of, and holds a 93% ownership interest in, Southwest JV. Titan initially held the other 7% ownership interest with the right to acquire an additional 3.0% profits-only interest based upon the satisfaction of certain budget and completion milestones with respect to the project, which Titan met during the second quarter of 2016, at which time the Company recorded Titan’s sale profit participation of $0.7 million in the accompanying condensed consolidated balance sheet as an increase in the asset basis with an offsetting increase to noncontrolling interests, as IMH Gabella is a consolidated entity, and the amounts attributable to Titan are a noncontrolling interest. The Company, through its wholly-owned subsidiary, has the power and authority to govern the business of Southwest JV, subject to certain conditions.
 
Upon formation of Southwest JV, we contributed certain land, made certain cash equity contributions and secured a construction loan in the amount of $24.0 million for which the Company provided completion, repayment and carve-out guaranties. Funding of this loan commenced during the second quarter of 2015 when the Company completed the required $11.5 million equity funding under the loan. The Company has no further capital contribution requirements under the loan. In the event that certain specified occupancy targets are met, Titan has the right to have its interests repurchased by Southwest JV and Southwest JV, conversely, has certain rights to redeem Titan’s interest in the event Titan fails to exercise those put rights within a specified time. Generally, income or loss is to be allocated among the members of Southwest JV in accordance with their respective percentage interests. Upon the sale of the project, the sale proceeds shall be distributed first to the Company in an amount equal to its capital contributions less any previous distributions it may have received, and then to the members in accordance with their respective interests in Southwest JV.

The Company’s interests in Southwest JV relate to equity ownership and profits participation between the members; a profits interest arrangement between the members involving certain budget and completion milestones; equity option provisions; parental guaranties related to construction financing; and contractual arrangements limiting Titan’s initial participation in the economics of certain assets and liabilities. Terms of the equity option require the Company to purchase Titan’s equity investment upon certain conditions, after a specified period of time if Titan elects to sell its equity investment. The Company provided Southwest JV with all of its initial capital, executed contracts on behalf of Southwest JV, and has final approval rights over all significant matters. The assets, liabilities, and results of operations of IMH Gabella are included in the Company’s condensed consolidated financial statements under the voting interest model. Except for Titan’s sale profit participation described above, Titan had no reportable interest in the assets, liabilities or equity of Southwest JV at June 30, 2016 or December 31, 2015, or in the net income or loss of IMH Gabella during the three and six months ended June 30, 2016 or June 30, 2015.

Park City, Utah Lakeside VIE

In the fourth quarter of 2015, the Company, through a consolidated subsidiary, Lakeside DV Holdings, LLC (“LDV Holdings”), entered into a joint venture with a third party developer, Park City Development, LLC (“PCD”) for the purpose of acquiring, holding and developing certain real property located in Park City, Utah (“Lakeside JV”). The intent is to sell townhome, single family residential and hotel lots. Under the Lakeside JV limited liability company agreement, the Company agreed to contribute up to $4.2 million for a 90% interest in Lakeside JV, while PCD agreed to contribute up to $0.5 million for a 10% interest. PCD’s principal has provided a limited guaranty to the Company for performance in the case of certain defaults by PCD.


F-17
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — INVESTMENT IN JOINT VENTURES, PARTNERSHIPS AND OTHER RELATED MATTERS- continued


As of June 30, 2016, the Company had contributed $3.6 million to Lakeside JV and is obligated to contribute an additional $0.6 million over the life of the development project, per the project’s initial operating budget. During the three and six months ended June 30, 2016, the Company provided no financial or other support to Lakeside JV that was not contractually required. Equity balances are subject to a 12% preferred return, compounded quarterly. Once the preferred return is distributed, a combination of pro rata distributions and additional distributions to PCD are made until PCD and the Company each receive a 26% internal rate of return. Thereafter, 50% of the balance is to be distributed pro rata to each party and 50% is to be paid to PCD.

As more fully described in our Form 10-K for the year ended December 31, 2015, it was determined that the Company is not the primary beneficiary of the VIE and, therefore, does not consolidate its investment in the Park City, Utah VIE. The investment balance of $3.4 million is included as a component of investment in unconsolidated entities on the condensed consolidated balance sheet.

During 2015, the Company syndicated $1.7 million of its required investment in Lakeside JV to several investors (“Syndicates”) by selling equity interests in LDV Holdings. These investments are included in non-controlling interests, a component of shareholders’ equity in the accompanying condensed consolidated balance sheets.

In the Company’s estimation, the fair value of the unimproved real estate holdings of Lakeside JV exceeds our investment basis as of June 30, 2016. The Company’s maximum exposure to loss in the Lakeside JV as of June 30, 2016 is $2.4 million. The risk of loss on the balance of the investment is borne by the Syndicates.

LDV Holdings’ cash flows are to be distributed first to its members in proportion to the preferred equity investment, including the preferred return, then to the extent of additional capital contributions made by the members. Thereafter, cash flows are to be distributed to members at varying rates as certain return hurdles are achieved.

During the three and six months ended June 30, 2016, the loss on the equity investment that was recorded in the accompanying condensed consolidated statements of operations was $46,000 and $0.2 million, respectively of which $18,000 and $73,000, respectively, was allocable to the Syndicates.

The following is a summary of the Company’s interest in the Park City Utah VIE and the Company’s maximum exposure to loss as a result of its involvement as of June 30, 2016, (in thousands):

Entity
 
Initial Investment
 
Additional Contributions
 
Net Loss Inception to Date
 
Company's Variable Interest in Entity
 
Commitment to Future Additional Contributions
 
Company's Maximum Exposure to Loss in Entity
Lakeside JV
 
$
1,823

 
$
135

 
$
(117
)
 
$
1,841

 
$
574

 
$
2,415


Equity Interests Acquired through Guarantor Recoveries

During the second quarter of 2015, the Company, through certain subsidiaries, obtained certain real estate assets and equity interests in a number of limited liability companies and limited partnerships with various real estate holdings and related assets as a result of certain enforcement and collection efforts. Several of the limited liability companies and partnerships hold interests in real property and are now co-owned with various unrelated third parties. Since the entities were not considered VIEs, we applied the voting interest model to ascertain the need for consolidation. Certain of these entities have been consolidated in the accompanying condensed consolidated financial statements, while others have been accounted for under the equity method of accounting, based on the extent of the Company’s controlling financial interest in each such entity. Based on our analysis, the consolidated entities in which these equity interests were awarded did not meet the definition of a business under GAAP since the only assets of such entities consist of unimproved real estate holdings, and the entities lack other inputs and processes necessary to produce outputs.

Because the entities did not qualify as businesses, the acquisition of such interests in these entities was deemed to be an asset acquisition, whereby we recorded our proportionate interest of each entity’s total assets and liabilities at fair value at the date of acquisition. Thereafter, any subsequent income or loss is being allocated to controlling and noncontrolling interests based on their respective ownership percentages. For entities where the Company does not control the real estate venture, and the other unrelated partners (or the equivalent) either hold substantive participating rights or have control, the Company uses the equity method of accounting.

F-18
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — INVESTMENT IN JOINT VENTURES, PARTNERSHIPS AND OTHER RELATED MATTERS- continued



As more fully described in our Form 10-K for the year ended December 31, 2015, as a result of limitations over the accuracy or reliability of available historical financial information, the Company has presented financial information on its investment in these entities based on the fair value of the underlying real estate assets and estimable liabilities as of the acquisition date, as it believes this information is reliable and relevant to the users of its financial statements.

The assets of these entities include primarily unimproved real estate and rights to develop water located in the Southwestern United States. The Company does not consolidate these entities because the Company and the other owners of equity interests in these entities share decision making abilities and have joint control over the entities, and/or because the Company does not control the activities of the entities. The Company does not have any obligation to fund the outstanding liabilities or working capital needs of these entities. The Company’s ownership interests in these entities range from 2.4% to 48.0% and, collectively, the Company’s net investment in these entities totals $3.0 million at June 30, 2016.

Summarized Financial Information of Unconsolidated Entities

The following presents summarized certain financial information of the entities in which the Company holds investments that are recorded on the equity method as of and for the quarter ended June 30, 2016 (in thousands):

 
 
June 30, 2016
Total assets
 
$
19,182

Total liabilities
 
$
927

There were no revenues and $46,000 and $0.2 million of expenses incurred by our unconsolidated entities during the three and six months ended June 30, 2016, respectively. There were no revenues or expenses incurred by our unconsolidated entities during the three and six months ended June 30, 2015.

F-19
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 — FAIR VALUE
 
Valuation Allowance and Fair Value Measurement of Loans and Real Estate Owned

Our valuation analysis processes and procedures are disclosed in our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2015. We perform a valuation analysis of our loans, REO held for sale and other REO not less frequently than on a quarterly basis. We consider all relevant, material circumstances to determine if, and the extent to which, a valuation allowance is required.

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

REO assets that are classified as held for sale and Other REO are measured at the lower of carrying amount or fair value, less estimated cost to sell. REO assets that are classified as operating properties or held for development are considered “held and used” and are evaluated for impairment when circumstances indicate that the carrying amount exceeds the sum of the undiscounted net cash flows expected to result from the development or operation and eventual disposition of the asset. If an asset is considered impaired, an impairment loss is recognized for the difference between the asset’s carrying amount and its fair value, less estimated cost to sell. If we elect to change the disposition strategy for our real estate held for development, and such assets were deemed to be held for sale, we may record additional impairment charges, and the amount of such charges could be significant.

We assess the extent, reliability and quality of market participant inputs such as sales pricing, cost data, absorption, discount rates, and other assumptions, as well as the significance of such assumptions in deriving valuation. We generally employ one of four valuation approaches (as applicable), or a combination of such approaches, in determining the fair value of the underlying collateral of each loan, REO held for sale and Other REO asset: (i) the development approach; (ii) the income capitalization approach; (iii) the sales comparison approach; or (iv) the receipt of recent offers on specific properties. The valuation approach taken depends on several factors including:

•
the type of property;
•
the current status of entitlement and level of development (horizontal or vertical improvements) of the respective project;
•
the likelihood of a bulk sale as opposed to individual unit sales;
•
whether the property is currently or near ready to produce income;
•
the current sales price of property in relation to cost of development;
•
the availability and reliability of market participant data; and
•
the date of an offer received in relation to the reporting period.

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

Factors Affecting Valuation
 
The underlying collateral of our loans and our REO varies by stage of completion, which consists of either raw land (also referred to as pre-entitled land), entitled land, partially developed, or mostly developed/completed lots or projects. While we may engage outside independent third-party valuation firms on a periodic, as-needed basis to provide complete valuation reports for certain of our larger loans and REO assets, we rely primarily on our asset management consultants and internal staff to gather available market participant data from independent sources to establish assumptions used to derive fair value of the collateral supporting our loans and real estate owned for a majority of our loan and REO assets.

Our fair value measurement is based on the highest and best use of each property which is generally consistent with our current use for such property. In addition, our assumptions are consistent with those that we believe market participants for those assets

F-20
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 — FAIR VALUE- continued


would also use. During the period ended June 30, 2016, we performed both a macro analysis of market trends and economic estimates, as well as a detailed analysis on selected significant loan and REO assets.

The following is a summary of the procedures performed in connection with our fair value analysis as of and for the period ended June 30, 2016:

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

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

3.
For the period ended June 30, 2016, given the lack of significant change in overall general market conditions since December 31, 2015 of our real estate asset portfolio, we performed an internal analysis to evaluate fair value of our portfolio. Our internal analysis of fair value included a review and update of current market participant activity, analysis of overall market conditions, the current status of any project related to that asset, our direct knowledge of local market activity affecting any such project, as well as other market indicators observed by our asset management group and third parties to determine whether there were any indications of a material increase or decrease in the value of the underlying collateral or REO asset since the last complete valuation for such asset. Our asset-specific analysis focused on the higher valued assets of our loan collateral and REO portfolio. We considered the results of our analysis and the potential valuation implication to the balance of the portfolio based on similar asset types and geographic location.

4.
In addition, in those instances where we have received a bona fide written third-party offer to buy our loans or REO assets (or have executed a purchase and sale agreement), or the borrower has received a bona fide written third-party offer to buy the related project (or has executed a purchase and sale agreement), we generally utilized the purchase price in such offer or agreement whether that amount is within or outside our current valuation range. Such offers or agreements are only considered if we deem it to be valid, reasonable and negotiable, and we believe the counterparty has the financial wherewithal to execute the transaction.

Based on our analysis, the valuation approach taken and assumptions utilized with respect to each asset at December 31, 2015 remained generally applicable at June 30, 2016, except for those assets subject to a recent bona fide written third-party offer or executed purchase and sales agreements. See our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2015 for a summary of the key assumptions and valuation methodologies utilized to derive fair value.

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

Valuation Conclusions

Based on the results of our evaluation and analysis, during the three and six months ended June 30, 2016 and 2015, we did not record any non-cash provision for credit losses on our loan portfolio. However, we recorded other net recoveries of credit losses of $0.1 million and $9.7 million for the three months ended June 30, 2016 and 2015, respectively, relating to the collection of cash and other assets from guarantors on certain legacy loans, and $0.1 million and $10.7 million for the six months ended June 30, 2016 and 2015, respectively. We did not record any impairment charges for real estate owned during the three or six months ended June 30, 2016. During the three and six months ended June 30, 2015 we recorded impairment charges of $0.1 million.


F-21
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 — FAIR VALUE- continued


As of June 30, 2016 and December 31, 2015, the valuation allowance totaled $12.7 million and $12.9 million, respectively, representing 97.2% and 53.6%, respectively, of the total outstanding loan principal and accrued interest balances. Based on the valuation and impairment allowance recorded as of June 30, 2016, we believe that, as of that date, the fair value of our loans, REO assets held for sale and other REO is adequate in relation to the net carrying value of the related assets and that no additional valuation allowance or impairment is considered necessary. While the above results reflect management’s assessment of fair value as of June 30, 2016 based on currently available data, we will continue to evaluate our loan and REO portfolio to determine the adequacy and appropriateness of the valuation allowance and/or carrying value. Depending on market conditions, such updates may yield materially different values and potentially increase or decrease the valuation allowance for loans or impairment charges for REO assets.
 
Valuation Categories
 
There were no losses recorded during the three or six months ended June 30, 2016 or 2015 in the categories for which net mortgage loans and REO held for sale were measured at fair value on a non-recurring basis based upon the lowest level of significant input to the valuation as of June 30, 2016 or 2015.

Additionally, there were no assets that were measured at fair value using Level 2 inputs for which any losses were recorded during the three or six months ended June 30, 2016 or 2015. Generally, all of our mortgage loans, REO held for sale and other REO are valued using significant unobservable inputs (Level 3) obtained through updated analysis prepared by our asset management staff, except for such assets for which third party offers or executed purchase and sale agreements were used, which are considered Level 2 inputs. Changes in the use of Level 3 valuations are based solely on whether we utilized third party offers for valuation purposes.

F-22
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 — DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS
At June 30, 2016 and December 31, 2015, our notes payable and special assessment obligations consisted of the following (in thousands):
 
 
June 30, 2016
 
December 31, 2015
Notes Payable, Net of Discount
 
 
 
 
$50.0 million non-recourse note payable secured by first liens on operating hotel properties and related assets, bears annual interest at the greater of a) 7.25% or b) LIBOR plus 6.75%, actual interest at minimum rate of 7.25% at June 30, 2016 and December 31, 2015, matures February 1, 2018, interest only payable monthly, principal due at maturity, subject to a carve-out guarantee by the Company
 
$
50,000

 
$
50,000

$5.9 million note payable secured by real estate in New Mexico, annual interest only payments based on annual interest rate of prime plus 2.0% for the first two years, and prime plus 3.0% thereafter (5.5% at June 30, 2016 and December 31, 2015), matures December 31, 2019
 
5,940

 
5,940

Unsecured note payable under class action settlement, face value of $10.2 million, net of discount of $2.4 million at June 30, 2016, 4% annual interest rate (14.6% effective yield), interest payable quarterly, matures April 28, 2019
 
7,730

 
7,385

$5.4 million note payable secured by a mortgage receivable totaling $7.2 million at December 31, 2015, monthly interest only payments based on annual interest rate of 4.5%, scheduled maturity on April 30, 2016 (repaid in full in February 2016)
 
—

 
5,400

Notes Payable and Special Assessment Obligations, Assets Held for Sale
 
 
 
 
$24.0 million construction note payable to a bank dated October 2014 for the construction of Gabella, secured by real property and improvements, bears annual interest of LIBOR plus 3.75%, with a floor of 4.25% (4.40% at June 30, 2016 and 4.36 % at December 31, 2015), matures October 20, 2017, reported as Notes Payable, Net at December 31, 2015
 
20,935

 
16,861

$3.7 million community facility district bonds dated 2005, secured by residential land located in Buckeye, Arizona, annual interest rate ranging from 5%-6%, maturing various dates through April 30, 2030, reported as Special Assessment Obligations at December 31, 2015
 
3,067

 
3,207

$2.3 million special assessment bonds dated between 2002 and 2007, secured by residential land located in Dakota County, Minnesota, annual interest rate ranging from 6%-7.5%, maturing various dates through 2022, reported as Special Assessment Obligations at December 31, 2015
 
851

 
927

$1.1 million development assistance note payable to Apple Valley Economic Development Authority, dated March 29, 2013, secured by developmental real estate, annual interest rate 6%, matures December 31, 2016. Expected to be forgiven upon completion of Gabella project, subject to various requirements, reported as Notes Payable, Net at December 31, 2015
 
762

 
762

Notes Payable to Related Party
 
 
 
 
$5.0 million unsecured note payable to an affiliate of a director and shareholder dated December 31, 2014, bears interest at 16% per annum, all amounts due and payable upon maturity, original maturity of April 24, 2015, extended to September 19, 2016
 
5,000

 
5,000

$4.0 million line of credit from an affiliate of a director and shareholder dated March 23, 2016, secured by residential land, bears interest at 5% per annum, all amounts due and payable upon maturity, original maturity of June 23, 2016, extended to September 23, 2016
 
2,500

 
—

Total debt, notes payable and special assessment obligations
 
96,785

 
95,482

Deferred financing costs, net
 
(1,120
)
 
(1,365
)
Total debt, notes payable and special assessment obligations, net
 
$
95,665

 
$
94,117

Interest expense for the three months ended June 30, 2016 and 2015 was $2.3 million and $2.4 million, respectively. Interest expense for the six months ended June 30, 2016 and 2015 was $4.4 million and $5.2 million, respectively.


