☒

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

☐

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

Delaware

26-3541068

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

177 Bovet Road, Suite 520, San Mateo, CA

94402

(Address of principal executive offices)

(Zip Code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Units of Limited Liability Company Interests

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐   (Do not check if a smaller reporting company)

Smaller reporting company

☒

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                                                          ☐

Part I

Item 1 – Business

1

Item 1A – Risk Factors

8

Item 1B – Unresolved Staff Comments

35

Item 2 – Properties

35

Item 3 – Legal Proceedings

35

Item 4 – Mine Safety Disclosures

35

Part II

Item 5 – Market for the Registrant’s Units, Related Unitholder Matters and Issuer Purchases of Equity Securities

36

Item 6 – Selected Financial Data

38

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

Item 7A – Quantitative and Qualitative Disclosures About Market Risk

47

Item 8 – Financial Statements and Supplementary Data

47

Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

73

Item 9A – Controls and Procedures

73

Item 9B – Other Information

76

Part III

Item 10 – Directors, Executive Officers and Corporate Governance

77

Item 11 – Executive Compensation

78

Item 12 – Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters

78

Item 13 – Certain Relationships and Related Transactions, and Director Independence

79

Item 14 – Principal Accountant Fees and Services

79

Part IV

Item 15 – Exhibits and Financial Statement Schedules

80

Item 16 – Form 10-K Summary

-

80

SIGNATURES

81

•

changes in economic conditions, interest rates, and/or changes in California real estate markets;

•

the impact of competition and competitive pricing for mortgage loans;

•

our ability to grow our mortgage lending business;

•

the manager’s ability to make and arrange for loans that fit our investment criteria;

•

the volume and timing of loan sales to third parties or if we are able to sell loans at all;

•

the concentration of credit risks to which we are exposed;

•

increases in payment delinquencies and defaults on our mortgage loans; and

•

changes in government regulation and legislative actions affecting our business.

•

sale of members’ units (net of reimbursement to RMC of organization and offering expenses (O&O expenses)), including units sold by reinvestment of distributions;

•

loan payoffs;

•

borrowers’ monthly principal and interest payments; and

•

to a lesser degree and, if obtained, a line of credit.

•

dissolve the company;

•

amend the operating agreement, subject to certain limitations;

•

approve or disapprove the sale of all or substantially all of the assets of the company; or

•

remove or replace the manager.

•

after one year, 92% of the purchase price or of the capital account balance, whichever is less;

•

after two years, 94% of the purchase price or of the capital account balance, whichever is less;

•

after three years, 96% of the purchase price or of the capital account balance, whichever is less;

•

after four years, 98% of the purchase price or of the capital account balance, whichever is less;

•

after five years, 100% of the purchase price or of the capital account balance, whichever is less.

•

yield a favorable rate of return from our business of making and/or investing in loans;

•

preserve and protect our capital by making and/or investing in loans secured by California real estate, preferably income-producing properties geographically situated in the San Francisco Bay Area and the coastal metropolitan regions of Southern California; and

•

generate and distribute cash flow from these mortgage lending and investing activities.

•

monthly payments of either (i) interest only with a balloon payment at maturity or (ii) principal and interest based on a 30-year amortization schedule with a balloon payment at maturity; and

•

having maturities of 5 years or less.

•

the conduct of a mortgage lending business by a licensed California real estate broker under state and federal law;

•

real estate settlement procedures;

•

fair lending;

•

truth in lending;

•

federal and state loan disclosure requirements;

•

the establishment of maximum interest rates, finance charges and other charges;

•

loan-servicing procedures;

•

secured transactions and foreclosure proceedings;

•

privacy regulations providing for the use and safeguarding of non-public personal financial information of borrowers; and

•

with respect to the company and the offering of member units, required filings with the Securities and Exchange Commission (“SEC”) pursuant to federal securities laws, including periodic reports such as Form 10-K and Form 10-Q, and with the States’ securities agencies.

•

California Real Estate Law.

•

Dodd-Frank Wall Street Reform and Consumer Protection Act.

•

Real Estate Settlement Procedures Act (“RESPA”).

•

Truth in Lending Act (“TILA”).

•

Home Ownership and Equity Protection Act (“HOEPA”) and California Covered Loan Law.

•

Mortgage Disclosure Improvement Act.

•

Home Mortgage Disclosure Act (“HMDA”).

•

Red Flags Rule.

•

Gramm-Leach-Bliley Act (aka Financial Services Modernization Act of 1999).

•

The California Homeowner Bill of Rights (“HOBR”).

•

Federal Securities Laws: The Securities Act of 1933 and The Exchange Act of 1944

•

Sarbanes-Oxley Act of 2002

•

Financial Industry Regulatory Authority Regulatory Notice 15-02

•

Blue Sky Laws

•

the requirements of sponsors (i.e., the manager), such as the required experience and net worth of the sponsor;

•

the fiduciary duty obligations of the sponsor;

•

the suitability of the investors, including the economic suitability, the factors that must be reviewed in determining that the investor is suitable and the representations that can be required of the investor in the subscription agreement for the investment;

•

the fees and compensation that can be charged and paid to the sponsor as well as the expenses that can be reimbursed to the sponsor;

•

the handling of certain conflicts of interest between us and the sponsor; and

•

investment restrictions on our activities and restrictions on the sponsor related to our activities.

Our units are not listed on an exchange or quoted through a quotation system, and will not be for the foreseeable future, if ever. Therefore, it is unlikely that investors will be able to sell them.

Our units are not listed on an exchange or quoted through a quotation system, and there is no secondary market nor do we expect that any will develop in the foreseeable future. Investors will have limited ability to sell their units. Therefore, an investment in our units is not suitable for investors who expect to require short-term liquidity from their investments.

There are substantial restrictions on the transferability of units.

Units are not freely transferable, and they may not be acceptable by a lender as security for borrowing. Our operating agreement also imposes substantial restrictions upon your ability to transfer units (See “SUMMARY OF NINTH AMENDED AND RESTATED LIMITED LIABILITY COMPANY OPERATING AGREEMENT”). In addition, the transfer of units will generally require the consent of the California Commissioner of Business Oversight, except as permitted in the Commissioner’s rules.

You are limited in your ability to have your units redeemed under our unit redemption program.

Our unit redemption program contains significant restrictions and limitations that limit your ability to redeem your units. Therefore, in making a decision to purchase units, you should not assume that you will be able to sell any of your units back to us pursuant to our redemption program. Our operating agreement makes no provision for members to withdraw from the company or to obtain the return on their capital accounts for a one-year period from the date of the purchase of units. In addition, the number of units you may redeem per quarter is subject to a maximum of the greater of 100,000 units or 25% of your units outstanding. Also, we will not, in any calendar year, redeem from all of our members a total of more than 5% (or in any calendar quarter, redeem more than 1.25%) of the weighted average number of all units outstanding during the 12-month period immediately prior to the date of the redemption.

Moreover, our manager reserves the right, in its sole discretion, at any time, to reject any request for redemption, or to suspend or terminate the acceptance of new redemption requests without prior notice, or to terminate, suspend or amend the unit redemption program upon 30-day notice.

We will fund redemptions solely from available company cash flow and will not establish a working capital reserve from which to fund redemptions. For this purpose, cash flow is considered to be available only after all current company expenses have been paid (including compensation to our manager), adequate provision has been made for payment of our current and future debt, and adequate provision has been made for the payment of all monthly cash distributions to members who do not reinvest distributions pursuant to our distribution reinvestment plan. Accordingly, we cannot guarantee that we will have sufficient funds to accommodate all redemption requests made in any given year.

There is no assurance you will receive cash distributions.