F-23
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



Senior Indebtedness
 
In January 2015, the Company, through various of its subsidiaries, entered into a series of loan agreements, promissory notes and related agreements with Calmwater Capital 3, LLC (“Calmwater”) for three loans in the aggregate principal amount of $78.8 million for the purposes of refinancing 1) the Company’s prior $36.0 million senior secured loan with NWRA Ventures I, LLC (“NW Capital”) and 2) a prior $24.8 million note payable from a bank, as well as to provide working capital for certain development activities and operational costs. The Company used $4.0 million of the loan proceeds to fund a portion of its equity commitment for the construction of Gabella and $2.0 million to partially fund the capital improvement program at the Company’s hotel properties and restaurants located in Sedona, Arizona. The balance of the loan proceeds have been or are being used for working capital, reserves, and certain fees.

The general terms of the respective loans are as follows:

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

The Sedona Loan contains customary affirmative and negative covenants, including, but not limited to: (i) a $5.0 million liquidity balance during 2016; (ii) a minimum net worth of the Company of no less than $50.0 million; and (iii) DSCR and minimum NOI requirements measured on a trailing 12 month basis. During the three months ended March 31, 2016, the hotels did not meet these DSCR and NOI requirements during the first quarterly measurement period, for which the lender provided a one-time forbearance through June 30, 2016. While the hotels met the DSCR and NOI requirements during the second quarterly reporting period ended June 30, 2016, there is no assurance that the hotels will meet the DSCR and/or NOI requirements in future quarterly reporting periods.  In the event that they do not meet such requirements, we would seek a supplemental forbearance from the lender, although there is no assurance that such a forbearance would be granted. For purposes of the minimum net worth requirement, the lender has agreed that the carrying value of our redeemable convertible preferred stock is considered a component of shareholder’s equity. The Sedona Loan also requires the Company to fund customary annual interest, tax, insurance, and furniture, fixtures and equipment reserve accounts, each of which are pledged as additional collateral for the Sedona Loan. Additional construction reserves were required in connection with the capital improvement program as well as funding for contractor liens filed in connection with the project. The Sedona Loan also contains customary events of default, the occurrence of which could result in the acceleration of the obligations under the loan and, under certain circumstances, the application of a default interest rate during the existence of an event of default at a rate equal to 5.0% in excess of the note rate. The Company is permitted to make optional prepayments at any time, subject to a .50% prepayment premium if paid prior to February 1, 2017, and other conditions set forth in the loan agreement. Thereafter, the Company may prepay the Sedona Loan in full or in part without prepayment premium costs.

•
A $24.4 million non-recourse loan secured by a) first liens on certain operating and non-operating real estate assets owned by affiliates of the Company, b) pledges by certain Company affiliates of their interests in certain mortgage loan documents evidencing payment obligations owed to such affiliates, and c) the Company’s membership interest in IMH Gabella. The loan required interest only payments beginning on March 1, 2015 and bore annual interest at a base equal to the sum of: (i) the greater of (A) 0.50% per annum or (B) LIBOR (as defined) plus (ii) 8.5% per annum. The loan had a maturity date of February 1, 2017 and was repaid in full during the fourth quarter of 2015.

•
A $4.4 million non-recourse loan secured by a) first liens on certain operating and non-operating real estate assets owned by affiliates of the Company and b) pledges by certain Company affiliates of their interests in certain mortgage loan documents evidencing payment obligations owed to such affiliates. The loan required interest only payments beginning on March 1, 2015 and bore annual interest at a base equal to the sum of: (i) the greater of (A) 0.50% per annum or (B)

F-24
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



LIBOR (as defined) plus (ii) 8.5% per annum. The loan had a maturity date of February 1, 2017 and was repaid in full during the fourth quarter of 2015.

Exchange Notes
Under the terms of a previous class action settlement, we conducted an offering of our five-year, 4%, unsecured notes in exchange for common stock held by participating shareholders (“Exchange Offering”). The Exchange Offering was completed in April 2014 and we issued Exchange Offering notes (“EO Notes”) with an aggregate face value of $10.2 million, which were recorded by the Company at fair value. The estimated fair value of the EO Notes was $6.4 million based on an imputed effective yield of such notes of 14.6% (as compared to the note rate of 4%) resulting in an original debt discount of the EO Notes of $3.8 million, with a balance of $2.4 million and $2.8 million as of June 30, 2016 and December 31, 2015, respectively. This discount amount is being amortized as an adjustment to interest expense using the effective interest method over the term of the EO Notes. The amortized discount added to the principal balance of the EO Notes during the three and six months ended June 30, 2016 totaled $0.2 million and $0.3 million, respectively. Interest is payable quarterly in arrears each January, April, July and October. The EO Notes mature on April 28, 2019, and may be prepaid in whole or in part without penalty at the option of the Company. However, subject to certain minimum cash and profitability conditions, the terms of the EO Notes may require a 50% prepayment on April 29, 2018.

Notes Payable and Special Assessment Obligations, Assets Held for Sale

During the quarter ended June 30, 2016, the Company reclassified certain of its assets to REO held for sale as a result of management’s decision and actions to dispose of such assets. In accordance with GAAP, we have similarly reclassified the corresponding debt relating to such assets which includes each of the following notes payable and special assessment obligations. In addition to these liabilities, we have a $2.5 million line of credit obligation due to a related party as described below whose payoff is tied to the sale of one of our assets held for sale. We have classified that indebtedness in notes payable to related parties in the accompanying condensed consolidated balance sheet.

Construction Loan

In October 2014, the Company secured a construction loan in connection with the Gabella development in the amount of $24.0 million pursuant to a Construction Loan Agreement entered into between Bank of the Ozarks (“Ozarks”) and IMH Gabella (the “Construction Loan”). The Company has made draws totaling $20.9 million on the Construction Loan as of June 30, 2016. The Construction Loan is secured by a first lien mortgage on the project, as well as certain adjacent parcels that are planned for future development, improvements thereon, and an assignment of rents and revenues. As of June 30, 2016 and December 31, 2015, the total carrying value of the land and improvements totaled $30.3 million and $27.8 million, respectively. Unless there is an event of default, the Construction Loan bears annual interest at the greater of (i) three-month LIBOR plus 375 basis points, or (ii) 4.25%. The loan matures October 20, 2017, provided, however, that the initial term may be extended for two additional one-year terms subject to the satisfaction of certain conditions, including the payment of an extension fee equal to 0.25% of the then outstanding principal balance of the Construction Loan. Interest only payments on the outstanding principal commenced on November 1, 2014 and monthly payments of principal and interest will commence on the earlier of (i) December 1, 2016 and (ii) the first month following stabilization (as defined in the loan agreement).

The Construction Loan is also subject to a completion and repayment carve-out guaranty by the Company and requires the Company to maintain a minimum liquidity balance of $7.5 million throughout the term of the loan. During the three months ended March 31, 2016 and again subsequent to June 30, 2016, we fell below the $7.5 million liquidity requirement, resulting in a non-compliance event under the terms of our guaranty. The lender has, to-date, not taken any enforcement action with respect to this non-compliance event. While we restored our unrestricted cash balance to above $7.5 million during the quarter ended June 30, 2016, there is no assurance that we will be able to maintain adequate cash and cash equivalents to be available to meet this liquidity requirement or that the lender will not elect to exercise its non-compliance event rights under the loan.

In the event of prepayment of the Construction Loan prior to October 20, 2016, the Company would have to pay a prepayment penalty equal to two years of contractual interest less non-default interest paid through the prepayment date. After October 20, 2016, the Construction Loan may be prepaid without penalty.


F-25
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



Special Assessment Obligations

As of June 30, 2016 and December 31, 2015, obligations arising from our allocated share of certain community facilities district special revenue bonds and special assessments had carrying values of $3.9 million and $4.1 million, respectively. These obligations are described below.
 
One of the special assessment obligations had an outstanding balance of $3.1 million and $3.2 million as of June 30, 2016 and December 31, 2015, respectively, and has an amortization period that extends through April 30, 2030, with an annual interest rate ranging from 5% to 6%. This special assessment obligation is secured by certain real estate held for sale consisting of 171 acres of unentitled land located in Buckeye, Arizona which had a carrying value of $5.3 million at June 30, 2016.
 
The other special assessment obligations are comprised of a series of special assessments that collectively had an outstanding balance of $0.9 million as of June 30, 2016 and December 31, 2015. These special assessment obligations have amortization periods that extend through 2022, with annual interest rates ranging from 6% to 7.5%. These special assessment obligations are secured by certain real estate consisting of 7 acres of unentitled land located in Dakota County, Minnesota, which land has a carrying value of approximately $3.7 million at June 30, 2016.

The responsibility for the repayment of each of the foregoing special assessment obligations rests with the owner of the property and would transfer to the buyer of the related real estate upon sale. Accordingly, if the assets to which these obligations relate are sold before the full amortization period of such obligations, the Company would be relieved of any further liability since the buyer would assume the remaining obligations. Nevertheless, these special assessment obligations are deemed to be obligations of the Company in accordance with GAAP because they are fixed in amount and for a fixed period of time. During the six months ended June 30, 2016, we made principal repayments in the amount of $0.2 million on these special assessment obligations.

Development Assistance Note Payable

In connection with the Gabella project, we entered into, among other agreements, a business subsidy agreement and related loan agreement dated March 29, 2013, as amended on July 10, 2014, with the EDA. Under the terms of the business subsidy agreement, the EDA agreed to advance to us up to $1.1 million as a loan. As of June 30, 2016 and December 31, 2015, the total amount advanced to us under the EDA loan agreement was $0.8 million. In no event is the EDA loan to exceed the amount received from Dakota County, Minnesota, for the statutory penalty and interest on special assessment taxes which were assessed in the tax years 2007 through 2011. The special assessment taxes and related statutory penalties and interest were fully repaid as of December 31, 2015. The EDA loan bears interest at the rate of 6.0% per annum which accrues until the loan is paid in full or is forgiven by the EDA. The Company met its performance obligation to complete the Gabella project prior to April 30, 2016, and has received a certificate of occupancy for the project. If it is determined that we did not meet the specified requirements, the loan principal and all accrued unpaid interest is due December 31, 2016. In addition, in order to retain the benefits received under the business subsidy agreement, we are not allowed to sell, transfer or otherwise convey all or part of the property for a period of five years following completion without the prior written consent of the EDA. This would also require a buyer’s consent to assume any ongoing obligations under the business subsidy agreement. We have neither sought nor received such consents to date.

Other Notes Payable Activity
During the fourth quarter of 2015, a wholly-owned subsidiary of the Company borrowed $5.4 million pursuant to a non-revolving credit facility with the Banc of California, National Association (the “BOC Facility”). The BOC Facility was secured by a $7.2 million mortgage receivable, was guaranteed by the Company, was scheduled to mature on April 30, 2016, and bore interest at a per annum rate equal to the greater of (i) the prime rate as published by The Wall Street Journal (the “WSJ Prime Rate”) plus 1.25%, or (ii) 4.5%. During the six months ended June 30, 2016, we repaid the BOC Facility in full upon collection of the mortgage receivable that served as collateral for that loan.
In addition, during the fourth quarter of 2015, we purchased real estate located in New Mexico that was previously owned by certain partnerships in which the Company was awarded equity interests, and such real estate was foreclosed by the prior lien holder/seller. The purchase price for that real estate was $6.8 million, for which the seller provided seller-financing of $5.9 million. The note bears interest at the WSJ Prime Rate as of December 31, 2015 (recalculated annually) plus 2.00% for the first two years, and the WSJ Prime Rate plus 3.00% thereafter. Interest only payments are due on December 31 of each year with the principal balance and any accrued unpaid interest due at maturity on December 31, 2019. The note may be prepaid in whole or in part without penalty.

F-26
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



Note Payable to Related Party

In December 2014, the Company borrowed $5.0 million from SRE Monarch Lending, LLC (“SRE Monarch”) pursuant to an unsecured non-revolving credit facility (“SRE Note”). The Company used the loan proceeds to make a scheduled payment under the Company’s then-senior loan. SRE Monarch is a related party of Seth Singerman, one of the Company’s directors and an affiliate of one of our preferred equity holders. The SRE Note bears interest at a per annum base rate of 16%, and is subject to increase in the event it is not repaid in full on or prior to the or extended maturity date.

The SRE Note was originally scheduled to mature on the 91st day after full repayment of the Company’s then-senior loan. During 2015 and 2016, the Company entered into a series of amendments to extend the SRE Note’s maturity date. The current maturity date is September 19, 2016. The Company paid all accrued interest at the date of each amendment and paid various extension fees totaling $0.3 million in 2015 and $0.2 million during the six months ended June 30, 2016, which fees have been or are being amortized over the loan term.
 
Revolving Line of Credit with Related Party

In March 2016, a subsidiary of the Company executed an agreement with SRE Monarch for a revolving secured line of credit facility (“SRE Revolver”). The SRE Revolver bears interest at a per annum base rate of 5% and has a term that expires on the earliest to occur of 1) June 23, 2016 (which may be extended for an additional three months subject to the payment of a $50,000 extension fee), 2) the sale of the land serving as collateral under the SRE Revolver, or 3) the sale of Gabella. The SRE Revolver is secured by certain land owned by a subsidiary of the Company with a carrying value of $5.3 million, and is guaranteed by the Company. The SRE Revolver had an initial advance limit of $2.5 million that may be increased to $4.0 million with 12 days written notice and the payment of a $25,000 fee. Additionally, upon each advance, the Company must pay a $50,000 advance fee. Upon entering into the SRE Revolver, the Company paid a facility fee and other closing costs totaling approximately $0.2 million. All amounts advanced under the SRE Revolver may be prepaid in whole or in part without premium or penalty. During April 2016, we drew our initial advance in the amount of $2.5 million in order to provide additional working capital for the Company. In connection with the advance, we paid fees totaling $50,000 which are being amortized to interest expense using the effective interest method over the term of the line of credit. Additionally, we exercised our option to extend the SRE Revolver’s maturity date from June 23, 2016 to September 23, 2016, and paid extension fees of $50,000 to SRE Monarch.

In the event of a sale of the land serving as collateral under the SRE Revolver prior to March 31, 2017 ("Facility Exit Date"), we are obligated to pay SRE Monarch an amount equal to five percent (5%) of the net sale proceeds. In the event that no sale of the collateral has occurred or is expected to occur prior to the Facility Exit Date, we are obligated to pay SRE Monarch an amount equal to five percent (5%) of the presumed net sales proceeds based on the appraised value of the collateral. As of June 30, 2016, the Company reclassified the related asset to REO held for sale as a result of management’s decision and actions to dispose of the related collateral.

Our debt, notes payable and special assessment obligations have the following scheduled maturities as of June 30, 2016 (in thousands):
 
Year
 
Amount
2016
 
$
8,339

2017
 
21,235

2018
 
50,306

2019
 
13,985

2020
 
315

Thereafter
 
2,605

Total
 
$
96,785


F-27
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION
 
Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which discrete financial information is available that is evaluated regularly by our chief operating decision makers in deciding how to allocate resources and in assessing performance. As of and for the period ended June 30, 2016 and December 31, 2015, the Company’s reportable segments are based on the products and services offered by the Company and management’s intent for such assets, which include the following:

Hospitality and Entertainment Operations — Consists of revenues less direct operating expenses, depreciation and amortization relating to hotel, golf, spa, and food & beverage operations. This segment also reflects the carrying value of such assets and the related financing and operating obligations.
 
Mortgage and REO – Legacy Portfolio and Other Operations — Consists of the collection, workout and sale of new and legacy loans and REO assets, including the financing of such asset sales, the carrying costs of such assets and other related expenses. This segment also reflects the carrying value of such assets and the related financing and operating obligations. This segment also consists of rental revenue and tenant recoveries less direct property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses), depreciation and amortization from commercial and residential real estate leasing operations, and the carrying value of such assets and the related financing and operating obligations.