Although our manager has provided significant financial support as discussed below in “– We may need to defer or reduce distributions,” our manager will be paid and reimbursed by us for certain services performed for us and expenses paid on our behalf. We will bear all other expenses incurred in our operations. All of these fees and expenses are deducted from cash funds generated by our operations prior to computing the amount that is available for distribution to you. In this regard, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Performance overview” for a discussion of:

•the financial support that has been provided by our manager in 2016 and 2017;

•our manager’s plan to reduce and ultimately cease financial support and waiving fees in any form by July 2019; and

•reduction in the distribution rate from 6.5% to 6% in March and as discussed below in “We may need to defer or reduce distributions”.

Also, our manager, in its discretion, may retain a portion of cash funds generated from operations for working capital purposes. Thus, there is no assurance as to when or whether cash will be available for distributions to you.

We may need to defer or reduce distributions.

In the event we do not have enough cash flow from operating activities to fund our distributions, we may need to defer or reduce distributions. For example, our manager has provided significant financial support that improved net income, and the return to investors. Since our inception the manager, at its sole discretion, has:

•waived fees;

•elected not to request reimbursement for certain operating expenses; and

•absorbed professional fees.

If our manager had not taken this action, then we would not have had enough cash flow from operating activities to fund our distributions at past levels. Our manager has indicated it will begin to reduce its support to us beginning in April 2018 and intends to cease providing support by July 2019. Depending on our future cash flow from operating activities, we may be required to reduce our distributions as the manager’s support is reduced. In this regard, it is unlikely that we could maintain the existing distribution level through our investment activity, not including loans sales, alone because of the increased competition in mortgage loans as discussed in “—Increased competition and new entrants in the market for mortgage loan originations could adversely impact our ability to originate and acquire real estate-related loans at attractive risk-adjusted returns.” Thus, if prospective loan sales do not materialize the distribution rate will decrease.

You will have no control over our operations, including the loans we make or sell; you must rely on the judgment of our manager in making loans.

You have no right or power to take part in our management. All decisions with respect to our management will be made exclusively by our manager. Our success will, to a large extent, depend on the judgment of our manager as it relates to lending decisions and sales of loans to third parties, if any. You should carefully evaluate our manager’s capabilities to perform such functions.

Our manager has broad discretion to implement our investment objectives and can change investment strategies without member consent.

Our operating agreement contains investment objectives, but our manager has broad discretion to implement those objectives. A change in our investment strategy may, among other things, increase our exposure to real estate market fluctuations, default risk and interest rate risk, all of which could materially affect our results of operations and financial condition.

Our manager has various conflicts of interest.

We are managed by our manager who has various conflicts of interest in connection with its management of us, including but not limited to the following:

•Our manager has legal and financial obligations with respect to other entities that are similar to its obligations to us.

•Our manager has to allocate its time between us and other activities, including other entities with which it is involved.

•The fees of our manager are not determined based on arm’s-length negotiations.

•The same legal counsel currently represents us and the manager.

•Our manager has the right to conduct other business and to compete with our business.

•Our manager is responsible for originating or arranging substantially all of the loans invested by us and can place loans in our portfolio or other funds that are also managed by our manager. Loan brokerage commissions on loans originated by our manager for our portfolio are retained by our manager.

•In the event our manager defaults on the repayment of the formation loan, a conflict of interest would arise on the manager’s part in connection with the enforcement of the formation loan  and continued payment of other fees and compensation to our manager, including, but not limited to, the loan servicing fees, loan administrative fees and asset management fees, while such default is continuing. See “CONFLICTS OF INTEREST”.

We have no independent board, committees or any audit or compensation committees to provide certain governance oversight.

As is customary for a limited liability company, we do not have a board of directors or any independent directors. In addition, we are not subject to certain of the corporate governance rules under the federal securities laws or under rules established by the national securities exchanges because our units are not registered for trading under the Exchange Act of 1934, as amended. Among other things, these rules relate to:

•independent director standards;

•audit and compensation committees standards; and

•the use of an audit committee financial expert.

Accordingly, our members will not receive the protections these rules and standards were enacted to provide, such as protections against interested director transactions, conflicts of interest and similar matters.

We do not have an audit or compensation committee. As a result, members will have to rely on our manager, which is not independent, to perform these functions. Thus, there is a potential conflict in that our manager, which is engaged in management, will participate in decisions concerning management compensation and audit issues that may affect management performance.

We established the $1 per unit offering price on an arbitrary basis.

We arbitrarily determined the $1 per unit selling price for the offering of units we are currently conducting as well as the $1 per unit price for reinvestment of distributions. Such price also is not necessarily the amount you may receive pursuant to your limited right to redeem units, subject to certain requirements. The amount that a redeeming member will receive is the lesser of the purchase price for the redeemed units or the redeeming member’s capital account balance as of the date of each redemption payment. The fair market value of your interest in the company will be irrelevant in determining amounts to be paid upon redemption.

Our manager may purchase units which generally will give our manager the same rights as members.

Our manager, in its discretion, may purchase units for its own account. Upon any such purchases of units, our manager will have the same rights as other members in respect of the units owned by them, including the right to vote on matters that are subject to the vote of members, subject to certain exceptions.

Your interest in us will be diluted if we issue additional units, which could reduce the value of your investment in us.

Our investors do not have any preemptive rights to any units we issue in the future. Pursuant to our operating agreement, we may issue additional units in the future without your consent or the consent of any other members. To the extent we issue additional equity interests after an investor purchases our units, an investor’s percentage ownership interest in us will be diluted. In addition, depending on the terms and pricing of any additional offerings and the value of our investments, an investor may also experience dilution in the book value of his or her units.

Our interests in our properties may not be insured against certain kinds of losses.

We will require comprehensive insurance, including fire and extended coverage, which is customarily obtained for or by a lender, on properties in which we acquire a security interest. Generally, such insurance will be obtained by and at the cost of the borrower. However, there are certain types of losses (generally of a catastrophic nature, such as civil disturbances or terrorism and acts of God such as earthquakes, floods and land or mud slides) which are either uninsurable or not economically insurable. Should such a disaster occur to, or cause the full or partial destruction of, any property serving as collateral for a loan, we could lose both our invested capital and anticipated profits from such investment. In addition, on certain real estate owned by us as a result of foreclosure, we may require homeowner’s liability insurance. However, insurance may not be available on such real estate owned for the following:

•theft;

•terrorism;

•vandalism;

•land or mud slides;

•hazardous substances; or earthquakes.

Thus, losses from such events would adversely affect our profitability.

Downturns in the economy and real estate market in the San Francisco Bay Area and the coastal metropolitan regions of Southern California or on a regional or national scale or changing conditions affecting the mortgage lending business

could adversely affect our business.

We expect that most of our loans will be secured by properties located in nine counties that comprise the San Francisco Bay Area (San Francisco, San Mateo, Santa Clara, Alameda, Contra Costa, Marin, Napa, Solano and Sonoma) and the coastal metropolitan regions of Southern California (Los Angeles, Orange, Ventura, and San Diego counties). Our anticipated concentration of loans in the San Francisco Bay Area and the coastal metropolitan regions of Southern California exposes us to greater risk of loss if the economy in the San Francisco Bay Area or the coastal metropolitan regions of Southern California weakens than would be the case if our loans were spread throughout California or the U.S. The San Francisco Bay Area or the coastal metropolitan regions of Southern California economy and/or real estate market conditions could be weakened by:

•an extended economic slowdown or recession in the area;

•overbuilding of commercial and residential properties;

•relocation of businesses outside of the area due to economic factors such as high cost of living and of doing business within the region;

•increased interest rates, thereby weakening the general real estate market’ and

•reductions in the availability of credit.

Increased risk of default and expected cash returns from mortgage lending can be disrupted by events and/or conditions such as:

•changes in national, regional or local economic, demographic or real estate market conditions;

•changes in supply of, or demand for, similar properties in an area;

•increased competition for real estate assets targeted by our investment strategy;

•bankruptcies, financial difficulties or lease defaults by property owners and tenants;

•changes in interest rates and availability of financing; and

•changes in government rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws.

These types of events are difficult to predict and can occur unexpectedly. If the economy were to weaken, it is possible that there would be more property available for sale, values would fall and lending opportunities would decrease. In addition, a weak economy and increased unemployment could adversely affect borrowers, resulting in an increase in the number of loans in default.

Should a significant economic deterioration occur in the San Francisco Bay Area or the coastal metropolitan regions of southern California, or on a more wide scale basis, regionally or nationally, we could suffer increases in loan delinquencies and declines in cash flows as was experienced by mortgage lenders in general during the period of financial crisis which began in 2009.

You will be bound by the actions taken by the majority voting

power.

Subject to certain limitations, members holding a majority of units may vote to, among other things:

•dissolve and terminate the company;

•amend the operating agreement, subject to certain limitations;

•approve or disapprove the sale of all or substantially all of our assets; and

•remove or replace our manager or elect additional or new managers.

If you do not vote with the majority in interest of the other members, you nonetheless will be bound by the majority vote.

If payments are not made on the formation loan under certain circumstances, such as our manager’s removal, it may reduce your rate of return or affect our access to capital to fund new loans.

We have and will continue to advance to our manager funds in an amount equal to the sales commissions for our units and premiums paid to investors in connection with unsolicited sales of our units. The principal balance of the formation loan will increase as additional sales of units are made. The formation loan is an unsecured loan that will not bear interest and will be repaid in annual installments.

A portion of the amount we receive from redeeming members as early redemption penalties may first be applied to reduce the principal balance of the formation loan. This will have the effect of reducing the amount owed by our manager to us. If our manager is removed as a manager by the vote of a majority in interest of the members and a successor or additional manager, who is elected without the concurrence of the manager, begins using any other loan brokerage firm for the placement of loans or loan servicing, our manager will be immediately released from any further payment obligation under the formation loan. If the manager is removed, no other manager is elected, the company is liquidated or our manager is no longer receiving payments for services rendered, we will forgive the debt on the formation loan and our manager will be immediately released from any further obligations under the formation loan.

In addition, if we and our manager agree to suspend formation loan payments for a period of time, then as a result of such suspended payments we would have less capital to invest in loans during that period, which could adversely affect our profitability. See “CONFLICTS OF INTEREST.”

Upon liquidation, you may experience delays in receiving distributions, you may not be able to fully recover your investment or you may not receive any distributions.

Under our operating agreement, we will continue to operate until October 8, 2028, unless our term is extended by the vote of a majority in interest of the members. We do not currently intend to cease operations prior to the end of our term. We could be dissolved and terminated earlier by operation of law or upon the occurrence of various events described in our operating agreement. Upon our dissolution, our manager will seek to promptly liquidate our assets for the best price reasonably obtainable, to use any proceeds to satisfy our debts and to distribute any remaining proceeds to our members and manager in accordance with the terms of our operating agreement. Accordingly, your ability to recover all or any portion of your investment under such circumstances will depend on the amount of funds so realized and claims to be satisfied from those proceeds. Our manager may not be successful in liquidating us regardless of whether it occurs on our anticipated termination date or on an earlier dissolution date. Delays in liquidation could arise due to market conditions and other factors beyond the control of our manager. In the event we are unable to liquidate on or prior to the end of our anticipated term and depending on the amount of liquidation proceeds the manager is able to obtain, you and other members may not receive distributions of remaining proceeds, if any, in a timely manner or at all.

We cannot precisely determine compensation to be paid to our manager that may not be commensurate with your rate of return.

Our manager is unable to predict the amounts of its compensation to be paid to it. Any such prediction would necessarily involve assumptions of future events and operating results which cannot be made at this time. As a result, there is a risk that members will not have the opportunity to judge ahead of time whether the compensation realized by our manager is commensurate with the return generated by the loans.

Payment of fees to our manager will reduce cash available for investment and distribution.

Our manager performs services for us in connection with the offer and sale of units, the selection and acquisition of our investments and the administration of our investments. It is paid substantial fees for these services, which will reduce the amount of cash available for investment in loans or distribution to members.

We cannot predict the amounts of compensation to be paid to the manager.

Because the fees that we pay to the manager are based in part on the level of our business activity and whether the manager decides to waive part or all of the fees owed to it, it is not possible to predict the amounts of compensation that we will be required to pay the manager. In addition, because key employees of the manager are given broad discretion to determine when to consummate a transaction, we will rely on these key persons to dictate the level of our business activity. Fees paid to the manager reduce funds available for payment of distributions.

Insufficient working capital reserves may require borrowings or liquidating our loans which,

if not possible, may adversely affect us.

We intend to maintain a working capital reserve to meet our obligations, including our carrying costs and operating expenses. Our manager believes such reserves are reasonably sufficient for our contingencies. If for any reason those reserves are insufficient, we will have to borrow the required funds or liquidate some or all of our loans. In the event our manager deems it necessary to borrow funds, such borrowings may not be on acceptable terms or even available to us which could materially adversely affect our business.

We may be required to forego more favorable investments to avoid regulation under the Investment Company Act of 1940.

Our manager intends to conduct our operations so that we will not be subject to regulation under the Investment Company Act of 1940. Among other things, our manager will monitor the proportions of our funds which are placed in various investments and the form of such investments so that we do not come within the definition of an investment company under such law. As a result, we may have to forego certain investments which would produce a more favorable return.

Conflicts or limitations may arise as a result of our manager’s legal and financial obligations to itself and other mortgage programs.

Our manager and its affiliates are currently involved with one active mortgage program with investment objectives similar to ours. Our manager may also organize other mortgage programs in the future with investment objectives similar to ours. Our manager has legal and financial obligations with respect to the other mortgage program that are similar to its obligations with respect to us. These obligations may at times conflict or require our manager to limit the resources allocated to us and the other program.

Conflicts may arise regarding the financial condition of our manager.

Our manager must maintain a healthy financial condition for the success of our business. This may require our manager to make decisions regarding investments and other aspects of our business to allow it to collect fees and expense reimbursements, which actions could negatively affect our profitability. The manager must be able to maintain a healthy financial condition so that it:

•can repay the formation loan;

•keep its key employees as discussed in “– If Our Manager Loses or is Unable to Maintain Key Personnel, Our Ability to Implement Our Strategic Plans Could be Impaired”; and

•receives cash flow so that cash flow exceeds the carrying value of its intangible assets on its balance sheet.

Conflicts may arise from our manager’s allocation of time between us and others and loan brokerage services.

Our manager has conflicts of interest in allocating the time of its personnel between us and other activities in which it is involved. Our manager also provides loan brokerage services to investors other than us. Since our manager originates loans or arranges for the purchase of loans for our loan portfolio, a conflict of interest may exist as to the loans our manager allocates to us and to other mortgage programs it manages or investors with which it is affiliated at such time.

Conflicts may arise if we participate in loans with other programs organized by our manager.

In certain limited circumstances and subject to compliance with applicable regulations or guidelines, we may participate in loans or joint ventures with other programs organized by our manager, where we purchase a direct or indirect partial  interest in a loan. Our portion of the total loan may be smaller or greater than the portion of the loan made by the other programs. You should be aware that participating in loans or joint ventures with other programs organized by our manager could result in a conflict of interest between us and our manager as well as between us and such other programs, in the event that the borrower defaults on the loan and our manager protects the interests of other programs, which it has organized, in the loan and in the underlying security.