Prior to June 30, 2016, the Company reported amounts for the commercial and residential real estate leasing operations in a separate segment titled Commercial and Residential Real Estate Leasing Operations. Commencing in the quarter ended June 30, 2016, the amounts and results of the previously reported Commercial and Residential Real Estate Leasing Operations segment have been combined with the Mortgage and REO - Legacy Portfolio and Other Operations segment. All prior periods have been restated in the following segment tables and discussion to correspond to this segment change. This reclassification aligns the Company’s reportable segments with the overall strategy of the Company since the related assets in the Commercial and Residential Real Estate Leasing Operations segment were classified as REO held for sale once it was economically feasible to dispose of such assets, as the Company did not intend to operate the assets on a long-term basis.

Corporate and Other — Consists of our centralized general and administrative and corporate treasury and deposit gathering activities, and interest expense associated with non-property specific debt issuances. Corporate and Other also includes reclassifications and eliminations between the reportable operating segments, if any. This segment also reflects the carrying value of such assets and the related financing and operating obligations.
 
The information presented in our reportable segments tables that follow may be based in part on internal allocations, which involve management judgment. Substantially all revenues recorded are from external customers. There is no material intersegment activity.
 
Condensed consolidated financial information for our reportable operating segments as of June 30, 2016 and December 31, 2015 and for the three and six month periods ended June 30, 2016 and 2015 is summarized as follows (in thousands):

F-28
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION- continued


Balance Sheet Items
 
June 30, 2016
 
December 31, 2015
Total Assets
 
(unaudited)

 
 

Mortgage and REO - Legacy Portfolio and Other Operations
 
$
75,721

 
$
87,107

Hospitality and Entertainment Operations
 
96,442

 
93,883

Corporate and Other
 
6,169

 
4,826

Consolidated
 
$
178,332

 
$
185,816

Notes Payable, Special Assessment Obligations, Capital Leases and Other Long Term Obligations
 
 
 
 
Mortgage and REO - Legacy Portfolio and Other Operations
 
$
33,683

 
$
32,630

Hospitality and Entertainment Operations
 
50,506

 
50,302

Corporate and Other
 
12,640

 
12,360

Consolidated
 
$
96,829

 
$
95,292

Operating Liabilities
 
 
 
 
Mortgage and REO - Legacy Portfolio and Other Operations
 
$
4,596

 
$
5,323

Hospitality and Entertainment Operations
 
5,773

 
4,468

Corporate and Other
 
2,579

 
2,920

Consolidated
 
$
12,948

 
$
12,711



 
Three Months Ended June 30, 2016 (Unaudited)
Income Statement Items
Mortgage and REO - Legacy Portfolio and Other Operations
Hospitality and Entertainment Operations
Corporate and Other
Consolidated
Revenues:
 
 
 
 
Operating property revenue
$
450

$
8,571

$
—

$
9,021

Investment and other income
74

3

—

77

Mortgage loan income, net
96

—

—

96

Total Revenue
620

8,574

—

9,194

Expenses:
 
 
 
 
Operating Property Direct Expenses (exclusive of interest and depreciation):
 
 
 
 
Payroll related expenses
78

3,025

—

3,103

Cost of sales
—

931

—

931

Property taxes
7

73

—

80

Management fees
14

323

—

337

Other departmental and general and administrative costs
3

1,333

—

1,336

Other costs
137

800

—

937

Operating Property Direct Expenses (exclusive of interest and depreciation)
239

6,485

—

6,724

Expenses for Non-Operating Real Estate Owned:
 
 
 
 
Property taxes
$
82

—

—

82

Other costs
49

—

2

51

Expenses for Non-Operating Real Estate Owned
131

—

2

133

 
 
 
 
 

F-29
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION- continued


 
Three Months Ended June 30, 2016 (Unaudited) (continued)
Income Statement Items
Mortgage and REO - Legacy Portfolio and Other Operations
Hospitality and Entertainment Operations
Corporate and Other
Consolidated
Professional Fees:
 
 
 
 
Financial reporting - audit, legal and tax
4

—

291

295

Legal- general and enforcement
749

—

—

749

Asset management
38

—

24

62

Other costs
—

—

156

156

Professional Fees
791

—

471

1,262

General and Administrative Expenses:
 
 
 
 
Payroll related expenses
—

—

1,229

1,229

Insurance expense
8

—

274

282

Rent
—

—

53

53

Other general and administrative costs
8

—

375

383

General and Administrative Expenses
16

—

1,931

1,947

Other Expenses (Income):
 
 
 
 
Interest expense
669

1,048

587

2,304

Depreciation and amortization expense
307

841

49

1,197

Loss on disposal of assets, net
226

—

—

226

Recovery of credit losses, net
(120
)
—

—

(120
)
Loss of unconsolidated subsidiaries
46

—

—

46

Other Expenses
1,128

1,889

636

3,653

Total Expenses, net
2,305

8,374

3,040

13,719

Net Income (Loss)
(1,685
)
200

(3,040
)
(4,525
)
Net Loss Attributable to Noncontrolling Interests
18

—

—

18

Cash Dividend on Redeemable Convertible Preferred Stock
—

—

(533
)
(533
)
Deemed Dividend on Redeemable Convertible Preferred Stock
—

—

(620
)
(620
)
Net Income (Loss) Attributable to Common Shareholders
$
(1,667
)
$
200

$
(4,193
)
$
(5,660
)
 
 
 
 
 
 
Three Months Ended June 30, 2015 (Unaudited)
Income Statement Items
Mortgage and REO - Legacy Portfolio and Other Operations
Hospitality and Entertainment Operations
Corporate and Other
Consolidated
Revenues:
 
 
 
 
Operating property revenue
$
436

$
8,396

$
62

$
8,894

Investment and other income
301

—

3

304

Mortgage loan income, net
175

—

—

175

Total Revenue
912

8,396

65

9,373

Expenses:
 
 
 
 
Operating Property Direct Expenses (exclusive of interest and depreciation):
 
 
 
 

F-30
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION- continued


 
Three Months Ended June 30, 2015 (Unaudited) (continued)
Income Statement Items
Mortgage and REO - Legacy Portfolio and Other Operations
Hospitality and Entertainment Operations
Corporate and Other
Consolidated
Payroll related expenses
19

2,843

—

2,862

Cost of sales
—

888

—

888

Property taxes
83

71

—

154

Management fees
13

410

—

423

Other departmental and general and administrative costs
7

1,283

—

1,290

Other costs
253

703

—

956

Operating Property Expenses (exclusive of interest and depreciation)
375

6,198

—

6,573

Expenses for Non-Operating Real Estate Owned:
 
 
 
 
Property taxes
179

—

—

179

Other costs
145

—

1

146

Expenses for Non-Operating Real Estate Owned
324

—

1

325

Professional Fees:
 
 
 
 
Financial reporting - audit, legal and tax
2

—

221

223

Legal- general and enforcement
399

—

118

517

Asset management
127

—

—

127

Other costs
—

—

178

178

Professional Fees
528

—

517

1,045

General and Administrative Expenses:
 
 
 
 
Payroll related expenses
—

—

1,795

1,795

Insurance expense
14

—

253

267

Rent
—

—

52

52

Other general and administrative costs
87

—

346

433

General and Administrative Expenses
101

—

2,446

2,547

Other Expenses (Income):
 
 
 
 
Interest expense
900

1,048

469

2,417

Depreciation and amortization expense
1

598

52

651

Loss on disposal of assets, net
239

—

—

239

Recovery of credit losses, net
(9,745
)
—

—

(9,745
)
Impairment of Real Estate Owned
140

—

—

140

Other Expenses (Income)
(8,465
)
1,646

521

(6,298
)
Total Expenses, net
(7,137
)
7,844

3,485

4,192

Net Income (Loss)
8,049

552

(3,420
)
5,181

Net Income (Loss) Attributable to Noncontrolling Interests
(586
)
—

—

(586
)
Cash Dividend on Redeemable Convertible Preferred Stock
—

—

(533
)
(533
)
Deemed Dividend on Redeemable Convertible Preferred Stock
—

—

(571
)
(571
)
Net Income (Loss) Attributable to Common Shareholders
7,463

552

(4,524
)
3,491


F-31
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION- continued


 
Six Months Ended June 30, 2016 (Unaudited)
Income Statement Items
Mortgage and REO - Legacy Portfolio and Other Operations
Hospitality and Entertainment Operations
Corporate and Other
Consolidated
Revenues:
 
 
 
 
Operating property revenue
$
683

$
14,909

$
—

$
15,592

Investment and other income
141

7

23

171

Mortgage loan income, net
313

—

—

313

Total Revenue
1,137

14,916

23

16,076

Expenses:
 
 
 
 
Operating Property Direct Expenses (exclusive of interest and depreciation):
 
 
 
 
Payroll related expenses
146

5,523

—

5,669

Cost of sales
—

1,662

—

1,662

Property Taxes
10

144

—

154

Management Fees
24

691

—

715

Other departmental and general and administrative costs
6

2,406

—

2,412

Other costs
290

1,441

—

1,731

Operating Property Direct Expenses (exclusive of interest and depreciation)
476

11,867

—

12,343

Expenses for Non-Operating Real Estate Owned:
 
 
 
 
Property Taxes
175

—

—

175

Other costs
116

—

—

116

Expenses for Non-Operating Real Estate Owned
291

—

—

291

Professional Fees:
 
 
 
 
Financial Reporting - audit, legal and tax
5

—

534

539

Legal - general and enforcement
1,231

—

13

1,244

Asset management
50

—

73

123

Other costs
—

—

317

317

Professional Fees
1,286

—

937

2,223

General and Administrative Expenses:
 
 
 
 
Payroll related expenses
—

—

2,534

2,534

Insurance expense
31

—

522

553

Rent
—

—

105

105

Other general and administrative costs
11

—

659

670

General and Administrative Expenses
42

—

3,820

3,862

Other Expenses (Income):
 
 
 
 
Interest expense
1,075

2,096

1,189

4,360

Depreciation and amortization expense
506

1,635

98

2,239

Gain on disposal of assets, net
(22
)
—

—

(22
)
Loss of unconsolidated subsidiaries
190

—

—

190

Recovery of Credit Losses, net
(120
)
—

—

(120
)
Other Expenses
1,629

3,731

1,287

6,647

Total Expenses, net
3,724

15,598

6,044

25,366


F-32
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION- continued


 
Six Months Ended June 30, 2016 (Unaudited) (continued)
Income Statement Items
Mortgage and REO - Legacy Portfolio and Other Operations
Hospitality and Entertainment Operations
Corporate and Other
Consolidated
Provision for income taxes
—

—

2

2

Net Loss
(2,587
)
(682
)
(6,023
)
(9,292
)
Net Loss Attributable to Noncontrolling Interests
73

—

—

73

Cash Dividend on Redeemable Convertible Preferred Stock
—

—

(1,067
)
(1,067
)
Deemed Dividend on Redeemable Convertible Preferred Stock
—

—

(1,227
)
(1,227
)
Net Loss Attributable to Common Shareholders
$
(2,514
)
$
(682
)
$
(8,317
)
$
(11,513
)

 
Six Months Ended June 30, 2015 (Unaudited)
Income Statement Items
Mortgage and REO - Legacy Portfolio and Other Operations
Hospitality and Entertainment Operations
Corporate and Other
Consolidated
Revenues:
 
 
 
 
Operating property revenue
$
815

$
15,200

$
63

$
16,078

Investment and other income
2,151

—

3

2,154

Mortgage loan income, net
673

—

—

673

Total Revenue
3,639

15,200

66

18,905

Expenses:
 
 
 
 
Operating Property Direct Expenses (exclusive of interest and depreciation):
 
 
 
 
Payroll related expenses
30

5,202

—

5,232

Cost of sales
—

1,701

—

1,701

Property Taxes
167

141

—

308

Management Fees
20

804

—

824

Other departmental and general and administrative costs
10

2,365

—

2,375

Other costs
470

1,307

—

1,777

Operating Property Direct Expenses (exclusive of interest and depreciation)
697

11,520

—

12,217

Expenses for Non-Operating Real Estate Owned:
 
 
 
 
Property Taxes
350

—

—

350

Other costs
261

—

2

263

Expenses for Non-Operating Real Estate Owned
611

—

2

613

Professional Fees:
 
 
 
 
Financial Reporting - audit, legal and tax
7

—

480

487

Legal- general and enforcement
1,153

—

69

1,222

Asset management
213

—

1

214

Other costs
—

—

368

368

Professional Fees
1,373

—

918

2,291


F-33
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION- continued


 
Six Months Ended June 30, 2015 (Unaudited) (continued)
Income Statement Items
Mortgage and REO - Legacy Portfolio and Other Operations
Hospitality and Entertainment Operations
Corporate and Other
Consolidated
General and Administrative Expenses:
 
 
 
 
Payroll related expenses
—

—

3,255

3,255

Insurance expense
22

—

505

527

Rent
—

—

105

105

Other general and administrative costs
125

—

728

853

General and Administrative Expenses
147

—

4,593

4,740

Other Expenses (Income):
 
 
 
 
Interest expense
1,589

2,036

1,606

5,231

Depreciation and amortization expense
1

1,176

105

1,282

Loss on disposal of assets, net
282

—

—

282

Recovery of Credit Losses
(10,660
)
—

—

(10,660
)
Impairment of Real Estate Owned
140

—

—

140

Other Expenses
(8,648
)
3,212

1,711

(3,725
)
Total Expenses, net
(5,820
)
14,732

7,224

16,136

Net Income (Loss)
9,459

468

(7,158
)
2,769

Net Income Attributable to Noncontrolling Interests
(586
)
—

—

(586
)
Cash Dividend on Redeemable Convertible Preferred Stock
—

—

(1,061
)
(1,061
)
Deemed Dividend on Redeemable Convertible Preferred Stock
—

—

(1,131
)
(1,131
)
Net Income (Loss) Attributable to Common Shareholders
$
8,873

$
468

$
(9,350
)
$
(9
)

F-34
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE

Common Stock

Shares of Common Stock, Class B Common Stock, Class C Common Stock, and Class D Common Stock share proportionately in our earnings and losses attributable to common shareholders. There are no shares of the Class D common stock outstanding as of June 30, 2016 or December 31, 2015.

In addition, at June 30, 2016 and December 31, 2015, the Company had reserved the following number of shares of its authorized but unissued common stock for possible future issuance in connection with the following (in thousands):
 
 
June 30, 2016
 
December 31, 2015
Exercise and future grants of stock options
 
2,700

 
2,700

Exercise of stock warrants
 
2,000

 
2,000

Conversion of preferred stock
 
8,200

 
8,200

Approved but unissued restricted common stock
 
1,180

 
1,565

Total authorized but unissued shares
 
14,080

 
14,465


Preferred Stock
 
In 2014, the Company issued a total of 8.2 million shares of its Series B-1 and B-2 Cumulative Convertible Preferred Stock (“Series B Preferred Stock”) to certain investor groups (collectively, the “Series B Investors”) in exchange for $26.4 million (the “Preferred Investment”). Except for certain voting rights, the rights and obligations of the Series B-1 Preferred Stock and Series B-2 Preferred Stock are substantially the same.

The Certificate of Designation contains numerous provisions relating to dividend preferences, redemption rights, liquidation preferences and requirements, conversion rights, voting rights, investment committee participation and other restrictive covenants with respect to the Series B Preferred Stock. Other than the following items, there were no material changes to the descriptions of the foregoing contained in our Form 10-K for the year ended December 31, 2015.

•
Dividends. Dividends on the Series B Preferred Stock are cumulative and accrue from the issue date and compound quarterly at the rate of 8% of the issue price per year, payable quarterly in arrears. During the three and six months ended June 30, 2016 and 2015, we incurred cash dividends on the Series B Preferred Stock of $0.5 million and $1.1 million for each period, respectively.

•
Redemption upon Demand. At any time after July 24, 2019, each holder of Series B Preferred Stock may require the Company to redeem, out of legally available funds, the shares of Series B Preferred Stock held by such holder at the a price (the “Redemption Price”) equal to the greater of (i) 150% of the sum of the original price per share of the Series B Preferred Stock plus all accrued and unpaid dividends or (ii) the sum of the tangible book value of the Company per share of voting Common Stock plus all accrued and unpaid dividends, as of the date of redemption. Based on the initial investment of $26.4 million, the Redemption Price would presently be $39.6 million, resulting in a redemption premium of $13.2 million. In accordance with applicable accounting standards, Series B Preferred Stock is classified as temporary equity on the balance sheet and we have elected to amortize the redemption premium using the effective interest method as an imputed dividend over the five year holding term of the Series B Preferred Stock. During the three months ended June 30, 2016 and 2015, we recorded amortization of the redemption premium of $0.6 million for each period as a deemed dividend. During the six months ended June 30, 2016 and 2015, we recorded amortization for the redemption premium of $1.2 million and $1.1 million, respectively.