Conflicts may arise if we participate in loans with other unaffiliated lenders.

We may participate in loans with other unaffiliated lenders, where we purchase a fractional undivided interest or other direct participation in a loan. Our portion of the total loan may be smaller or greater than the portion of the loan made by the other lender(s). Such investments may involve risks not otherwise present with other methods of investment, such as reliance on underwriting, due diligence and/or document preparation conducted primarily by a co-lender, which could subject us to liabilities and thus reduce our returns on our investment. In addition, disagreements or disputes between us and our co-lender(s) regarding certain major decisions, such as loan workouts, foreclosure, protective advances or the sale of the property, could result in litigation and/or a loss of control over the management of the investment.

The amount of loan brokerage commissions and other compensation of our manager may adversely affect the rate of return to you.

None of the compensation payable to our manager was determined by arm’s-length negotiations. We anticipate that the loan brokerage commissions charged to borrowers by our manager will average approximately 2% to 5% of the principal amount of each loan, but may be higher or lower depending upon market conditions. Any increase in the loan brokerage commission charged on loans may have a direct, adverse effect on the interest rates we charge on loans and thus the overall rate of return to you. This conflict of interest will exist in connection with every loan transaction and all compensation paid to our manager, and you must rely upon our manager to protect your interests.

If our manager loses or is unable to maintain key personnel, our ability to implement our strategic plans could be impaired.

We depend on the diligence, experience and skills of certain executive officers and other key personnel of our manager for the selection, acquisition, structuring and monitoring of our lending and investment activities. These individuals are not bound by employment agreements with the manager or with us. If any of our manager’s key personnel were to cease their employment with the manager or its affiliates, our operating results could suffer. We also believe that our future success depends, in large part, upon the ability of our manager or its affiliates to hire and retain highly skilled managerial, operational and marketing personnel. We cannot assure you that it will be successful in attracting and retaining such personnel. The loss of key personnel and the inability of our manager to hire any key person could harm our business, financial condition, cash flow and results of operations.

We do not intend to provide key-person insurance for our manager’s key personnel. Notwithstanding, we do not expect that its key personnel will cease their employment during the offering period.

Certain officers and other key personnel of our manager will face competing demands relating to their time and this may cause our operations and our investors’ investments to suffer.

We will rely on certain executive officers and key personnel of our manager to provide services to us for the day-to-day operation of our business. As a result of their interests in other programs, their obligations to other investors and the fact that they engage in and will continue to engage in other business activities on behalf of themselves and others, these executive officers and key personnel face conflicts of interest in allocating their time between us and other programs sponsored by our manager and other business activities in which they are involved. Should our manager devote insufficient time or resources to our business, our returns on our direct or indirect investments, and the value of our units, may decline.

We will rely on independent broker-dealers to sell units in the offering in order to raise sufficient funds to enable us to successfully grow our business.

We are offering the units through selected broker-dealers who are not affiliated with our manager and are members of FINRA.  Because we do not have a captive or affiliated broker-dealer that will be exclusively or primarily focused on selling our units, our ability to successfully complete the offering will depend, in large part, on our ability to develop and maintain relationships with a sufficient number of unaffiliated participating broker-dealers. In addition, the offering is being made on a “best efforts” basis, which means the broker-dealers participating in the offering are only required to use their best efforts to sell our units and have no firm commitment or obligation to purchase any of the units. These broker-dealers are engaged in the sale of various securities and investment products beyond those offered by us, including those of competing mortgage programs. In the event we are unable to enter into selling agreements with a sufficient number of qualified participating broker-dealers, or if those participating broker-dealers engaged by us fail to devote sufficient time and attention to the marketing of our units, we may be unable to raise a sufficient amount of funds in the offering as may be necessary to enable us to grow our business. In such event, the likelihood of our profitability being affected by the performance of any one of our investments may increase. In addition, our fixed operating expenses as a percentage of gross income would be higher, and the amount of distributions could be adversely affected.

We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect our liquidity, financial condition or results of operations.

Our business is dependent on third party communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control. There could be:

•sudden electrical or telecommunications outages;

•natural disasters such as earthquakes, tornadoes and hurricanes;

•disease pandemics;

•events arising from local or larger scale political or social matters, including terrorist acts; and

•cyber attacks.

These events, in turn, could have a material adverse effect on our operating results and negatively affect the value of our units and our ability to pay distributions.

Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include:

•disrupted operations;

•misstated or unreliable financial data;

•liability for stolen assets or information;

•increased cybersecurity protection and insurance costs;

•litigation; and

•damage to our investor relationships.

As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those we have outsourced. Third parties with which we do business (including those that provide services to us) also may be targets of cyber-attacks or sources of other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information and assets, as well as certain investor, counterparty, employee and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above. Privacy and information security laws and regulation changes, and compliance with those changes, may also result in cost increases due to system changes and the development of new administrative processes.  

Our processes and controls to mitigate cyber security risks may not be efficient in preventing a cyber incident.

We have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations, business relationships or confidential information will not be negatively impacted by such an incident.

As a public company, we are subject to regulations not applicable to private companies, such as provisions of the Sarbanes-Oxley Act. Efforts to comply with such regulations have and will involve significant expenditures.

As a public company, we are subject to regulations not applicable to private companies, including provisions of the Sarbanes-Oxley Act and the related rules and regulations promulgated by the SEC. Our management will be required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and rules and regulations of the SEC thereunder. We are required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis, to evaluate and disclose changes in our internal control over financial reporting. In the past, we have identified material weaknesses in our internal control over financial reporting, and while we remediated those material weaknesses as of September 30, 2017, we may be unable in future periods to maintain an effective system of internal controls and maintain compliance with the Sarbanes-Oxley Act and related rules.

If we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal controls over financial

reporting is effective investors may lose confidence in the accuracy and completeness of our financial reports, and we could become subject to investigations by the SEC, or other regulatory authorities, which could require additional financial and management resources.

In addition, we have incurred significant expenses to comply with the Sarbanes-Oxley Act and other regulations and may be required to spend significant amounts in the future to remain in compliance. Such expenditures may reduce amounts available for distribution and may have a material adverse effect on our financial condition and results of operations.

We cannot predict far-reaching consequences and market distortions that may stem from governmental intervention in the economic and financial system or from regulatory reform of the oversight of financial markets.

In July 2010, the U.S. Congress enacted the Dodd-Frank Act, in part to impose significant investment restrictions and capital requirements on banking entities and other organizations that are significant to U.S. financial markets. For instance, the Dodd-Frank Act has imposed significant restrictions on the proprietary trading activities of certain banking entities and subject other systemically significant organizations regulated by the U.S. Federal Reserve to increase capital requirements and quantitative limits for engaging in such activities. The Dodd-Frank Act also seeks to reform the asset-backed securitization market (including the mortgage backed securities, or MBS, market) by requiring the retention of a portion of the credit risk inherent in the pool of securitized assets and by imposing additional registration and disclosure requirements. The Dodd-Frank Act also imposes significant regulatory restrictions on the origination and securitization of commercial mortgage loans. Also, the significant changes to Regulation FB could lead to sweeping changes to commercial and residential mortgage loan securitization markets as well as to the market for the re-securitization of MBS. The Dodd-Frank Act also created a new regulator, the Consumer Financial Protection Bureau, or the CFPB, which oversees many of the core laws which regulate the mortgage industry, including the Real Estate Settlement Procedures Act and the Truth in Lending Act. While the full impact of the Dodd-Frank Act and the role of the CFPB cannot be assessed until all implementing regulations are released, the Dodd-Frank Act’s extensive requirements may have a significant effect on the financial markets, and may affect the availability or terms of our targeted loans, which may have an adverse effect on our financial condition and results of operations.

From time to time, there may be other governmental intervention in the economic and financial system or regulatory reform measures relating to the oversight of financial markets and other laws that may be enacted which could have an adverse impact on our financial condition and results of operations.

Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions, and changes in such rules, accounting interpretations or our assumptions could adversely impact our ability to timely and accurately prepare our consolidated financial statements.

We are subject to Financial Accounting Standards Board, or FASB, interpretations that can result in significant accounting changes that could have a material and adverse impact on our results of operations and financial condition. Accounting rules for financial instruments, including the origination, acquisition and sales of mortgage loans, and other aspects of our operations are highly complex and involve significant judgment and assumptions. For example, our estimates and judgments are based on a number of factors, including projected cash flows from the collateral securing our loans, the likelihood of repayment in full at the maturity of a loan, potential for a loan refinancing opportunity in the future and expected market discount rates for varying property types. These complexities could lead to a delay in the preparation of financial information and the delivery of this information to our members.

Changes in accounting rules, interpretations or our assumptions could also undermine our ability to prepare timely and accurate financial statements, which could result in a lack of investor confidence in our financial information and could materially and adversely affect our offering of units.

A weak economy or real estate market could adversely affect us and your rate of return.

Our manager receives referrals from a variety of sources but will only originate or arrange loans that satisfy our investment criteria. The ability to find suitable loans is more difficult when the economy is weaker and there is less activity in the real estate market. For example, in the past the residential and commercial real estate markets experienced a significant downturn in investment and purchase activity in the market and less demand for mortgage loans. From time to time a similar decline in demand for loans may occur, and we may be unable to find a sufficient number of suitable loans, which could leave us with excess cash. In such event, we will make short-term, interim investments in government obligations, certificates of deposit, money market or other liquid-asset accounts, with the offering proceeds pending investment in suitable loans. Interest returns on these investments are usually lower than on mortgage loans, which would reduce our profits and return to members.

Concerns over U.S. fiscal policy could have a material adverse effect on our business, financial condition and results of operations.

In prior years, financial markets were affected by significant uncertainty relating to the stability of U.S. fiscal and budgetary policy. Any continuing uncertainty, together with the continuing U.S. debt and budget deficit concerns, could contribute to a U.S. economic slowdown. The impact of U.S. fiscal uncertainty is inherently unpredictable and could adversely affect U.S. and global financial markets and economic conditions. These developments could cause interest rates and borrowing costs to rise. Reversion to adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.

Changing market conditions may make it more difficult for us to analyze potential loans and our loan portfolio.

Our success depends, in part, on our ability to effectively analyze origination opportunities in order to assess the level of risk-adjusted returns that we should expect from any particular loan. To the extent that we use historical assumptions that are inappropriate under current market conditions, we may make a loan that we otherwise might not originate, which could have a material and adverse effect on our results of operations and or ability to make distributions.

If borrowers default, and/or economic circumstances increase defaults, we may have to foreclose on the underlying property. Foreclosure proceedings and other matters may slow our collection efforts and delay ultimate satisfaction of the loan.

We are engaged in the business of lending and, as such, we are subject to the risk that borrowers may be unable to repay the loans we have made to them in accordance with the terms of the loan agreement. Residential mortgage loans are secured by single-family residential property and are subject to risks of delinquency, foreclosure and loss. The ability of a borrower to repay a loan secured by a residential property is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn, natural disasters, terrorism, social unrest and civil disturbances, may impair borrowers’ abilities to repay their loans. Our loans are not insured by the Federal Housing Administration or guaranteed by the Veterans Administration or otherwise guaranteed or insured by a government agency. Our loans require monthly interest-only payments or monthly payments of interest and principal. This means:

•Some loans are structured to provide for relatively small monthly payments, typically interest-only, with a large “balloon” payment of principal due at the end of the term. These borrowers may be unable to repay such loans at maturity out of their own funds and may be compelled to refinance or sell their property.

•Defaults and foreclosures may increase if the economy weakens or if interest rates increase, which may make it more difficult for borrowers to refinance their loans at maturity or sell their property.

•If a borrower is unable to repay the loan and defaults, we may be forced to acquire the property at a foreclosure sale. If we cannot quickly sell or refinance such property, and the property does not produce income in excess of expenses, our profitability will be adversely affected.

•Recently enacted consumer protection laws, both Federal and in California, impose additional notice and disclosure requirements on lenders which may slow or limit a lender’s ability to exercise remedies against residential real property collateral (principally 1-4 units), including rights to sell the property in a foreclosure sale and certain rights of tenants residing in the properties. Additional federal and state legislation may be proposed in the future which, if enacted, may further limit a lender’s ability to exercise remedies against residential real property collateral following a borrower’s default in the performance of its loan obligations.

In addition, any litigation instituted by a defaulting borrower or the operation of the federal bankruptcy laws may have the effect of delaying enforcement of the lien on a defaulted loan and may in certain circumstances reduce the amount realizable from the sale of a foreclosed property. A “lien” is a charge against the property of which the holder may cause the property to be sold and use the proceeds in satisfaction of the lien. In the event our right to foreclose is contested, the legal proceedings necessary to resolve the issue can be time-consuming. A judicial foreclosure may be subject to most of the delays and expenses of other litigation, sometimes requiring up to several years to complete. If we acquire a property from a borrower, then there are many factors that are beyond our control that affect the real estate market and could affect our ability to sell properties for the price, on the terms or within the time frame that we desire. These factors include general economic conditions, the availability of financing, interest rates and other factors, including supply and demand. Further, before we can sell a property on the terms we want, it may be necessary to expend funds to correct defects or to make improvements. However, we can give no assurance that we will have the funds available to correct such defects or to make such improvements. We may be unable to sell our properties at a profit. Our inability to sell properties at the time and on the terms we want could reduce our cash flow and limit our ability to make distributions and could reduce the value of our units.

Our entry into workout agreements with delinquent borrowers could lead to a loss of revenue.

In the event we enter into workout agreements, we may experience a loss of revenue, which could adversely affect our profitability and the returns to our members. For example, we may periodically enter into workout agreements with borrowers who are past maturity or delinquent in their regular payments. Typically, a workout allows the borrower to extend the due date of the balloon payment and/or defer past-due payments, often while continuing to make current monthly payments, which allows the borrower time to seek alternative means of paying the loan in full.

We rely on appraisals to determine the fair market value (FMV) of the underlying property securing our loans. These appraisals may be inaccurate or not reflect subsequent events affecting FMV which could increase our risk of loss.

We will rely on appraisals prepared by unrelated third parties to determine the fair market value of real property used to secure our loans. We rely on such appraisals for, among other matters, determining our loan-to-value ratio (“LTV”). In the case of a loan made in connection with a pending property purchase, an appraisal may, for various reasons, reflect a higher or lower value than the purchase amount; we may nevertheless base our LTV on the appraised value, rather than on such purchase amount. We cannot guarantee that such appraisals will, in any or all cases, be accurate or that the appraisals will reflect the actual amount buyers will pay for the property. If an appraisal is not accurate, our loan may not be as secure as we anticipated. In the event of foreclosure, we may not be able to recover our entire investment. Additionally, since an appraisal fixes the value of real property at a given point in time, subsequent events could adversely affect the value of the real property used to secure a loan. For example, if the value of the property declines to a value below the amount of the loan, the loan could become under-collateralized. This would result in a risk of loss for us if the borrower defaults on the loan.