Share-Based Compensation

During the six months ended June 30, 2016, we issued 324,500 options, covering an equal number of shares of our common stock to employees under our First Amended and Restated 2010 Employee Stock Incentive Plan. During the three and six months ended June 30, 2016, options with respect to 50,000 shares of our common stock were forfeited in connection with the termination of certain employees. During the three and six months ended June 30, 2015, options with respect to 65,000 shares of our common

F-35
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE- continued


stock were forfeited in connection with the termination of certain employees. During the three and six months ended June 30, 2016, 66,666 unvested restricted stock grants were forfeited upon termination of the related employees. As of June 30, 2016, there were (i) fully vested stock options to purchase 701,667 shares of our common stock, (ii) fully vested warrants to purchase 2,000,000 shares of common stock, and (iii) unvested restricted stock grants for 843,335 shares of common stock. Net stock-based compensation expense relating to our restricted stock and option grants was $0.2 million and $0.4 million for the three and six months ended June 30, 2016 and 2015, respectively. We did not receive any cash from option or warrant exercises during the six months ended June 30, 2016 or 2015. As of June 30, 2016, there was $1.1 million of unrecognized compensation cost related to the time-based restricted stock and stock options that is expected to be recognized as a charge to earnings over the remaining weighted-average vesting period of 1.58 years.

Net Income (Loss) Per Common Share
 
The Company has adopted the two-class computation method, and thus includes all participating securities in the computation of basic shares for the periods in which the Company has net income available to common shareholders. A participating security is defined as an unvested share-based payment award containing non-forfeitable rights to dividends regardless of whether or not the awards ultimately vest or expire. Net losses are not allocated to participating securities unless the holder has a contractual obligation to share in the losses.

The following table presents a reconciliation of net loss from continuing operations to net loss attributable to common shareholders used in the basic and diluted loss per share calculations for the three and six months ended June 30, 2016 and 2015 (amounts in thousands, except for share and per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Earnings allocable to common shares:
 
 
 
 
 
 
 
Numerator - Income (Loss) Attributable to Common Shareholders:
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
(4,525
)
 
$
5,181

 
$
(9,292
)
 
$
2,769

Net (income) loss attributable to noncontrolling interest
18

 
(586
)
 
73

 
(586
)
Preferred dividends (cash and deemed)
(1,153
)
 
(1,104
)
 
(2,294
)
 
(2,192
)
Net income (loss) attributable to common shareholders
$
(5,660
)
 
$
3,491

 
$
(11,513
)
 
$
(9
)
Denominator - Weighted average shares:
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic loss per common share
15,922,321

 
15,279,062

 
15,910,197

 
15,264,946

Weighted average common shares outstanding for diluted earnings per common share
15,922,321

 
27,690,271

 
15,910,197

 
15,264,946

Basic loss per common share:
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders per share
$
(0.36
)
 
$
0.23

 
$
(0.72
)
 
$
—

Diluted earnings per common share:
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders per share
$
(0.36
)
 
$
0.13

 
$
(0.72
)
 
$
—


The following weighted average securities were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Options to purchase common stock
981

 
—

 
955

 
702

Restricted stock
843

 
—

 
855

 
1,515

Warrants to purchase common stock
2,000

 
—

 
2,000

 
2,000

Convertible preferred stock
8,200

 
—

 
8,200

 
8,200

Total
12,024

 
—

 
12,010

 
12,417


F-36
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 — COMMITMENTS AND CONTINGENCIES
 
Development Services Agreements

In April 2014, we entered into an amended and restated development services agreement with Titan, a third party developer, to manage the Gabella project. Under terms of the development services agreement, Titan is entitled to a (i) pre-development services fees not to exceed $0.4 million, (ii) a development services fee equal to 3.0% of the total project cost (less an agreed-upon land basis of $3.0 million), and (iii) a post-development services fee. The post-development services fee consists of a profit participation upon sale of the Gabella project ranging from 7% to 10% of the profit, depending on the amount and timing of the project’s completion and sale. Alternatively, not earlier than 15 months following the achievement of 90% occupancy for the project, Titan may elect to cause us to buy out its interest in the project. If Titan makes such an election, the post-development services fee will be based on the fair market value of the project at the time of the election. During the second quarter of 2016, at which time the Company recorded Titan’s sale profit participation of $0.7 million in the accompanying condensed consolidated balance sheet as an increase in the asset basis with an offsetting increase to noncontrolling interests, as IMH Gabella is a consolidated entity, and the amounts attributable to Titan are a noncontrolling interest. The agreement is in effect until the fifth anniversary of the substantial completion of the project, as defined. If we elect not to proceed with phase 1, 2 or 3 of the project prior to our approval to proceed with development of each phase, the agreement is cancelable by us with 30 day notice to Titan, subject to full payment of (i) the predevelopment services fee for each phase we elect not to develop, (ii) a $0.5 million breakage fee for each phase we elect not to develop, and (iii) any budgeted and approved costs incurred to date. During the three and six months ended June 30, 2016, we paid Titan $0 and $45,000, respectively, in development services fees due under these arrangements, and subsequent to June 30, 2016, we paid Titan $0.2 million, which is the final payment on the development services fee for phase 1 (Gabella). During the three and six months ended June 30, 2015, we paid Titan $0 and $0.1 million, respectively.

In connection with Gabella and related projects, we entered into a Development Assistance Agreement and related agreements with the City of Apple Valley and the EDA. In connection with these agreements the project is expected to generate up to $3.2 million in tax increment financing over an extended period as well as a business subsidy totaling $1.1 million, of which we have received $0.8 million as of June 30, 2016 (as described in Note 7). As a condition to sell the Gabella project, in order that any buyer may retain the benefits under these agreements, we are required to obtain 1) the consent of the EDA, and 2) the buyer’s consent to assume any ongoing obligations under these agreements. We have neither sought nor received such consents to date.

Guarantor Recovery

As more fully described in our Form 10-K for the year ended December 31, 2015, we have previously received judgments against certain guarantors in connection with their personal guarantees on certain legacy assets. Due to the uncertainty of the nature and extent of the available assets of these guarantors to pay the judgment amounts, we do not record recoveries for any amounts due under such judgments, except to the extent we have received assets without contingencies. In addition, these judgments may be subject to appeal.

We recorded recovery income of $0.1 million during the three and six months ended June 30, 2016 for cash collected under certain settlements. During the three and six months ended June 30, 2015, we recorded total recovery income of $9.7 million and $10.7 million, respectively, relating to cash and or other assets received in connection with such enforcement and collection efforts.

We are continuing to investigate and evaluate the assets of various guarantors. However, the nature, amount and availability of such assets are not determinable as of June 30, 2016 and have not been recognized as recovery income in the accompanying condensed consolidated statements of operations. Further recoveries under this and other enforcement and collection efforts will be recognized when realization of the recovery is deemed probable and when all contingencies relating to recovery have been resolved.

Legal Matters
 
We may be a party to litigation as the plaintiff or defendant in the ordinary course of business. While various asserted and unasserted claims may exist, resolution of these matters cannot be predicted with certainty. We establish reserves for legal claims when payments associated with the claims become probable and the payments can be reasonably estimated. Given the inherent difficulty of predicting the outcome of litigation and regulatory matters, it is generally difficult to predict what the eventual outcome will be, and when the matter will be resolved. The actual costs of resolving legal claims may be higher or lower than any amounts reserved for the claims.

F-37
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 — COMMITMENTS AND CONTINGENCIES- continued


Partnership Claim

In May 2015, Justin Ranch 123 LLLP (“Justin 123”), an Arizona limited liability limited partnership for which a wholly-owned subsidiary of IMH serves as general partner, sold certain real estate assets in an arms-length transaction approved by a court-appointed receiver. During the quarter ended March 31, 2016, a limited partner in Justin 123 filed a complaint in United States District Court for Arizona against the Company, certain of our subsidiaries, our CEO in his individual capacity and the court-appointed receiver, alleging that the defendants were in violation of their fiduciary duties to the limited partner. Subsequently, the complaint was amended to dismiss without prejudice all claims against the receiver and our CEO. The plaintiff is seeking an unspecified amount of consequential damages and losses, and removal of the Company’s subsidiary as general partner. Management believes the plaintiff’s claims are without merit and intends to vigorously defend against this claim.

F-38
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 — RELATED PARTY TRANSACTIONS

Notes Payable

As described further in Note 7, the Company has an outstanding note payable to SRE Monarch in the amount of $5.0 million. SRE Monarch is a related party of Seth Singerman, one of the Company’s directors and an affiliate of one of our preferred equity holders. The SRE Note bears interest at a per annum base rate of 16%, and is subject to increase in the event it is not repaid in full on or prior to the maturity date or extended maturity date. During the three and six months ended June 30, 2016, we incurred interest expense on the SRE Note totaling $0.2 million and $0.4 million, respectively. During the three and six months ended June 30, 2015, we incurred interest expense on the SRE Note totaling $0.1 million and $0.5 million, respectively.

The original maturity date of the SRE Note was April 24, 2015. During 2015 and 2016, the Company entered into a series of amendments to extend the SRE Note’s maturity date to September 19, 2016. The Company paid all accrued interest at the date of each amendment, and paid various extension fees totaling $0.3 million, of which $0.1 million was paid during the three months ended June 30, 2015, and $0.2 million was paid during the six months ended June 30, 2016. The extension fees are being amortized over each extension term.

Line of Credit

In March 2016 a subsidiary of the Company executed an agreement with SRE Monarch for a revolving secured line of credit facility (“SRE Revolver”). The SRE Revolver has an initial advance limit of $2.5 million that may be increased to $4.0 million with 12 days written notice and the payment of a $25,000 fee. Additionally, upon each advance, the Company must pay a $50,000 advance fee. Upon entering into the SRE Revolver, the Company paid a facility fee and other closing costs totaling $0.2 million. All amounts advanced under the SRE Revolver may be prepaid in whole or in part without premium or penalty. During the quarter ended June 30, 2016, we drew our initial advance in the amount of $2.5 million in order to provide additional working capital for the Company. In connection with this advance, we paid fees totaling $50,000 which are being amortized to interest expense using the effective interest method over the term of the line of credit. Additionally, we executed our option to extend the SRE Revolver’s maturity date from June 23, 2016 to September 23, 2016 and paid extension fees of $50,000 to SRE Monarch.

Contractual Agreements
 
Juniper Capital Partners, LLC and Related Entities

In July 2014, the Company entered into a consulting services agreement (the “Consulting Agreement”) with JCP Realty Advisors, LLC (“JCP”), an affiliate of Juniper Capital and one of the Series B Investors, pursuant to which JCP agreed to perform various services for the Company, including, but not limited to, (a) advising the Company with respect to identifying, structuring, and analyzing investment opportunities, and (b) assisting the Company in managing and liquidating assets, including non-performing assets. The initial term of the Consulting Agreement is three years and is automatically renewable for an additional two years unless notice of termination is provided.

JCP is entitled to an annual base consulting fee of $0.6 million under the Consulting Agreement (subject to possible upward adjustment based on annual review by our board of directors). In addition to the annual base consulting fee, JCP may be entitled to certain additional fees in connection with loans made by the Company or its affiliates to persons or opportunities arising through the efforts of JCP. JCP is also entitled to legacy fee payments derived from the disposition of certain assets held by the Company as of December 31, 2010, at an amount equal to 5.5% of the positive difference derived by subtracting (i) 110% of our December 31, 2010 valuation mark of that asset then owned by us from the (ii) the gross sales proceeds, if any, from sales of that asset (on a legacy asset by asset basis without any offset for losses realized on any individual asset sales).

During the three months ended June 30, 2016 and 2015, we incurred base consulting fees to JCP of $0.2 million for each period. During the six months ended June 30, 2016 and 2015, we incurred base consulting fees to JCP of $0.3 million for each period. The consulting fees are included in professional fees in the accompanying condensed consolidated statement of operations. During the three and six months ended June 30, 2016, JCP earned $0.1 million in legacy fees. During the three and six months ended June 30, 2015, JCP earned legacy fees in the amount of $0.1 million.


F-39
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 — RELATED PARTIES- continued


SRE Fee Agreement

In July 2014, we entered into an agreement with SRE, an affiliate with one of our directors, pursuant to which SRE is entitled to certain fees if we make or enter into loans or investments originated or identified by SRE. The Company made no payments under this agreement during the three or six months ended June 30, 2016 or 2015.

Investment in Lakeside JV

As described further in Note 5, during 2015, the Company syndicated $1.7 million of its equity investment in Lakeside JV to several investors by selling equity interests in LDV Holdings, of which $1.4 million was sold to various related parties, including $1.1 million to one of the Company’s directors and preferred shareholders, $0.2 million to two members of the Company’s board of directors, and $0.1 million to a partner of one of the Company’s outside law firms. The Company incurred legal or other professional fees totaling $0.2 million and $0.4 million to that law firm during the three months ended June 30, 2016 and 2015, respectively. The Company incurred legal or other professional fees totaling $0.4 million and $0.5 million to that law firm during the six months ended June 30, 2016 and 2015, respectively. The Company had outstanding accounts payable to that law firm totaling $0.4 million and $0.2 million as of June 30, 2016 and December 31, 2015, respectively.

F-40


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and accompanying notes as of and for the year ended December 31, 2015 included in our previously filed Annual Report on Form 10-K (“Form 10-K”), and with the unaudited condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q (“Form 10-Q”).
Forward-Looking Statements
This Form 10-Q contains forward-looking statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “will,” “plan,” “potential,” “should” and “would” or the negative of these terms or other comparable terminology. Forward-looking statements in this Form 10-Q include: our business strategy and liquidity plan, including our intention to dispose of a significant portion of our mortgage loans and other real estate assets in the next 12 to 24 months, and our goals and plans to invest in different real estate platforms, including consideration of opportunities to act as a sponsor and co-investor in real estate mortgages and other real estate-based vehicles, diversify our investments geographically and expand our investment capital base and pursue development activities with certain REO properties; the outcome of actions we may take, or fail to take, that result in defaults of obligations that have liens or collateral interest in our commercial mortgage loan and REO properties, including our ability to cure such defaults; our plans and the anticipated timing and results relating to our actions to foreclose on defaulted mortgage loans; trends and expectations relating to the real estate and lending markets we operate in; expected amortization period of unrecognized compensation costs; that future mortgage income will remain at minimal levels; that property taxes, costs and expenses relating to REO assets and other operating expenses may increase; that we may modify existing loans and/or subordinate our first lien position on our mortgage loans to protect our collateral and maximize our opportunity for recovery; that the concentration of our current loan portfolio will not materially change until we begin making new loans; our sources and the sufficiency of liquidity in the next twelve months; that our financial assets do not give rise to significant interest rate risk; that we may sell whole loans or participations in loans to increase our liquidity; the impact of new accounting standards; that we expect to complete the foreclosure process on our defaulted real estate mortgage loans in the next six to nine months; expectations about future derivative investments; recent trends and expectations relating to rental and hospitality and entertainment activities; that changes in our disposition strategy and related changes in classifications of such assets under GAAP could result in material impairment charges; our future liability relating to CFD and special assessment obligations; that the fair value of the collateral underlying our mortgage loans is sufficient in relation to the current carrying value of the related loans; and that we may further increase our leverage.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance. These beliefs, assumptions and expectations can change, and actual results and events may differ materially, as a result of many possible events or factors, not all of which are known to us or are within our control. These risk factors and uncertainties should be carefully considered by current and potential investors. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include:

•
that we may continue to record losses;
•
that we may incur increased operating expenses;
•
that a substantial portion of our loan portfolio is comprised of non-performing and distressed assets;
•
that we continue to foreclose on our remaining mortgage loan portfolio;
•
the concentration of credit risk to a particular borrower or borrower group;
•
difficulties in analyzing potential investment opportunities as a result of dislocations in the real estate market;
•
our relative inexperience in managing and developing real estate acquired through foreclosure;
•
our inability to sell our current mortgage loan and REO assets and execute our business and liquidity strategy;
•
our inability to resume our mortgage loan lending activities or implement our investment strategy and grow our business;
•
risks of owning real property obtained through foreclosure or other means;
•
the supply of commercial mortgage loans and the resulting impact on our strategy;
•
litigation;
•
our inability to retain and hire consultants and employees necessary to execute our business strategy;

1


•
the lack of a secondary market for our loans that impairs our ability to diversify our portfolio;
•
lack of access to public and private capital markets;
•
the short-term nature of the loans we originate;
•
risks of holding subordinated loans;
•
lender due diligence risks;
•
recent legislative initiatives;
•
government regulation;
•
failure to maintain our exemption from registration under the Investment Company Act;
•
lender loan covenants that restrict our liquidity;
•
our ability to secure joint venture partners on development projects;
•
risks related to additional borrowings;
•
that our liquidity is subject to a cash management agreement or other controlled accounts;
•
restrictive covenants that are contained in debt agreements;
•
the risks our borrowers are exposed to that could impair their ability to repay our loans;
•
inability of our commercial borrowers to generate sufficient income from their operating properties to repay our loans;
•
declines in value of our real estate collateral arising from inaccurate estimates of value due to management or appraisal errors or subsequent events;
•
failure of our underwriting standards;
•
that the guarantors of our mortgage loans will have insufficient assets or resources to support their guarantees;
•
a decline in the fair value of our assets;
•
uncertainty relating to assets valued at fair value;
•
reductions in income resulting from our borrowers’ refinancing their loans at lower interest rates;
•
the adverse effects on our business of increasing interest rates;
•
competition;
•
geographic concentration in our loan and REO portfolio;
•
protection of our rights as a secured lender;
•
exposure to liability under lender liability laws;
•
inadequate insurance coverage on the REO properties we acquire;
•
hazardous substances on the REO properties we acquire;
•
our inability to utilize our tax net operating losses;
•
continued decline in economic conditions;
•
reliance on key personnel;
•
conflicts of interest relating to existing contractual agreements;
•
complex accounting rules;
•
our failure to maintain adequate internal controls;
•
our ability to change our business, leverage and financing strategies without stockholder consent;
•
use of liquidity to pay required preferred dividends;
•
covenants relating to the issuance of preferred stock that restrict our ability to take certain actions;
•
restrictions on the payment of dividends to common stockholders;
•
dilution resulting from future issuances of debt and equity securities;
•
provisions in our certificate of incorporation, bylaws and Delaware law that could impede or delay an acquisition of the Company; and

2


•
other factors listed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015. 