Our emphasis on the collateral value of the real estate securing our loans may result in increased delinquencies.

Our focus on asset-based lending may result in increased borrower delinquencies as compared to other lenders who place greater emphasis on other underwriting factors. For loans secured by real property other than owner-occupied personal residences, our lending decision is based primarily on a determination that the value of the real property is sufficient, in and of itself, as a source of repayment. Other considerations such as the cash flow and the income generated by the real property that is to secure the loan and the general creditworthiness, experience and reputation of the borrower are secondary considerations. Accordingly, loans may be made to borrowers who are in default under other of their obligations (e.g., to consolidate their debts) or who do not have sources of income that would be sufficient to qualify for loans from other lenders such as banks or savings and loan associations. There is a greater risk that such borrowers will default under loans we make to them. For any loan, the amount of the loan combined with the outstanding debt and claims secured by a senior deed of trust on the real property generally will not exceed a specified percentage of the appraised value of the property as determined by an independent written appraisal at the time the loan is made. The LTV generally will not exceed 80% for residential properties (including multi-family), 75% for commercial properties, and 50% for land. The excess of the value of the collateral securing the loan over our debt and any senior debt owing on the property is the “protective equity.” Significant declines in real estate values may reduce the protective equity provided by the collateral securing our

outstanding loans and were we to foreclose on loans with respect to properties that have declined in value, we may ultimately recover less than the amount of such loans.

Increased competition and new entrants in the market for mortgage loan originations could adversely impact our ability to originate and acquire real estate-related loans at attractive risk-adjusted returns.

New entrants in our target markets for mortgage loan originations could adversely impact our ability to execute our investment strategy on terms favorable to us. In originating our loans, we may compete with REITs, numerous regional and community banks, specialty finance companies, savings and loan associations, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, other lenders and other entities, and we expect that others may be organized in the future. The effect of the existence of other institutions may be an increase in competition for the available supply of loans suitable for investment by us, which may cause us to reduce the interest rate that can be charged on our loans. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of real estate-related loans and establish more relationships than us. We cannot assure you that the competitive pressures we may face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, desirable loans may be limited in the future and we may not be able to take advantage of attractive lending opportunities from time to time, as we can provide no assurance that we will be able to identify and make loans that are consistent with our investment objectives.

Some of our loans are junior in priority to first and second liens that may make it more difficult and costly to protect our junior security interest.

We anticipate that our loans will eventually be diversified as to priority approximately as follows:

•first mortgages – 40 to 60%;

•second mortgages (junior to first mortgages) – 40-60%; and

•third mortgages (junior to other two mortgages) – 0-10%.

There is no assurance that we will be able to diversify our loans as set forth above or that this diversification strategy, if successfully implemented, will provide us with the best risk adjusted returns and/or decrease our risk of loss.

The lien securing each loan will not be junior to more than two other encumbrances (a first and, in some cases, a second deed of trust) on the real property which is to be used as security for the loan. In the event of foreclosure under a second or third deed of trust, the debt secured by a senior deed(s) of trust must be satisfied before any proceeds from the sale of the property can be applied toward the debt owed to us. As a result, we many not recover some or all of our investment. To protect our junior security interest, we may be required to make substantial cash outlays for such items as loan payments to senior lien holders to prevent their foreclosure, property taxes, insurance, repairs, maintenance and any other expenses associated with the property. These expenditures could have an adverse effect on our profitability.

Our commercial loans are dependent on the ability of the commercial property owner to generate net income from operating the property, which may result in the inability of such property owner to repay a loan, as well as the risk of foreclosure.

Our commercial loans may be secured by office, retail, mixed use, warehouse, and other types of commercial properties and are subject to risks of delinquency, foreclosure and of loss that may be greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability to repay the loan may be impaired.

Loans to small businesses involve a high degree of business and financial risk, which can result in substantial losses that would adversely affect our business, results of operation and financial condition.

Our operations and activities may include loans to small, privately owned businesses to purchase or refinance real estate used in their operations or by investors seeking to acquire or refinance small office, retail, mixed use or warehouse properties. Often, there is little or no publicly available information about these businesses. Accordingly, we must rely on our own due diligence to obtain information in connection with our investment decisions. Our borrowers may not meet net income, cash flow and other coverage tests typically imposed by banks. A borrower's ability to repay its loan may be adversely impacted by numerous factors, including a downturn in its industry or other negative local or more general economic conditions. Deterioration in a borrower's financial condition and prospects may be accompanied by deterioration in the collateral for the loan. In addition, small businesses typically depend on the management talents and efforts of one person or a small group of people for their success. The loss of services of one or more of these persons could have a material and adverse impact on the operations of the small business. Small companies are typically more vulnerable to customer preferences, market conditions and economic downturns and often need additional capital to expand or compete. These factors may have an impact on loans involving such businesses. Loans to small businesses, therefore, involve a higher degree of business and financial risk, which can result in substantial losses.

We may make construction loans which may subject us to greater risks.

Construction loans are those loans made to borrowers constructing entirely new structures or dwellings, whether residential, commercial or multi-family properties. We may make construction loans up to a maximum of 10% of our then gross offering proceeds. Investing in construction loans subjects us to greater risk than loans related to properties with operating histories. If we foreclose on property under construction, construction generally will have to be completed before the property can begin to generate an income stream or be sold. We may not have adequate cash reserves on hand with respect to junior encumbrances and/or construction loans at all times to protect our security. If we have inadequate cash reserves, we could suffer a loss of our investment. Additionally, we may be required to obtain permanent financing of the property in addition to the construction loan which could involve the payment of significant fees and additional cash obligations for us. As of December 31, 2017, we did not have any construction loans.

We may make rehabilitation loans which may subject us to greater risks.

In addition to construction loans, we may make “rehabilitation loans.” Rehabilitation loans are those loans made to borrowers remodeling, adding to and/or rehabilitating existing structures or dwellings,

whether residential, commercial or multi-family properties. Investing in rehabilitation loans subjects us to greater risk than standard acquisition loans for properties. We may make rehabilitation loans up to a maximum of 15% of our total loan portfolio. If we foreclose on a property undergoing remodeling or rehabilitation, such remodeling or rehabilitation generally will have to be completed before the property can realize the anticipated increase in value from such remodeling or rehabilitation. We may not have adequate cash reserves on hand with respect to junior encumbrances and/or rehabilitation loans at all times to protect our security. If we have inadequate cash reserves, we could suffer a loss of our investment. Additionally, we may be required to obtain permanent financing of the property in addition to the rehabilitation loan, which could involve the payment of significant fees and additional cash obligations for us. As of December 31, 2017, we did not have any rehabilitation loans.

Owning real estate following foreclosure will subject us to additional risks.

If a borrower is unable to pay our loan or refinance it when it is due, it may be in our best interest to institute foreclosure proceedings against the borrower, and we may sometimes be required to own the property for a period of time. We will be subject to certain economic and liability risks attendant to property ownership which may affect our profitability. The risks of ownership will include the following:

•The property could generate less income for us than we could have earned from interest on the loan.

•If the property is a rental property we will be required to find and keep tenants.

•We will be required to oversee and control operating expenses of the property.

•We will be subject to general and local real estate and economic market conditions which could adversely affect the value of the property.

•We will be subject to any change in laws or regulations regarding taxes, use, zoning and environmental protection and hazards.

•We will be required to maintain insurance for property and liability exposures such as potential liability for any injury that occurs on or to the property.

•We will be subject to state and federal laws and local municipal codes and penalties relating to tenant retention and the maintenance and upkeep of lender-owned properties.

•We may be subject to federal and state tax laws and regulations with respect to the tax treatment of items of our income, gain, loss or deductions for real estate held for investment, rental and/or sale, which in turn may result in federal and state tax payment and filing exposure for our members.

•We will be subject to municipal ordinances, where they have been enacted, applicable to foreclosed and/or distressed properties which require the payment of additional costs and registration fees and may obligate us to secure and maintain, at our expense, real property securing our loans upon the filing of a notice of default or after we acquire ownership of real property through foreclosure.

If we decide to develop property acquired by us, we will face many additional risks.

If we have acquired property through foreclosure or otherwise, there may be circumstances in which it would be in our best interest not to immediately sell the property, but to develop it ourselves. Depending upon the location of the property and market conditions, the development done by us could be either residential (single or multi-family) or commercial. Development of any type of real estate involves risks including the following:

•We will be required to rely on the skill and financial stability of third-party developers and contractors.

•Any development or construction will involve obtaining local government permits. We will be subject to the risk that our project does not meet the requirements necessary to obtain those permits.

•Any type of development and construction is subject to delays and cost overruns.

•There can be no guarantee that upon completion of the development that we will be able to sell the property or realize a profit from the sale.

•Economic factors and real estate market conditions could adversely affect the value of the property.

Bankruptcy and legal limitations on personal judgments may affect our ability to enforce the loans and increase our costs.

Any borrower has the ability to delay a foreclosure sale by us for a period ranging from several months to several years or more by filing a petition in bankruptcy. The filing of a petition in bankruptcy automatically stops or “stays” any actions to enforce the terms of the loan. The length of this delay and the costs associated with it will generally have an adverse impact on our profitability. We also may not be able to obtain a personal judgment against a borrower.

If we make high-cost mortgage loans, we will be required to comply with additional federal and state regulations and our non-compliance could adversely affect us.

Although we anticipate making relatively few loans that would qualify as “high-cost mortgages,” as defined by regulations, the failure to comply with these regulations could adversely affect us. Section 1026.32 of Regulation Z defines a “high-cost mortgage” as any consumer loan secured by a primary residence where either (i) the annual percentage rate (“APR”), measured as of the date the rate is set, exceeds the average prime offer rate (“APOR”) for a comparable transaction on that date by more than 6.5% on a first mortgage or 8.5% on a junior mortgage; or (ii) the total fees payable by the consumer exceed 5% for a loan of more than or equal to $20,000, or 8.5% or $1,000 (whichever is less) on a loan of less than $20,000. The high-cost mortgage regulations primarily focus on:

•additional disclosure requirements with respect to the terms of the loan to the borrower;

•the timing of such disclosures; and

•the prohibition of certain terms in the loan including balloon payments and negative amortization.

The failure to comply with the regulations, even if the failure was unintended, will render the loan rescindable for up to three years. If the loan is rescinded, interest and fees paid by the borrower must be refunded by the lender. The lender could also be held liable for attorneys’ fees, finance charges and fees paid by the borrower and certain other money damages.

In addition, under California law consumer loans secured by liens on primary residences in amounts less than the Fannie Mae/Freddie Mac conforming loan limit are considered to be “high-cost loans” if they have (i) an annual percentage rate at least 8% above the interest rate on U.S. Treasury securities of a comparable maturity, or (ii) points and fees in excess of 6% of the loan amount, exclusive of the points and fees. While it is unlikely that we would make many high-cost loans, the failure to comply with California law regarding such loans could have significant adverse effects on us. The law prohibits certain lending practices with respect to high-cost loans, including the making of a loan without regard to the borrower’s income or obligations. When making such loans, lenders must provide borrowers with a consumer disclosure and provide for an additional rescission period prior to closing the loan. The reckless or willful failure to comply with any provision of this law, including the mandatory disclosure provisions, could result in, among other penalties, the imposition of administrative penalties of $25,000, loss or suspension of the offending broker’s license, as well as exposure to civil liability to the consumer/borrower (including the imposition of actual and punitive damages).

We operate in a heavily regulated industry and compliance with regulations could increase our costs and lower your return.

The mortgage business has traditionally been heavily regulated. The costs of complying with these regulations could adversely affect our profitability, and violations of these regulations could materially adversely affect our business and financial results. For example, the company’s lending activity is subject to regulations promulgated by

the Consumer Finance Protection Bureau (“CFPB”), and further, the company may be subject to examination by the CFPB, as well as the California Bureau of Real Estate and the California Department of Business Oversight. Such examinations, as well as regulations that may be issued in the future, could ultimately increase our administrative burdens and our costs and could adversely affect the return to our members.

Since we are not regulated as a bank, our members and borrowers may have fewer protections.

Although we are engaged in mortgage lending, we and our affiliates are not banks and, accordingly, are not generally subject to the federal and state banking regulations, policies and oversight applicable to banks. For example, banks are subject to federal regulation and examination by the Federal Deposit Insurance Corporation, which insures bank deposits up to applicable limits. The operations of banks are also subject to the regulation and oversight of the Federal Reserve Board and state banking regulators. Banks are required to maintain a minimum level of regulatory capital in accordance with stringent guidelines established by federal law. Federal and state banking agencies also regulate the lending practices, capital structure, investment practices and dividend policy of banks, among other things.

Because we and our affiliates are generally not subject to the capital requirements and other regulations and oversight applicable to banks, our members and borrowers may not have the same level of protections and safeguards afforded to owners and customers of banks.

The implementation of changes to investor account statements described in Financial Industry Regulatory Authority Regulatory Notice 15-02 may impact our ability to raise funds.

The SEC has approved amendments to the rules of the Financial Industry Regulatory Authority, Inc. (“FINRA”) applicable to securities of direct participation programs and non-listed real estate investment trusts. The amendments, which became effective on April 11, 2016, provide, among other things, that (i) FINRA members must include in customer account statements the per share estimated value of the non-listed entity, which must be developed using a methodology reasonably designed to ensure the per share estimated value’s reliability; and (ii) per share estimated value disclosed from and after 150 days following the second anniversary of the admission of stockholders of the non-listed entity’s public offering must be based on an appraised valuation methodology developed by, or with the material assistance of, a third-party expert and updated on at least an annual basis. The rule changes also provide that account statements must include additional disclosure regarding the sources of distributions to stockholders of unlisted entities.

Larger loans or concentration of loans in one borrower may result in less diversity and may increase risk.

Investing in fewer, larger loans generally decreases diversification of the portfolio and may increase the risk of credit losses and the possible resultant reduction in profits and yield to our members. However, since larger loans generally will carry a somewhat higher interest rate, our manager may determine, from time to time, that a relatively larger loan is advisable for us. Our maximum investment in a loan will not exceed 10% of our then total gross offering proceeds.

We may invest in multiple secured loans that share a common borrower or principal. The aggregate of our loans, however, to any one borrower may not exceed 10% of the then total gross offering proceeds. The more concentrated our portfolio is with one or a few borrowers, the greater the credit risk we face.

Use of borrowed money to fund loans may reduce our profitability.

We are permitted to borrow funds for the purpose of making loans, for increased liquidity, reducing cash reserve needs, or developing or refinancing property that we acquired through foreclosure or for any other proper purpose on any terms commercially available. We may assign all or a portion of our loan portfolio and/or all or a portion of real estate that we own as security for such loans. Our manager may not leverage more than, and our total indebtedness may not at any time exceed, 50% of members’ capital.