You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date on which it was made. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. The factors described within this Form 10-Q could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to such future periods. Except to the extent required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the events described by our forward-looking statements might not occur. We qualify any and all of our forward-looking statements by these cautionary factors. Please keep this cautionary note in mind as you read this Form 10-Q and the documents incorporated by reference into this Form 10-Q.

Overview of the Business
 
We are a real estate investment and finance company based in the southwestern United States with over a decade of experience in various and diverse facets of the real estate lending and investment process, including origination, acquisition, underwriting, documentation, servicing, enforcement, development, marketing, and disposition.
 
The Company’s focus is to invest in, originate, manage and dispose of commercial real estate mortgage and related investments, and to perform all functions reasonably related thereto, including developing, managing and either holding for investment or disposing of real property acquired through foreclosure, investment or other means. The Company also considers opportunities to act as a sponsor and/or co-investor in real estate mortgages and other real estate-based investment vehicles.
 
Through our traditional credit analysis coupled with real estate valuation techniques used by developers, we have invested in real estate assets with a carrying value of $156.1 million as of June 30, 2016, comprised primarily of owned property acquired through foreclosure with a carrying value of $155.7 million. Our owned property consists of operating properties, REO held for sale and other REO assets. Our mortgage loans and REO held for sale are being marketed for disposition within the next twelve months. During the six months ended June 30, 2016, we sold five REO assets (or portions thereof) for $3.3 million, net of selling costs, which resulted in a net gain of approximately $0.2 million and one mortgage loan for $3.0 million, net of selling costs, which resulted in a net loss of approximately $0.1 million. We also received $7.6 million in principal mortgage payments during the six months ended June 30, 2016.

During the six months ended June 30, 2016 we reclassified certain REO assets from operating properties, REO held for development and Other REO to REO held for sale due to management’s decision to dispose of such assets and efforts taken to achieve such disposal.

As of June 30, 2016, our operating properties consisted of the following:

•
Two operating hotels located in Sedona, Arizona. One of the hotels is an 89-room resort hotel with an on-site restaurant and spa known as L’Auberge de Sedona (“L’Auberge”). Our other hotel property is Orchards Inn, a 70-room limited-service hotel with a restaurant located adjacent to the hotel. The Company began a capital improvement program at these properties in mid-2015 which was substantially completed by the end of the second quarter of 2016.

•
A 196-unit multi-family residential leasing development located in Apple Valley, Minnesota known as Gabella. The first 98 units of this project were completed and commenced leasing in the fourth quarter of 2015, and the second 98 units were completed and commenced leasing in the first quarter of 2016. The assets and liabilities of this operation were classified as REO held for sale as of June 30, 2016 as a result of management’s decision and actions to market that asset for sale.

•
A golf course operation in Bullhead City, Arizona which offers golf, spa and food and beverage operations. The assets of this operation were classified as REO held for sale as of June 30, 2016 as a result of management’s decision and actions to market that asset for sale.

In addition to managing its operating properties and engaging in on-going real estate development activities, management continues to aggressively pursue enforcement action against current and former borrowers through foreclosure and recovery of other guarantor assets. We recorded recovery income of $0.1 million during the three and six months ended June 30, 2016.


3


During the six months ended June 30, 2016, we repaid a $5.4 million note payable to a bank upon collection of the mortgage receivable that served as collateral for that loan. In addition, we secured a $4.0 million revolving line of credit from a related party, of which $2.5 million was drawn during the period ended June 30, 2016.
Continuing Challenges

We continue to face a number of challenges impacting our financial performance including, but not limited to, the following:

1.
We have been unable to fully fund our operations, including interest expense and preferred dividend obligations, out of income from ongoing operations, and as such, we remain dependent on borrowings and sales of real estate assets to generate sufficient cash to sustain operations;

2.
Despite our efforts to expedite the sale of our assets through reduced pricing and increased marketing, the velocity of asset sales has been slower than desired or anticipated. This has been attributed to various factors including, but not limited to, a constrained financing market for certain of our assets, longer than expected due diligence periods, and that certain of our REO assets are held in less desirable local markets;

3.
While we have sought various financing alternatives during the first six months of 2016, we have been unable to secure new or replacement financing at favorable terms; and

4.
Certain loan guarantee agreements contain a minimum liquidity covenant which has the effect of restricting the use of our cash to fund operations, engage in new development activities or acquire additional assets, thereby negatively impacting our operating results.

Key Operational Aspects

•
Our net losses for the three and six months ended June 30, 2016 were $4.5 million and $9.3 million, respectively, compared to net income of $5.2 million and $2.8 million for the three and six months ended June 30, 2015, respectively.

•
Our total assets were $178.3 million as of June 30, 2016 compared to $185.8 million as of December 31, 2015.

•
Our total revenue decreased by $0.2 million and $2.8 million, to $9.2 million and $16.1 million for the three and six months ended June 30, 2016, respectively, from the corresponding periods in 2015.

•
We recorded recoveries of credit losses of $0.1 million for the three and six months ended June 30, 2016, compared to $9.7 million and $10.7 million, respectively, for the three and six months ended June 30, 2015.

•
Basic net income (loss) per common share for the three and six months ended June 30, 2016 was $(0.36) and $(0.72), respectively, compared to $0.23 and less than $0.01 for the three and six months ended June 30, 2015. Diluted net income (loss) per share for the three and six months ended June 30, 2016 was $(0.36) and $(0.72), respectively, compared to $0.13 and less than $0.01 for the three and six months ended June 30, 2015.

4


Results of Operations for the Three and Six Months Ended June 30, 2016 Compared to the Three and Six Months Ended June 30, 2015
 
Revenues (dollars in thousands)
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
$ Change
 
% Change
 
2016
 
2015
 
$ Change
 
% Change
Operating Property Revenue
 
$
9,021

 
$
8,894

 
$
127

 
1.4
 %
 
$
15,592

 
$
16,078

 
$
(486
)
 
(3.0
)%
Investment and Other Income
 
77

 
304

 
(227
)
 
(74.7
)%
 
171

 
2,154

 
(1,983
)
 
(92.1
)%
Mortgage Loan Income, Net
 
96

 
175

 
(79
)
 
(45.1
)%
 
313

 
673

 
(360
)
 
(53.5
)%
Total Revenue
 
$
9,194

 
$
9,373

 
$
(179
)
 
(1.9
)%
 
$
16,076

 
$
18,905

 
$
(2,829
)
 
(15.0
)%
 
Operating Property Revenue. For the three months ended June 30, 2016, operating property revenue was $9.0 million as compared to $8.9 million for the three months ended June 30, 2015, an increase of $0.1 million, or 1.4%. The increase in operating property revenue for the three month period is primarily attributable to a higher combined average daily rate (“ADR”) at the Company’s hotel properties during the second quarter of 2016. The ADR for the Company’s hotel properties during the three months ended June 30, 2016 was $393, compared to $314 during the same period of 2015. The increase in ADR was partially offset by decreased occupancy rates at these hotels. The hotels recognized occupancy of 79.7% during the three months ended June 30, 2016, compared to occupancy of 85.3% during the same period of 2015. During the six months ended June 30, 2016, operating property revenue was $15.6 million compared to $16.1 million for the six months ended June 30, 2015, a decrease of $0.5 million or 3.0%. The decrease in operating property revenue for the six month period is primarily attributed to lower occupancy at our two hotels, partially offset by higher ADR. The hotels recognized occupancy of 72.5% and ADR of $364 during the six months ended June 30, 2016, compared to occupancy of 81.4% and an ADR of $305 during the same period of 2015. Also contributing to the increase in operating property revenues for the three and six months ended June 30, 2016 was our Gabella residential leasing project which commenced operations in the fourth quarter of 2015 which was partially offset by the loss of lease revenues due to the sale of our commercial office building in August 2015.

Investment and Other Income. Investment and other income during the three and six months ended June 30, 2016 consisted primarily of land rental income. For the three months ended June 30, 2016, investment and other income was $0.1 million compared to $0.3 million for the three months ended June 30, 2015, a decrease of $0.2 million, or 74.7%. The decrease for the three month period is primarily attributable to the sale of an easement onto one of our REO - Legacy properties during the second quarter of 2015. The investment and other income for the six months ended June 30, 2016 was $0.2 million compared to $2.2 million during the same period of 2015, a decrease of $2.0 million or 92.1%. The $2.0 million decrease is primarily attributable to a settlement payment received on a limited guarantee provided by the Company relating to a previous preferred equity investment when the borrower secured a replacement guarantor on the senior loan during the first quarter 2015, as well as the cessation of the limited guarantee quarterly payments in the second quarter of 2015.

Mortgage Loan Income, Net. For the three and six months ended June 30, 2016, mortgage loan income was $0.1 million and $0.3 million, respectively, as compared to $0.2 million and $0.7 million for the three and six months ended June 30, 2015, respectively, a decrease of $0.1 million, or 45.1%, for the three month period, and $0.4 million, or 53.5%, for the six month period. The decreases in mortgage loan income for the three and six months is primarily attributable to a decrease in the balance of our outstanding loan portfolio due to loan sales and payoffs during the second half of 2015 and the first half of 2016, coupled with a lower average income-earning portion of our loan portfolio in 2016 resulting from loan payoffs.


5


Costs and Expenses (dollars in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
$ Change
 
% Change
 
2016
 
2015
 
$ Change
 
% Change
Operating Property Direct Expenses (exclusive of Interest and Depreciation)
 
$
6,724

 
$
6,573

 
$
151

 
2.3
 %
 
$
12,343

 
$
12,217

 
$
126

 
1.0
 %
Expenses for Non-Operating Real Estate Owned
 
133

 
325

 
(192
)
 
(59.1
)%
 
291

 
613

 
(322
)
 
(52.5
)%
Professional Fees
 
1,262

 
1,045

 
217

 
20.8
 %
 
2,223

 
2,291

 
(68
)
 
(3.0
)%
General and Administrative Expenses
 
1,947

 
2,547

 
(600
)
 
(23.6
)%
 
3,862

 
4,740

 
(878
)
 
(18.5
)%
Interest Expense
 
2,304

 
2,417

 
(113
)
 
(4.7
)%
 
4,360

 
5,231

 
(871
)
 
(16.7
)%
Depreciation and Amortization Expense
 
1,197

 
651

 
546

 
83.9
 %
 
2,239

 
1,282

 
957

 
74.6
 %
Recovery of Credit Losses, Net
 
(120
)
 
(9,745
)
 
9,625

 
(98.8
)%
 
(120
)
 
(10,660
)
 
10,540

 
(98.9
)%
Impairment of REO
 
—

 
140

 
(140
)
 
(100.0
)%
 
—

 
140

 
(140
)
 
(100.0
)%
Loss (Gain) on Disposal of Assets, Net
 
226

 
239

 
(13
)
 
(5.4
)%
 
(22
)
 
282

 
(304
)
 
(107.8
)%
Loss of Unconsolidated Subsidiaries
 
46

 
—

 
46

 
N/A

 
190

 
—

 
190

 
N/A

Total Costs and Expenses
 
$
13,719

 
$
4,192

 
$
9,527

 
227.3
 %

$
25,366

 
$
16,136

 
$
9,230

 
57.2
 %
 
Operating Property Direct Expenses (exclusive of Interest and Depreciation). Operating property direct expenses were $6.7 million for the three months ended June 30, 2016 compared to $6.6 million for the three months ended June 30, 2015, an increase of $0.1 million or 2.3%. For the six months ended June 30, 2016, operating property direct expenses were $12.3 million as compared to $12.2 million for the corresponding period in 2015. Despite the decrease in operating property revenues for the six months ended June 30, 2016, operating property direct expenses increased slightly as a percentage of operating property revenues, which is primarily attributed to the additional labor and equipment expenses incurred in connection with the renovations at our two operating hotel properties during the first two quarters of 2016.

Expenses for Non-Operating Real Estate Owned. Such expenses include property taxes, homeowners association (HOA) dues, utilities, and repairs and maintenance, as well as other carrying costs pertaining to non-operating properties. For the three months ended June 30, 2016, expenses for non-operating real estate owned assets were $0.1 million as compared to $0.3 million for the three months ended June 30, 2015, a decrease of $0.2 million, or 59.1%. For the six months ended June 30, 2016, expenses for non-operating real estate owned assets were $0.3 million as compared to $0.6 million for the six months ended June 30, 2015, a decrease of $0.3 million or 52.5%. The decreases are attributable to lower HOA dues, utilities, property taxes, insurance and licensing costs resulting from asset disposals between periods.

Professional Fees. For the three months ended June 30, 2016, professional fees were $1.3 million as compared to $1.0 million for the three months ended June 30, 2015, an increase of $0.2 million, or 20.8%. The increase for the three month period is due to increased legal costs primarily related to enforcement activities. For the six months ended June 30, 2016 professional fees were $2.2 million as compared to $2.3 million for the six months ended June 30, 2015, a decrease of 3.0%. The decrease in professional fees for the six months ended June 30, 2016 is primarily attributed to decreases in asset management costs as a result of asset disposals offset by increased guarantor enforcement costs.

General and Administrative Expenses. For the three months ended June 30, 2016, general and administrative expenses were $1.9 million as compared to $2.5 million for the three months ended June 30, 2015, a decrease of $0.6 million, or 23.6%. For the six months ended June 30, 2016, general and administrative expenses were $3.9 million as compared to $4.7 million, a decrease of $0.9 million or 18.5% The decrease in general and administrative expenses for the three and six months ended June 30, 2016 is primarily attributed to lower compensation and benefits, recruiting fees and marketing expenses, partially offset by higher due diligence expenses incurred in connection with our consideration of possible new investments.

Interest Expense. For the three months ended June 30, 2016, interest expense was $2.3 million as compared to $2.4 million for the three months ended June 30, 2015, a decrease of $0.1 million, or 4.7%. For the six months ended June 30, 2016, interest expense was $4.4 million as compared to $5.2 million, a decrease of $0.9 million or 16.7%. The decreases in the three and six month periods are attributed primarily to the lower average notes payable balances during the respective periods as a result of note payoffs.

Depreciation and Amortization Expense. For the three months ended June 30, 2016, depreciation and amortization expense was $1.2 million as compared to $0.7 million for the three months ended June 30, 2015, an increase of $0.5 million, or 83.9%. For the six months ended June 30, 2016, depreciation and amortization expense was $2.2 million as compared to $1.3 million for the corresponding period in 2015. The increase is primarily attributed to the commencement of leasing activities of the Gabella project

6


and the related depreciation recorded on that property, as well as depreciation recorded on the assets related to the capital improvement program at our hotels and restaurants in Sedona.
 
(Gain) Loss on Disposal of Assets, Net. For each of the three months ended June 30, 2016 and 2015, loss on the disposal of assets totaled $0.2 million. For the six months ended June 30, 2016, we recorded a gain on the disposal of assets of $22,000 as compared to net losses of $0.3 million for the corresponding period in 2015. For the six months ended June 30, 2016, we sold or otherwise disposed of five REO assets (or portions thereof) for $3.3 million (net of selling costs) and one mortgage note for $3.0 million. During the six months ended June 30, 2015, we sold or otherwise disposed of two mortgage loans and seventeen REO assets (or portions thereof) for $25.3 million (net of selling costs). Given the nature of assets being sold, we cannot always reliability predict the profitability, timing, or volume of these transactions.
 
Recovery of Credit Losses, Net. For the three months ended June 30, 2016, we recorded recovery of credit losses of $0.1 million, as compared to $9.7 million for the three months ended June 30, 2015, a decrease of $9.6 million. For the six months ended June 30, 2016, we recorded recovery of credit losses of $0.1 million as compared to $10.7 million for the same period of 2015. The decrease is due to the substantial recoveries received in the second quarter of 2015 as a result of our receipt of cash and other asset collections resulting from our enforcement activities.

Loss of Unconsolidated Subsidiaries. For the three and six months ended June 30, 2016, loss of unconsolidated subsidiaries was $46,000 and $0.2 million, respectively. These losses were incurred on our Lakeside JV that was formed in the fourth quarter of 2015, and are for normal operational expenses such as taxes and management fees.

Impairment of REO. We recorded no impairment charges on our REO assets for the three and six months ended June 30, 2016. For the three and six months ended June 30, 2015, we recorded impairment charges of $0.1 million resulting from our quarterly fair value analysis.

7


Operating Segments

Our operating segments reflect the distinct business activities from which revenues are earned and expenses incurred that are evaluated regularly by our executive management team in assessing performance and in deciding how to allocate resources. As of and for the three and six months ended June 30, 2016 and 2015, our reportable segments consisted of the following:
 
Hospitality and Entertainment Operations — Consists of revenues less direct operating expenses, depreciation and amortization relating to hotel, golf, spa, and food & beverage operations. This segment also reflects the carrying value of such assets and the related financing and operating obligations.

Mortgage and REO – Legacy Portfolio and Other Operations — Consists of the collection, workout and sale of new and legacy loans and REO assets, including the financing of such asset sales, the carrying costs of such assets and other related expenses. This segment also reflects the carrying value of such assets and the related financing and operating obligations. This segment also consists of rental revenue and tenant recoveries less direct property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses), depreciation and amortization from commercial and residential real estate leasing operations, and the carrying value of such assets and the related financing and operating obligations.

Prior to June 30, 2016, the Company reported amounts for the commercial and residential real estate leasing operations in a separate segment titled Commercial and Residential Real Estate Leasing Operations. Commencing in the quarter ended June 30, 2016, and for all comparable periods presented in the following segment tables and discussion, the amounts and results of the previously reported Commercial and Residential Real Estate Leasing Operations segment have been combined with the Mortgage and REO - Legacy Portfolio and Other Operations segment. This reclassification aligns the Company’s reportable segments with the overall strategy of the Company since the related assets in the Commercial and Residential Real Estate Leasing Operations segment were classified as REO held for sale once it was economically feasible to dispose of such assets, as the Company did not intend to operate the assets on a long-term basis.

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

A comparative summary and analysis of the financial results for each of our operating segments during the three and six months ended June 30, 2016 and 2015 follows:

Hospitality and Entertainment Operations
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
% of Consolidated Total
 
2015
 
% of Consolidated Total
 
2016
 
% of Consolidated Total
 
2015
 
% of Consolidated Total
Total Revenue
$
8,574

 
93.3%
 
$
8,396

 
89.6%
 
$
14,916

 
92.8%
 
$
15,200

 
80.4%
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Property Expenses (exclusive of interest and depreciation)
6,485

 
96.4%
 
6,198

 
94.3%
 
11,867

 
96.1%
 
11,520

 
94.3%
Total Operating Expenses
6,485

 
 
 
6,198

 
 
 
11,867

 
 
 
11,520

 
 
Net Operating Income
2,089

 
 
 
2,198

 
 
 
3,049

 
 
 
3,680

 
 
Net Operating Income % of Revenue
24.4
%
 
 
 
26.2
%
 
 
 
20.4
%
 
 
 
24.2
%
 
 
Other Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
1,048

 
45.5%
 
1,048

 
43.4%
 
2,096

 
48.1%
 
2,036

 
38.9%
Depreciation and Amortization Expense
841

 
70.3%
 
598

 
91.9%
 
1,635

 
73.0%
 
1,176

 
91.7%
Other Expenses
1,889

 
 
 
1,646

 
 
 
3,731

 
 
 
3,212

 
 
Total Expenses
8,374

 
61.0%
 
7,844

 
187.1%
 
15,598

 
61.5%
 
14,732

 
91.3%
Net Income (Loss)
$
200

 
(4.4)%
 
$
552

 
10.7%
 
$
(682
)
 
7.3%
 
$
468

 
16.9%

For the three months ended June 30, 2016 and 2015, the hospitality and entertainment operations segment revenues were $8.6 million and $8.4 million, respectively. The increase in revenue for the three months ended June 30, 2016 was primarily due to higher ADR at the hotels, partially offset by lower occupancy rates at the hotels. For the three months ended June 30, 2016, the

8


hotels recognized a higher ADR of $393, but lower occupancy of 79.7%, as compared to $314 ADR and 85.3% occupancy for the same period in 2015. For the six months ended June 30, 2016 and 2015, the hospitality and entertainment operations segment revenues were $14.9 million and $15.2 million, respectively. The decrease in revenue for the six months ended June 30, 2016 was primarily due to lower occupancy rates, partially offset by higher ADR at the hotels. For the six months ended June 30, 2016, the hotels recognized occupancy rates of 72.5% and $364 ADR, as compared to occupancy rates of 81.4% and $305 ADR during the same period in 2015.

For the three months ended June 30, 2016, the golf course operation revenues saw an overall decrease of 0.5%, attributable to a 2.6% decrease in golf and related revenue per round ($76.65 and $78.66 for the three months ended June 30, 2016 and 2015, respectively), partially offset by a 2.1% increase in total rounds played (7,481 and 7,324 for the three months ended June 30, 2016 and 2015, respectively). The three month decrease in golf and related revenue per round is primarily attributed to unfavorable weather conditions during the second quarter of 2016. For the six months ended June 30, 2016, the golf course operation revenues saw an overall decrease of 6.6%, attributable to a 6.3% decrease in golf and related revenue per round ($72.87 and $77.77 for the six months ended June 30, 2016 and 2015, respectively), and a 0.3% decrease in total rounds played (19,533 and 19,587 for the six months ended June 30, 2016 and 2015, respectively).

The increase in hospitality and entertainment operations revenues as a percentage of total consolidated revenues for the three and six months ended June 30, 2016 as compared to the same period for 2015 is attributable to a lack of other income-producing assets and our continued efforts to sell assets and loans in our legacy portfolio. Unless and until we are able to generate sufficient liquidity and cash flow to make income-producing investments in other operating segments, the hospitality and entertainment operations segment is expected to be our primary source of total revenue.

For the three and six months ended June 30, 2016 and 2015, the hospitality and entertainment operations segment constituted the majority of total operating property direct expenses. Net operating income for the segment as a percentage of related revenue was 24.4% and 26.2% for the three months ended June 30, 2016 and 2015, respectively, and 20.4% and 24.2% for the six months ended June 30, 2016 and 2015, respectively. The decrease in net operating income percentages for the three and six months ended June 30, 2016 as compared to the same period in 2015 is primarily attributed to increased labor and equipment costs incurred in connection with the renovation projects at the hotels.

After interest, depreciation and amortization expenses, the hospitality and entertainment operations segment contributed net income of $0.2 million and $0.6 million to the total consolidated net income (loss) for the three months ended June 30, 2016 and 2015, respectively, and a net loss of $0.7 million and net income of $0.5 million to the total consolidated net income (loss) for the six months ended June 30, 2016 and 2015, respectively.

Mortgage and REO – Legacy Portfolio and Other Operations

9


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
% of Consolidated Total
 
2015
 
% of Consolidated Total
 
2016
 
% of Consolidated Total
 
2015
 
% of Consolidated Total
Total Revenue
$
620

 
6.7%
 
$
912

 
9.7%
 
$
1,137

 
7.1%
 
$
3,639

 
19.2%
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Property Expenses (exclusive of interest and depreciation)
239

 
3.6%
 
375

 
5.7%
 
476

 
3.9%
 
697

 
5.7%
Expenses for Non-Operating Real Estate Owned
131

 
98.5%
 
324

 
100.0%
 
291

 
100.0%
 
611

 
99.7%
Professional Fees
791

 
62.7%
 
528

 
50.5%
 
1,286

 
57.8%
 
1,373

 
59.9%
General and Administrative Expenses
16

 
0.8%
 
101

 
4.0%
 
42

 
1.1%
 
147

 
3.1%
Other Expenses (Income):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
669

 
29.0%
 
900

 
37.2%
 
1,075

 
24.7%
 
1,589

 
30.4%
Depreciation and Amortization Expense
307

 
29.5%
 
1

 
—%
 
506

 
26.3%
 
1

 
—%
Loss (Gain) on Disposal of Assets, Net
226

 
100.0%
 
239

 
100.0%
 
(22
)
 
100.0%
 
282

 
100.0%
Recovery of Credit Losses, Net
(120
)
 
100.0%
 
(9,745
)
 
100.0%
 
(120
)
 
100.0%
 
(10,660
)
 
100.0%
Impairment of Real Estate Owned
—

 
—%
 
140

 
100.0%
 
—

 
—%
 
140

 
100.0%
Loss of Unconsolidated Subsidiaries
46

 
100.0%
 
—

 
—%
 
190

 
100.0%
 
—

 
—%
Total Expenses, net
2,305

 
16.8%
 
(7,137
)
 
(170.3)%
 
3,724

 
14.7%
 
(5,820
)
 
(36.1)%
Net Income (Loss)
(1,685
)
 
37.2%
 
8,049

 
155.4%
 
(2,587
)
 
27.8%
 
9,459

 
341.6%
Net (Income) Loss Attributable to Noncontrolling Interests
18

 
100.0%
 
(586
)
 
100.0%
 
73

 
100.0%
 
(586
)
 
100.0%
Net Income (Loss) Attributable to Common Shareholders
$
(1,667
)
 
29.5%
 
$
7,463

 
213.8%
 
$
(2,514
)
 
21.8%
 
$
8,873

 
N/A

For the three months ended June 30, 2016 and 2015, the Mortgage and REO - Legacy Portfolio and Other Operations segment contributed 6.7% and 9.7% of total consolidated revenues, respectively. For the six months ended June 30, 2016 and 2015, the Mortgage and REO - Legacy Portfolio and Other Operations segment contributed 7.1% and 19.2% of total consolidated revenues, respectively. The decrease in segment revenue during the three months ended June 30, 2016, as compared to the same period in 2015, resulted primarily from reduced mortgage and investment income due to real estate asset sales and payoffs of certain mortgage loans, partially offset by a slight increase in the commercial and residential leasing operations due to the completion of the Gabella multifamily project in the first quarter of 2016. Gabella was approximately 73% leased and 67% occupied as of June 30, 2016. The decrease in segment revenue during the six months ended June 30, 2016, as compared to the same period in 2015, resulted primarily from reduced mortgage and investment income due to real estate asset sales and payoffs of certain mortgage loans, partially offset by a slight decrease in the commercial office leasing operations due to a full six months of the commercial leasing operation in 2015, which was sold in the third quarter of 2015, as compared to only four months of full operations for the Gabella multifamily project in 2016.

The Mortgage and REO - Legacy Portfolio and Other Operations segment contributed $2.3 million of total consolidated expenses for the three months ended June 30, 2016 and reduced total consolidated expenses (due to recoveries which offset expenses) by $7.1 million during the three months ended June 30, 2015. The Mortgage and REO - Legacy Portfolio and Other Operations segment contributed $3.7 million of total consolidated expenses for the six months ended June 30, 2016 and reduced total consolidated expenses by $5.8 million for the same period of 2015. The increase in net expenses for the three and six months ended June 30, 2016 as compared to the same periods in 2015, is primarily due to (i) reduced recoveries from prior credit losses through asset collections from guarantors and the assignment of equity interests as a result of our enforcement and collection efforts during the second quarter of 2015, (ii) increases in operating property expenses due to greater efficiency and lower operating costs for the Gabella residential leasing operation during the three and six months ended June 30, 2016, compared to the commercial leasing operation during the same periods in 2015 , and (iii) higher depreciation and amortization expense as the residential leasing assets were depreciated as they weren’t moved to REO held for sale until late in the second quarter of 2016, as opposed to the commercial leasing assets that had no depreciation as they were classified as held for sale during all of 2015, partially offset by (i) reduced expenses for non-operating real estate owned due to sales of certain legacy assets, (ii) a decrease in interest expense due to the payoff of two non-recourse loans totaling $28.8 million secured by certain legacy assets during the fourth quarter of 2015. The segment recognized recoveries of $0.1 million for the three and six months ended June 30, 2016, compared to $9.7 million and $10.7 million for the three and six months ended June 30, 2015, respectively.
 

10


After interest, depreciation and amortization expenses, and recoveries of credit losses, the Mortgage and REO - Legacy Portfolio and Other Operations segment contributed net losses of $1.7 million and $2.5 million to the total consolidated net losses for the three and six months ended June 30, 2016, respectively, and net income of $8.0 million and $9.5 million to the total consolidated net income for the three and six months ended June 30, 2015, respectively.

See “Note 3 – Mortgage Investments and Loan Sales” in the accompanying condensed consolidated financial statements and Item 2. - “Real Estate Owned, Lending Activities, and Loan and Borrower Attributes” for additional information regarding our loan portfolio.

Corporate and Other
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
% of Consolidated Total
 
2015
 
% of Consolidated Total
 
2016
 
% of Consolidated Total
 
2015
 
% of Consolidated Total
Total Revenue
$
—

 
—%
 
$
65

 
0.7%
 
$
23

 
0.1%
 
$
66

 
0.3%
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses for Non-Operating Real Estate Owned
2

 
1.5%
 
1

 
0.3%
 
—

 
—%
 
2

 
0.3%
Professional Fees
471

 
37.3%
 
517

 
49.5%
 
937

 
42.2%
 
918

 
40.1%
General and Administrative Expenses
1,931

 
99.2%
 
2,446

 
96.0%
 
3,820

 
98.9%
 
4,593

 
96.9%
Interest Expense
587

 
25.5%
 
469

 
19.4%
 
1,189

 
27.3%
 
1,606

 
30.7%
Depreciation and Amortization Expense
49

 
4.1%
 
52

 
8.0%
 
98

 
4.4%
 
105

 
8.2%
Provision for Income Taxes
—

 
—%
 
—

 
—%
 
2

 
100.0%
 
—

 
—%
Total Expenses
3,040

 
22.2%
 
3,485

 
83.1%
 
6,046

 
23.8%
 
7,224

 
44.8%
Net Loss
(3,040
)
 
67.2%
 
(3,420
)
 
(66.0)%
 
(6,023
)
 
64.8%
 
(7,158
)
 
(258.5)%
Cash Dividend on Redeemable Convertible Preferred Stock
(533
)
 
100.0%
 
(533
)
 
100.0%
 
(1,067
)
 
100.0%
 
(1,061
)
 
100.0%
Deemed Dividend on Redeemable Convertible Preferred Stock
(620
)
 
100.0%
 
(571
)
 
100.0%
 
(1,227
)
 
100.0%
 
(1,131
)
 
100.0%
Net Loss Attributable to Common Shareholders
$
(4,193
)
 
74.1%
 
$
(4,524
)
 
(129.6)%
 
$
(8,317
)
 
72.2%
 
$
(9,350
)
 
N/A

Other than occasional, non-recurring miscellaneous revenue, the Corporate and Other segment does not generate any material revenues for the Company.

During the three months ended June 30, 2016 and 2015, the expenses in the Corporate and Other segment were $3.0 million and $3.5 million, respectively, or 22.2% and 83.1% of the Company’s consolidated expenses. The decline in expenses for this period is primarily attributable to reduced general and administrative costs due to reductions in compensation and related expenses and marketing expenses, partially offset by higher due diligence expenses. During the six months ended June 30, 2016 and 2015, the expenses in the Corporate and Other segment were $6.0 million and $7.2 million, respectively, or 23.8% and 44.8% of the Company’s consolidated expenses. The decline in expenses for this period is primarily attributable to (i) a decrease in interest expense due to the reduction of our outstanding notes payable balances; and (ii) reduced general and administrative costs due to reductions in compensation and related expenses, bank fees and franchise taxes, partially offset by higher due diligence expenses.

As a result of the above, for the three months ended June 30, 2016 and 2015, the Corporate and Other segment contributed losses of $3.0 million and $3.4 million to the Company’s consolidated net income (loss), respectively. The Corporate and Other segment contributed losses of $6.0 million and $7.2 million to the Company’s consolidated net income (loss) for the six months ended June 30, 2016 and 2015, respectively.

11


Real Estate Owned, Lending Activities, and Loan and Borrower Attributes
 
Operating Properties and Real Estate Held for Development or Sale
 
At June 30, 2016, we held total operating properties and REO assets of $155.7 million, of which $50.5 million were held for sale, $89.7 million were held as operating properties and $15.6 million were classified as other real estate owned. At December 31, 2015, we held total operating properties and REO assets of $152.9 million, of which $3.7 million were held for development, $5.3 million were held for sale, $116.2 million were held as operating properties and $27.7 million were classified as other real estate owned. Our properties are located in Arizona, Minnesota, New Mexico, Texas and California.
 
During the six months ended June 30, 2016, we sold five REO assets (or portions thereof) for $3.3 million (net of selling costs), resulting in a total net gain of $0.1 million. During the six months ended June 30, 2015, we sold seventeen REO assets (or portions thereof) for $11.6 million (net of selling costs), resulting in a net loss of $0.2 million.

The Company commenced a capital improvement program at its hospitality properties in Sedona, Arizona during the second quarter of 2015 which was substantially completed during the second quarter of 2016. We have incurred total project costs of $11.1 million through June 30, 2016, of which $4.8 million was incurred during the six months ended June 30, 2016.

During the fourth quarter of 2015, the first phase of our Gabella multifamily project began leasing operations. The second phase of Gabella commenced leasing operations in March 2016. During the six months ended June 30, 2016, we incurred development costs for Gabella totaling $2.9 million.

During the six months ended June 30, 2016, we reclassified our Gabella multifamily project and our golf operations from operating properties to REO held for sale, as well as other certain REO assets from REO held for development and Other REO to REO held for sale, due to management’s decision and actions taken to market such assets for sale. Other REO includes those assets which are generally available for sale but, for a variety of reasons, are not currently being marketed for sale, or those which are not expected to be disposed of within 12 months. Aside from these reclassifications, there were no material changes with respect to REO classifications or planned development during the six months ended June 30, 2016, other than as a result of REO asset sales and capitalized development costs.

In the fourth quarter of 2015, the Company, through a consolidated subsidiary, Lakeside DV Holdings, LLC (“LDV Holdings”), entered into a joint venture with a third party developer, Park City Development, LLC (“PCD”) for the purpose of acquiring, holding and developing certain real property located in Park City, Utah (“Lakeside JV”). The intent is to sell townhome, single family residential and hotel lots. Under the Lakeside JV limited liability company agreement, the Company agreed to contribute up to $4.2 million for a 90% interest in Lakeside JV, while PCD agreed to contribute up to $0.5 million for a 10% interest. PCD’s principal has provided a limited guaranty to the Company for performance in the case of certain defaults by PCD.

As of June 30, 2016, the Company had contributed $3.6 million to Lakeside JV and is obligated to contribute up to an additional $0.6 million per the project’s initial operating budget. During the quarter ended June 30, 2016, the Company provided no financial or other support to Lakeside JV that was not contractually required. Equity balances are subject to a 12% preferred return, compounded quarterly. Once the preferred return is distributed, a combination of pro rata distributions and additional distributions to PCD are to be made until PCD and the Company each receive a 26% internal rate of return. Thereafter, 50% of the balance is to be distributed pro rata to each party and 50% is to be paid to PCD.

Costs related to the development or improvements of the Company’s real estate assets are generally capitalized and costs relating to holding the assets are generally charged to expense. Cash outlays for capitalized development costs totaled $8.3 million during the six months ended June 30, 2016. In addition, costs and expenses related to operating, holding and maintaining such properties (including property taxes), which are expensed and included in property taxes and other operating expenses for REO assets in the accompanying condensed consolidated statement of operations, totaled $6.9 million and $12.6 million for the three and six months ended June 30, 2016, respectively, and $6.9 million and $12.8 million for the three and six months ended June 30, 2015, respectively. We intend to continue the process of disposing of a significant portion of our existing assets, individually or in bulk, which may result in the reclassification of a greater portion of our REO assets as held for sale.

See “Note 4 – Operating Properties and Real Estate Held for Development or Sale” in the accompanying condensed consolidated financial statements for additional information.


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Lending Activities

As of June 30, 2016, our loan portfolio consisted of three first mortgage loans with an aggregate carrying value of $0.4 million, of which two such loans have a zero carrying value. In comparison, as of December 31, 2015, our loan portfolio consisted of six first mortgage loans with an aggregate carrying value of $11.1 million. During the six months ended June 30, 2016, we sold one loan for $3.0 million (net of selling costs), which resulted in a loss of $0.1 million and received principal payoffs totaling $7.6 million. We did not originate any loans during the six months ended June 30, 2016. During the six months ended June 30, 2015, we originated no new loans, foreclosed on two loans in default with a carrying value of $0.9 million and sold two loans with a carrying value of $13.7 million for a loss of $0.1 million. As of June 30, 2016 and December 31, 2015, the valuation allowance represented 97.2% and 53.6%, respectively, of the total outstanding loan principal and interest balances.

Geographic Diversification
 
As of June 30, 2016, the collateral for our portfolio loans is located in New Mexico and California. As of December 31, 2015, 96.9% of our portfolio loan carrying value was attributed to collateral located in Arizona and California. Unless and until we resume meaningful lending activities, our ability to diversify the geographic aspect of our loan portfolio remains significantly limited and we expect little change in our loan portfolio profile in future periods until such time. The change year over year in the geographic diversification of our loans is primarily attributed to loan payoffs and sales.
 
See “Note 3 – Mortgage Investments and Loan Sales” in the accompanying condensed consolidated financial statements for additional information regarding our loan portfolio.

Interest Rate Information

At June 30, 2016, one of our three loans was performing and had an aggregate principal balance of $0.4 million and a contractual annual interest rate of 11.0%. At December 31, 2015, four of our six loans were performing and had an aggregate principal balance of $11.1 million and a weighted average annual interest rate of 10.5%.

See “Note 3 – Mortgage Investments and Loan Sales” in the accompanying condensed consolidated financial statements for additional information regarding interest rates for our loan portfolio.
 
Loan and Borrower Attributes

The collateral supporting our loans historically have consisted of fee simple real estate zoned for residential, commercial or industrial use. The real estate could be in any stage of development from unimproved land to finished buildings with occupants or tenants.
 
As of June 30, 2016, the original projected end-use of the collateral under our loans was comprised of 97.2% residential and 2.8% for commercial. As of December 31, 2015, the original projected end-use of the collateral under our loans was comprised of 65.9% residential, 31.4% mixed-use and the balance for commercial.
 
See “Note 3 – Mortgage Investments and Loan Sales” in the accompanying condensed consolidated financial statements for additional information regarding the classification of our loan portfolio.
 
Changes in the Portfolio Profile — Scheduled Maturities
 
As of June 30, 2016, the outstanding principal and interest balance of our portfolio loans, net of the valuation allowance, have scheduled principal paydowns or maturities as follows:
 
Quarter
 
Outstanding Balance
 
Percent
 
#
Matured
 
$
12,682

 
97.2
%
 
2
Thereafter
 
362

 
2.8
%
 
1
Total Principal and Interest
 
13,044

 
100.0
%
 
3
Less: Valuation Allowance
 
(12,682
)
 
 

 
 
Net Carrying Value
 
$
362

 
 

 
 

13


The entire balance of the matured loans has been fully reserved.

See “Note 3 – Mortgage Investments and Loan Sales” in the accompanying condensed consolidated financial statements for additional information regarding loan modifications.

14


Important Relationships Between Capital Resources and Results of Operations
 
Summary of Existing Loans in Default
 
At June 30, 2016, two of the three loans held in our loan portfolio were in default and fully reserved. We may exercise enforcement action which could lead to foreclosure or other disposition with respect to those loans. However, the completion and/or timing of any enforcement action with respect to these loans is dependent on several factors, including, but not limited to, applicable state statutes, potential bankruptcy filings by the borrowers, and the nature and extent of existing liens against such real estate collateral.
 
See “Note 3 – Mortgage Investments and Loan Sales” in the accompanying condensed consolidated financial statements for additional information regarding loans in default.
 
Valuation Allowance and Fair Value Measurement of Loans and Real Estate Held for Sale
 
A discussion of our valuation allowance, fair value measurement and summaries of the procedures performed in connection with our fair value analysis as of June 30, 2016 is presented in Note 6 of the accompanying condensed consolidated financial statements.
 
Based on the results of our evaluation and analysis, we did not record a non-cash provision for credit losses on our loan portfolio during the three or six months ended June 30, 2016. However, we recorded net recoveries of credit losses of $0.1 million during the three and six months ended June 30, 2016, and net recoveries of credit losses of $9.7 million and $10.7 million during the three and six months ended June 30, 2015, respectively, relating to the collection of cash and other assets from guarantors on certain legacy loans. We did not record any impairment charges for real estate owned during the three or six months ended June 30, 2016, and recorded an impairment charge of $0.1 million for real estate owned during the three and six months ended June 30, 2015.

As of June 30, 2016 and December 31, 2015, the valuation allowance totaled $12.7 million and $12.9 million, respectively, representing 97.2% and 53.6%, respectively, of the total outstanding loan principal and accrued interest balances.

Leverage to Enhance Yields
 
We have not historically employed a significant amount of leverage to enhance our investment yield although we may employ such leverage in the future if deemed appropriate.

Current and Anticipated Borrowings and Activity

During 2015, the Company, through various of its subsidiaries, entered into a series of loan agreements, promissory notes and related agreements with Calmwater Capital 3, LLC (“Calmwater”) for three loans in the aggregate principal amount of $78.8 million for the purposes of refinancing 1) the Company’s $36.0 million senior secured loan with NWRA Ventures I, LLC (“NW Capital”) and 2) the Company’s $24.8 million note payable from a bank, as well as to provide working capital for certain development activities and operational costs. The Company used $4.0 million of the Calmwater loan proceeds to fund a portion of its $11.5 million equity commitment for the construction of Gabella and $2.0 million to complete the capital improvement program at the Company’s hotel properties and restaurants located in Sedona, Arizona, which commenced in the second quarter of 2015 and was substantially completed during the second quarter of 2016. The balance of the loan proceeds was used for working capital, reserves and certain fees.

The general terms of the respective Calmwater loans are as follows:

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


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The Sedona Loan contains customary affirmative and negative covenants, including, but not limited to: (i) a $5.0 million liquidity balance during 2016; (ii) a minimum net worth of the Company of no less than $50.0 million; and (iii) DSCR and minimum NOI requirements measured on a trailing 12 month basis. During the three months ended March 31, 2016, the hotels did not meet these DSCR and NOI requirements during the first quarterly measurement period, for which the lender provided a one-time forbearance through June 30, 2016. The hotels met the DSCR and NOI requirements during the second quarterly reporting period ended June 30, 2016. However, there is no assurance that the hotels will meet the DSCR and/or NOI requirements in future quarterly reporting periods.  In the event that they do not meet such requirements, we would seek a supplemental forbearance from the lender, although there is no assurance that such a forbearance would be granted. For purposes of the minimum net worth requirement, the lender has agreed that the carrying value of our redeemable convertible preferred stock is considered a component of shareholder’s equity. The Sedona Loan also requires the Company to fund customary annual interest, tax, insurance, and furniture, fixtures and equipment reserve accounts, each of which are pledged as additional collateral for the Sedona Loan. Additional construction reserves were required in connection with the capital improvement program as well as funding for contractor liens filed in connection with the project. The Sedona Loan also contains customary events of default, the occurrence of which could result in the acceleration of the obligations under the loan and, under certain circumstances, the application of a default interest rate during the existence of an event of default at a rate equal to 5.0% in excess of the note rate. The Company is permitted to make optional prepayments at any time, subject to a .50% prepayment premium if paid prior to February 1, 2017, and other conditions set forth in the loan agreement. Thereafter, the Company may prepay the Sedona Loan in full or in part without prepayment premium costs.

•
A $24.4 million non-recourse loan secured by a) first liens on certain operating and non-operating real estate assets owned by affiliates of the Company, b) pledges by certain Company affiliates of their interests in certain mortgage loan documents evidencing payment obligations owed to such affiliates and c) the Company’s membership interest in IMH Gabella. The loan required interest only payments beginning on March 1, 2015 and bore annual interest at a base equal to the sum of: (i) the greater of (A) 0.50% per annum or (B) LIBOR (as defined) plus (ii) 8.5% per annum. The loan had a maturity date of February 1, 2017 and was repaid in full during the fourth quarter of 2015.

•
A $4.4 million non-recourse loan secured by a) first liens on certain operating and non-operating real estate assets owned by affiliates of the Company and b) pledges by certain Company affiliates of their interests in certain mortgage loan documents evidencing payment obligations owed to such affiliates. The loan required interest only payments beginning on March 1, 2015 and bore annual interest at a base equal to the sum of: (i) the greater of (A) 0.50% per annum or (B) LIBOR (as defined) plus (ii) 8.5% per annum. The loan had a maturity date of February 1, 2017 and was repaid in full during the fourth quarter of 2015.

Exchange Notes

Under the terms of a previous class action settlement, we conducted an offering of our five-year, 4%, unsecured notes in exchange for common stock held by participating shareholders (“Exchange Offering”). The Exchange Offering was completed in April 2014 and we issued Exchange Offering notes (“EO Notes”) with an aggregate face value of $10.2 million, which were recorded by the Company at fair value. The estimated fair value of the EO Notes was $6.4 million based on an imputed effective yield of such notes of 14.6% (as compared to the note rate of 4%) resulting in an original debt discount of the EO Notes of $3.8 million, with a balance of $2.4 million and $2.8 million as of June 30, 2016 and December 31, 2015, respectively. This discount amount is being amortized as an adjustment to interest expense using the effective interest method over the term of the EO Notes. The amortized discount added to the principal balance of the EO Notes during the six months ended June 30, 2016 totaled $0.3 million. Interest is payable quarterly in arrears each January, April, July and October. The EO Notes mature on April 28, 2019, and may be prepaid in whole or in part without penalty at the option of the Company. However, subject to certain minimum cash and profitability conditions, the terms of the EO Notes may require a 50% prepayment on April 29, 2018.

Notes Payable and Special Assessment Obligations, Assets Held for Sale

During the quarter ended June 30, 2016, the Company reclassified certain of its assets to REO held for sale as a result of management’s decision and actions to dispose of such assets. In accordance with GAAP, we have similarly reclassified the corresponding debt relating to such assets which includes each of the following notes payable and special assessment obligations. In addition to these liabilities, we have a $2.5 million line of credit obligation due to a related party as described below whose payoff is tied to the sale of one of our assets held for sale. We have classified that indebtedness in notes payable to related parties in the accompanying condensed consolidated balance sheet.

    

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Construction Loan

In October 2014, the Company secured a construction loan in connection with the Gabella development in the amount of $24.0 million pursuant to a Construction Loan Agreement entered into between Bank of the Ozarks (“Ozarks”) and IMH Gabella (the “Construction Loan”). The Company has made draws totaling $20.9 million on the Construction Loan as of June 30, 2016. The Construction Loan is secured by a first lien mortgage on the project, as well as certain adjacent parcels that are planned for future development, improvements thereon, and an assignment of rents and revenues. As of June 30, 2016 and December 31, 2015, the total carrying value of the land and improvements totaled $30.3 million and $27.8 million, respectively. Unless there is an event of default, the Construction Loan bears annual interest at the greater of (i) three-month LIBOR plus 375 basis points, or (ii) 4.25%. The loan matures October 20, 2017, provided, however, that the initial term may be extended for two additional one-year terms subject to the satisfaction of certain conditions, including the payment of an extension fee equal to 0.25% of the then outstanding principal balance of the Construction Loan. Interest only payments on any outstanding principal commenced on November 1, 2014 and monthly payments of principal and interest will commence on the earlier of (i) December 1, 2016 and (ii) the first month following stabilization (as defined in the loan agreement).

The Construction Loan is also subject to a completion, repayment, and carve-out guaranties by the Company and requires the Company to maintain a minimum liquidity balance of $7.5 million throughout the term of the loan. During the first quarter of 2016 and again subsequent to June 30, 2016, we fell below the $7.5 million liquidity requirement, resulting in a non-compliance event under the terms of our guaranty. The lender has, to-date, not taken any enforcement action with respect to this non-compliance event. While we restored our unrestricted cash balance to above $7.5 million during the quarter ended June 30, 2016, there is no assurance that we will be able to maintain adequate cash and cash equivalents to be available to meet this liquidity requirement or that the lender will not elect to exercise its non-compliance event rights under the loan.

In the event of prepayment of the Construction Loan prior to October 20, 2016, the Company would have to pay a prepayment penalty equal to two years of contractual interest less non-default interest paid through the prepayment date. After October 20, 2016, the Construction Loan may be prepaid without penalty.

Special Assessment Obligations

As of June 30, 2016 and December 31, 2015, obligations arising from our allocated share of certain community facilities district special revenue bonds and special assessments had carrying values of $3.9 million and $4.1 million, respectively. These obligations are described below.
 
One of the special assessment obligations had an outstanding balance of $3.1 million and $3.2 million as of June 30, 2016 and December 31, 2015, respectively, and has an amortization period that extends through April 30, 2030, with an annual interest rate ranging from 5% to 6%. This special assessment obligation is secured by certain real estate held for sale consisting of 171 acres of unentitled land located in Buckeye, Arizona which had a carrying value of $5.3 million at June 30, 2016.
 
The other special assessment obligations are comprised of a series of special assessments that collectively had an outstanding balance of $0.9 million as of June 30, 2016 and December 31, 2015. These special assessment obligations have amortization periods that extend through 2022, with annual interest rates ranging from 6% to 7.5%. These special assessment obligations are secured by certain real estate consisting of 7 acres of unentitled land located in Dakota County, Minnesota, which land has a carrying value of $3.7 million at June 30, 2016.

The responsibility for the repayment of each of the foregoing special assessment obligations rests with the owner of the property and would transfer to the buyer of the related real estate upon sale. Accordingly, if the assets to which these obligations relate are sold before the full amortization period of such obligations, the Company would be relieved of any further liability since the buyer would assume the remaining obligations. Nevertheless, these special assessment obligations are deemed to be obligations of the Company in accordance with GAAP because they are fixed in amount and for a fixed period of time. During the six months ended June 30, 2016, we made principal repayments in the amount of $0.2 million on these special assessment obligations.

Development Assistance Note Payable

In connection with the Gabella project, we entered into, among other agreements, a business subsidy agreement and related loan agreement dated March 29, 2013, as amended on July 10, 2014, with the EDA. Under the terms of the business subsidy agreement, the EDA agreed to advance to us up to $1.1 million as a loan. As of June 30, 2016 and December 31, 2015, the total amount advanced to us under the EDA loan agreement was $0.8 million. In no event is the amount of the EDA loan to exceed the amount received from Dakota County, Minnesota for the statutory penalty and interest on special assessment taxes which were assessed in the tax years 2007 through 2011. The special assessment taxes and related statutory penalties and interest were fully repaid as

17


of December 31, 2015. The EDA loan bears interest at the rate of 6.0% per annum which accrues until the loan is paid in full or is forgiven by the EDA. The Company met its performance obligation to complete the Gabella project prior to April 30, 2016, and we have received a certificate of occupancy for the project, and we believe we will meet the other requirements of the business subsidy agreement that will result in forgiveness of the loan in the third quarter of 2016. If it is determined that we did not meet the specified requirements, the loan and all accrued unpaid interest is due December 31, 2016. In addition, in order to retain the benefits received under the business subsidy agreement, we are not allowed to sell, transfer or otherwise convey all or part of the property for a period of five years following completion without the prior written consent of the EDA. This would also require a buyer’s consent to assume any ongoing obligations under the business subsidy agreement. While we expect to obtain such consents in the event of a sale of Gabella, we have neither sought nor received such consents to date.

Other Notes Payable Activity

During the fourth quarter of 2015, a wholly-owned subsidiary of the Company borrowed $5.4 million pursuant to a non-revolving credit facility with the Banc of California, National Association (the “BOC Facility”). The BOC Facility was secured by a $7.2 million mortgage receivable, was guaranteed by the Company, was scheduled to mature April 30, 2016, and bore interest at a per annum rate equal to the greater of (i) the prime rate as published by The Wall Street Journal (the “WSJ Prime Rate”) plus 1.25%, or (ii) 4.5%. In March 2016, we repaid the balance of the BOC Facility in full upon collection of the mortgage receivable that served as collateral for that loan.

In addition, during the fourth quarter of 2015, we purchased real estate located in New Mexico that was previously owned by certain partnerships in which the Company was awarded equity interests. The purchase price for that real estate was $6.8 million, for which the seller provided seller-financing of $5.9 million. The seller note bears interest at the WSJ Prime Rate as of December 31, 2015 (recalculated annually) plus 2.00% for the first two years, and the WSJ Prime Rate plus 3.00% thereafter. Interest only payments are due on December 31 of each year with the principal balance and any accrued unpaid interest due at maturity on December 31, 2019. The note may be prepaid in whole or in part without penalty.
Note Payable to Related Party

In December 2014, the Company borrowed $5.0 million from SRE Monarch Lending, LLC (“SRE Monarch”) pursuant to an unsecured non-revolving credit facility (“SRE Note”). The Company used the loan proceeds to make a scheduled payment under the Company’s then-senior loan. SRE Monarch is a related party of Seth Singerman, one of the Company’s directors and an affiliate of one of our preferred equity holders. The SRE Note bears interest at a per annum base rate of 16%, and is subject to increase in the event it is not repaid in full on or prior to the or extended maturity date.

The SRE Note was originally scheduled to mature on the 91st day after full repayment of the Company’s then-senior loan. During 2015 and 2016, the Company entered into a series of amendments to extend the SRE Note’s maturity date. The currently scheduled maturity date is September 19, 2016. The Company paid all accrued interest at the date of each amendment and paid various extension fees totaling $0.3 million in 2015 and $0.2 million during the six months ended June 30, 2016, which fees have been or are being amortized over the loan term.

Revolving Line of Credit with Related Party

In March 2016, a subsidiary of the Company executed an agreement with SRE Monarch for a revolving secured line of credit facility (“SRE Revolver”). The SRE Revolver bears interest at a per annum base rate of 5% and has a term that expires on the earliest to occur of 1) June 23, 2016 (which may be extended for an additional three months subject to the payment of a $50,000 extension fee), 2) the sale of the land serving as collateral under the SRE Revolver, or 3) the sale of Gabella. The SRE Revolver is secured by certain land owned by a subsidiary of the Company with a carrying value of $5.3 million. The SRE Revolver had an initial advance limit of $2.5 million that may be increased to $4.0 million with 12 days written notice and the payment of a $25,000 fee. Additionally, upon each advance, the Company must pay a $50,000 advance fee. Upon entering into the SRE Revolver, the Company paid a facility fee and other closing costs totaling $0.2 million. All amounts advanced under the SRE Revolver may be prepaid in whole or in part without premium or penalty. During April 2016, we drew our initial advance in the amount of $2.5 million in order to provide additional working capital for the Company. In connection with the advance, we paid fees totaling $50,000 which are being amortized to interest expense using the effective interest method over the term of the line of credit. Additionally, we exercised our option to extend the SRE Revolver’s maturity date from June 23, 2016 to September 23, 2016, and paid extension fees of $50,000 to SRE Monarch.

In the event of a sale of the land serving as collateral under the SRE Revolver prior to March 31, 2017 ("Facility Exit Date"), we are obligated to pay SRE Monarch an amount equal to five percent (5%) of the net sale proceeds. In the event that no sale of the

18


collateral has occurred or is expected to occur prior to the Facility Exit Date, we are obligated to pay SRE Monarch an amount equal to five percent (5%) of the presumed net sales proceeds based on an appraised value of the collateral.

Off-Balance Sheet Arrangements
General
We have equity interests in several off-balance sheet limited liability companies and limited partnerships recorded under the equity method as described in Note 5 of the accompanying unaudited condensed consolidated financial statements. Most of the limited liability companies and partnerships in which we have an interest are involved in the ownership and/or development of real estate. Wherever possible, the limited liability company or limited partnership will fund capital requirements or operational needs with cash from operations or financing proceeds. If additional capital is deemed necessary, the limited liability company or limited partnership may request a contribution from its respective members or partners, as appropriate, and we will evaluate such requests. Except as previously discussed, based on the nature of the activities conducted in these ventures, we cannot estimate with any reasonable degree of accuracy amounts that we may be required to fund in the short or long-term. However, we do not believe that additional funding of these limited liability companies or limited partnerships will have a material adverse effect on our financial condition or results of operations.

Debt

As of June 30, 2016 and December 31, 2015, certain of our unconsolidated limited liability companies and partnerships had outstanding indebtedness to third parties, all of which are non-recourse to us.
In certain instances, we provide “non-recourse carve-out guarantees” on certain non-recourse loans to certain subsidiaries. Certain of these loans have variable interest rates, which creates exposure in the form of market risk due to interest rate changes. As of June 30, 2016, we have provided guarantees for the following debt:
•
In October 2014, the Company entered into certain limited carve-out, completion and repayment guaranty agreements in connection with the Construction Loan between IMH Gabella and Ozarks. Pursuant to these guaranty agreements, the Company is responsible in the event of default, up to $12.0 million, which will be reduced to $6.0 million in the event that the Gabella project has stabilized rent for six months. Since the Company believes that the current fair value of the Gabella project exceeds the note amount due under the Construction Loan, the Company believes that it has no outstanding risk on these guarantees as of June 30, 2016.
•
In January 2015, the Company entered into a limited guaranty agreement in connection with the $50.0 million loan secured by our hotels and restaurants in Sedona, Arizona pursuant to which the Company is responsible in the event of default up to the entire loan amount of $50.0 million, as well as all required insurance and tax reserves. Since the Company believes that the current fair value of the property, which is secured by the lien, exceeds the note amount due under this loan, the Company believes that it has no outstanding risk on the guaranty as of June 30, 2016.
•
In October 2015, the Company entered into a limited guaranty agreement on the BOC Facility pursuant to which the Company is responsible in the event of default up to $5.4 million. The BOC Facility was repaid in full in the first quarter of 2016 and the Company’s guaranty was terminated.
Liquidity and Capital Resources
We require liquidity and capital resources for our general working capital needs, including, but not limited to, maintenance, development costs and capital expenditures for our operating properties and non-operating REO assets, professional fees, general and administrative operating costs, loan enforcement costs, costs on borrowings, dividends or distributions to shareholders, as well as to acquire our target assets. We expect our primary sources of liquidity over the next twelve months to consist of our current cash and restricted cash balances, revenues from operating properties, proceeds from borrowings, and proceeds from the disposition of our existing loan and REO assets held for sale.

Under the terms of our Gabella construction loan, the Company is required to maintain a minimum liquidity balance of $7.5 million. During the first quarter of 2016 and again subsequent to June 30, 2016, our unrestricted cash balance fell below this threshold, resulting in a non-compliance event under the terms of our guaranty. While the lender has, to date, not taken any enforcement action with respect to this non-compliance event, our failure to meet the minimum liquidity covenant in our guaranty, among other things, (i) entitles the lender to declare the entire construction loan outstanding principal and interest immediately due and payable; (ii) constituted a default under other loan obligations and non-compliance event under our Certificate of

19


Designation (for which a waiver was provided by our preferred shareholders); and (iii) may cause other third parties to terminate their business relationships with us, any one of which would have a materially adverse effect on our operations and financial conditions. While we restored our unrestricted cash balance to above $7.5 million during the quarter ended June 30, 2016, there is no assurance that we will be able to maintain adequate cash and cash equivalents to be available to meet this liquidity requirement or that the lender will not elect to exercise its non-compliance event rights under the loan. The Construction Loan also requires a minimum net worth of the Company of no less than $50.0 million.  For purposes of this requirement, the lender has agreed that the carrying value of our redeemable convertible preferred stock is considered a component of shareholders’ equity.

The lender under our loan secured by our Sedona hospitality assets requires a $5.0 million liquidity balance by the Company effective as of January 1, 2016. That loan also requires us to meet certain DSCR and minimum NOI requirements. During the three months ended March 31, 2016, the hotels did not meet these DSCR and NOI requirements during the quarterly measurement period, for which the lender provided a one-time forbearance through June 30, 2016.While the hotels met the DSCR and NOI requirements during the second quarterly reporting period ended June 30, 2016, there is no assurance that the hotels will meet the DSCR and/or NOI requirements in future quarterly reporting periods.  In the event that they do not meet such requirements, we would seek a supplemental forbearance from the lender, although there is no assurance that such a forbearance would be granted.

Unless and until we generate additional liquidity from the disposition of our assets or operations from our operating properties, we will likely need to seek additional short-term debt or alternative financing to fund our operations.

At June 30, 2016, we had cash and cash equivalents of $9.5 million and restricted cash and cash equivalents of $2.1 million, as well as loans held for sale totaling $0.4 million and REO held for sale of $50.5 million. The proceeds from these items, coupled with revenues generated from our operating properties, and proceeds from the issuance of debt, comprise our primary sources of liquidity and we believe they are sufficient to cover our liquidity needs over the next twelve months. However, there is no assurance that we will be successful in selling existing real estate assets in a timely manner or in obtaining additional financing, if needed, to sufficiently fund future operations or to implement our investment strategy.
Our requirements for and sources of liquidity and capital resources are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2015. There have been no material changes to our requirements for liquidity as of and for the six months ended June 30, 2016.
Cash Flows
Cash Used In Operating Activities  
Cash used in operating activities was $3.5 million for the six months ended June 30, 2016 compared to $0.6 million for the six months ended June 30, 2015. Cash flows from operating activities consist primarily of cash generated from our operating properties, investment and other income, and mortgage income from our loan portfolio, offset by amounts paid for operating property expenses, property taxes and other operating costs for REO assets, professional fees, consulting fees, general and administrative expenses, non-cash recoveries, interest incurred on our notes payable, and other operating expenses.
Cash Provided By Investing Activities  
Net cash provided by investing activities was $6.1 million for the six months ended June 30, 2016 compared to $8.9 million for the six months ended June 30, 2015. Primary sources of cash from investing activities for 2016 included $6.3 million from sales of REO assets and mortgage loans, and $7.6 million from the payoffs of mortgage loans, offset by $8.3 million in investments in real estate properties owned. Primary sources of cash from investing activities for six months ended June 30, 2015 primarily consisted of proceeds from mortgage loan sales of $13.7 million and proceeds from asset sales and recoveries of $11.6 million, offset by capital costs paid for REO assets of $16.2 million.
Cash Used In Financing Activities
Net cash used in financing activities was $0.6 million for the six months ended June 30, 2016 compared to $0.5 million for the six months ended June 30, 2015. During 2016, we drew financing proceeds of $6.6 million from our construction loan and our related party line of credit, repaid notes payable totaling $5.6 million, paid debt issuance costs of $0.5 million, and paid preferred dividends of $1.1 million. During the six months ended June 30, 2015, we generated $82.4 million from the issuance of notes payable which was partially offset by an increase in restricted cash of $17.1 million, the repayment of notes payable of $61.7 million, debt issuance costs of $3.0 million and preferred dividend payments of $1.1 million.

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Critical Accounting Policies
Our critical accounting policies are disclosed in our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2015.  As of June 30, 2016, there have been no significant changes in our critical accounting policies from December 31, 2015, except as disclosed in Note 2 of the unaudited condensed consolidated financial statements included in this Form 10-Q.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements that are applicable to us, see Note 2 to our unaudited condensed consolidated financial statements included with this Form 10-Q.

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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
The registrant is a Smaller Reporting Company and, therefore, is not required to provide the information under this item.

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Item 4.
CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2016. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of these disclosure controls and procedures were effective as of June 30, 2016.

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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 purposes in accordance with U.S. generally accepted accounting principles. Also, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2016, utilizing the 2013 framework established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on their assessment, we determined that the Company’s internal control over financial reporting was effective as of June 30, 2016.

This report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting since the Company is a smaller reporting company under the rules of the SEC.

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PART II


Item 1.
Legal Proceedings.

The status of our legal proceedings is provided in Note 10 – “Commitments and Contingencies – Legal Matters” of the accompanying unaudited condensed consolidated financial statements and is incorporated herein by reference.

Item 1A.
Risk Factors.
 
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Item 1A, “Risk Factors,” in our previously filed Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial condition or results of operations. The risks described in our Form 10-K are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.
Defaults Upon Senior Securities.

In 2014, IMH Gabella, LLC (“IMH Gabella”), a subsidiary of the Company, secured a construction loan in connection with the development of a multi-family project in Apple Valley, Minnesota. Funding under this loan commenced during the second quarter of 2015. The construction loan is subject to a completion and repayment carve-out guarantee by the Company and requires the Company to maintain a minimum liquidity balance of $7.5 million. During March 2016 and again subsequent to June 30, 2016, we fell below the $7.5 million liquidity threshold resulting in a non-compliance event under the terms of the guarantor agreement relating to the construction loan, which resulted further in a non-compliance event under the terms of our Certificate of Designation of Series B-1 Cumulative Convertible Preferred Stock and Series B-2 Cumulative Convertible Preferred Stock (“Certificate of Designation”). While the lender has not taken any enforcement action regarding this non-compliance event, and we have obtained a waiver from our preferred shareholders for this non-compliance event under the Certificate of Designation, the non-compliance event could have a material adverse effect on our business, results of operations and financial position.

Item 4.
Mine Safety Disclosures.
 
Not applicable.

Item 5.
Other Information.

None.

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Item 6.
Exhibits.
Exhibit No.
 
Description
3.1
 
Certificate of Incorporation of IMH Financial Corporation (filed as Exhibit 3.2 to the Quarterly Report on Form 10-Q filed on August 23, 2010 and incorporated by reference).
3.1.1
 
Certificate of Correction of Certificate of Incorporation of IMH Financial Corporation (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and incorporated by reference).
3.1.2
 
Certificate of Designation of Series B-1 Cumulative Convertible Preferred Stock and Series B-2 Cumulative Convertible Preferred Stock (filed as Exhibit 3.1 to Current Report on Form 8-K filed on July 29, 2014 and incorporated by reference).
3.2
 
Third Amended and Restated Bylaws of IMH Financial Corporation (filed as Exhibit 3.2 to Current Report on Form 8-K filed on July 29, 2014 and incorporated by reference).
10.51
 
Offer Letter between IMH Management Services, LLC and Samuel J. Montes dated April 13, 2016 (filed as Exhibit 10.1 to Current Report on Form 8-K filed on April 19, 2016 incorporated by reference).
22.1
 
Submission of Matters to a Vote of Security Holders dated June 29, 2016 (filed on Form 8-K filed on July 6, 2016 incorporated by reference).
31.1
 
Certification of Chief Executive Officer of IMH Financial Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Chief Financial Officer of IMH Financial Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of Chief Executive Officer and the Chief Financial Officer of IMH Financial Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date:
August 11, 2016
IMH FINANCIAL CORPORATION
 
 
 
 
 
 
 
 
By:
/s/ Samuel J. Montes
 
 
 
 
Samuel J. Montes
 
 
 
 
Chief Financial Officer
 
 
KNOW ALL MEN BY THESE PRESENTS, that Lawrence D. Bain, whose signature appears below constitutes and appoints Samuel J. Montes his true and lawful attorney-in-fact and agent, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof. 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
 
Title
 
Date
 
 
 
 
 
/s/ Lawrence D. Bain
 
Chief Executive Officer and Chairman of the Board
 
August 11, 2016
Lawrence D. Bain
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/ Samuel J. Montes
 
Chief Financial Officer (Principal Financial Officer
 
August 11, 2016
Samuel J. Montes
 
and Principal Accounting Officer)
 
 
 
 
 
 
 
 

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