If we have borrowed money to fund loans, increases in the prevailing rate may have an adverse effect. If borrowed money bears interest at a variable rate, and we are making fixed rate loans, a rise in the prevailing rate could result in our having to pay more in interest on the borrowed money than we make on loans to our borrowers. This may reduce our profitability, and, should the company default on its debt, may result in additional losses through forced liquidation of loans. In addition, if rising interest rates cause us to need additional capital to repay indebtedness in accordance with its terms or otherwise, we may need to liquidate one or more of our investments at times that may not permit realization of the maximum return on such investments. In addition, financing arrangements that we may enter into in the future may require us to make a lump-sum or “balloon” payment at maturity. At the time the balloon payment is due, we may not be able to refinance the balloon payment on terms as favorable as the original loan or sell investments at a price sufficient to make the balloon payment, either of which could increase our risk of default on the loan. The effect of a refinancing or sale could affect the rate of return to investors. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay distributions. Any of these results would have a significant negative impact on your investment.

Borrowing money also entails possible adverse tax consequences. (See “MATERIAL FEDERAL INCOME TAX CONSEQUENCES – Investment by Tax-Exempt Investors” and RISK FACTORS – TAX RISKS – We Expect to Generate Unrelated Business Taxable Income.”)

Changes in interest rates may affect your return on your investment.

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing. Also, rising interest rates reduce the value of our existing loans that do not have adjustable rates. A reduction in the volume of mortgage loans originated may affect the amount of our distributions. Conversely, we expect that the majority of our loans will not include prepayment penalties for a borrower paying off a loan prior to maturity. The absence of a prepayment penalty in our loans may lead borrowers to refinance higher-interest rate loans in a market of falling interest rates. This would then require us to reinvest the prepayment proceeds in loans or alternative short-term investments with lower interest rates and a corresponding lower yield to members.

The values of our loans may decline without any general increase in interest rates for a number of reasons, such as increases or expected increases in defaults, or increases or expected increases in voluntary prepayments for those loans that are subject to prepayment risk or widening of credit spreads.

We expect that our loans will typically have fixed rates and the majority of our loans will be for terms of one to five years. Consequently, due to the terms of our loans, if interest rates rapidly increase, such interest rates may exceed the average interest rate earned by our loan portfolio. If prevailing interest rates rise above the average interest rate being earned by our loan portfolio, you may be unable to quickly redeem your units, as our unit redemption program is subject to significant restrictions and limitations, in order to take advantage of higher returns available from other investments. In addition, an increase in interest rates accompanied by a tight supply of mortgage funds may make refinancing by borrowers with balloon payments difficult or impossible. This is true regardless of the market value of the underlying property at the time such balloon payments are due. In such event, the property may be foreclosed upon.

We may experience fluctuations in our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make loans that meet our investment criteria, the interest rate on loans in our portfolio, the level of our expenses, the volume and timing of loan sales to third parties, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions, As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods.

Marshaling of assets could delay or reduce recovery of loans.

As security for a single loan, we may require a borrower to execute deeds of trust on other properties owned by the borrower in addition to the property the borrower is purchasing or refinancing. In the event of a default by the borrower, we may be required to “marshal” the assets of the borrower. Marshaling is an equitable doctrine used to protect a junior lienholder with a security interest in a single property from being “squeezed out” by a senior lienholder, such as us, with a security interest not only in the property, but in one or more additional properties. Accordingly, if another creditor of the borrower forced us to marshal the borrower’s assets, foreclosure and eventual recovery of the loan could be delayed or reduced, and our costs associated therewith could be increased because we are required to seek recourse in the borrower’s other assets for payment on the loan.

We may face potential liability for toxic or hazardous substances as a result of our lending activities or as a result of foreclosure on properties that secure loans we make.

If we take an equity interest in, management control of, or foreclose on any of the loans, we may be considered the owner of the real property securing such loans. Under current federal and state law, the owner of real property contaminated with toxic or hazardous substances (including a mortgage lender that has acquired title through foreclosure) may be liable for all costs associated with any remedial action necessary to bring the property into compliance with applicable environmental laws and regulations. This liability may arise regardless of who caused the contamination or when it was caused. In the event of any environmental contamination, there can be no assurance that we

would not incur full recourse liability for the entire cost of any such removal and cleanup, even if we did not know about or participate in the contamination. Full recourse liability means that any of our property, including the contaminated property, could be sold in order to pay the costs of cleanup in excess of the value of the property at which such contamination occurred.

In addition, we could incur liability to tenants and other users of the affected property, or users of neighboring property, including liability for consequential damages. Consequential damages are damages that are a consequence of the contamination but are not costs required to clean up the contamination, such as lost profits of a business. We would also be exposed to risk of lost revenues during any cleanup and to the risk of lower lease rates or decreased occupancy if the existence of such substances or sources on the property becomes known.

If we fail to remove the substances or sources and clean up the property, federal, state, or local environmental agencies could perform such removal and cleanup. Such agencies would impose and subsequently foreclose liens on the property for the cost thereof. We may find it difficult or impossible to sell the property prior to or following any such cleanup. If such substances are discovered after we sell the property, we could be liable to the purchaser thereof if our manager knew or had reason to know that such substances or sources existed. In such case, we could also be subject to the costs described above.

If we are required to incur such costs or satisfy such liabilities, this could have a material adverse effect on our profitability. Additionally, if a borrower is required to incur such costs or satisfy such liabilities, this could result in the borrower’s inability to repay its loan from us.

Our manager’s selection of loans for sale to third parties may involve conflicts of interest between us and our manager.

We may, on occasion, subject to applicable laws and regulations and our operating agreement, sell some of our loans in the secondary market. If we sell loans, we may be required to make customary representations and warranties about such loans to the loan purchaser. Our loan sale agreements may require us to repurchase or substitute loans in the event we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or in the event of early payment default on a loan. Likewise, we may be required to repurchase or substitute loans if we breach a representation or warranty in connection with our securitizations, if any.

The remedies available to a purchaser of loans are generally broader than those available to us. Also, if a purchaser enforces its remedies against us, we may not be able to enforce the remedies we have against the borrowers. If we are required to make a significant amount of repurchases, our cash flow, results of operations, financial condition and business prospects could be materially adversely affected.

Also, there is a conflict of interest between us and our manager as to what loans will be sold. For example, the manager may select loans of a higher credit quality or having higher interest rates than other loans in our portfolio. The sale of these types of loans may result in a reduced overall yield of our portfolio. In addition, loans the manager may select to sell to third parties will benefit the manager to the extent that proceeds from the loans sales are used to pay fees and other costs we owe to our manager.

We intend to be treated as a partnership for federal income tax purposes but no assurance can be given that we would not face a challenge to such characterization.

We intend to be treated as a partnership (other than a publicly traded partnership) for federal income tax purposes and not as a corporation. Although we have received an opinion from Orrick, Herrington & Sutcliffe LLP to the effect that we will be treated as a partnership (other than a publicly traded partnership) for federal income tax purposes, we will not seek a ruling from the Internal Revenue Service (“IRS”) on the tax treatment of us or our members. Counsel’s opinion represents only its best legal judgment based upon existing law and, among other things, factual representations provided by our manager. The opinion of counsel has no binding effect on the IRS or any court, and no assurance can be given that the conclusions reached in said opinion would be sustained by a court if challenged by the IRS.

Your ability to offset income with our losses may be limited.

We are engaged in mortgage lending. We take the position that we are engaged in the active conduct of equity-financed lending. Under the applicable Treasury regulations, each member is required to report separately on his income tax return all or a portion of the member’s distributive share of our income as nonpassive income. Each member’s distributive share of our losses, if any, will be reported as passive losses. Passive losses may be used to offset passive income. To the extent that passive losses do not offset passive income, they may be carried forward to offset passive income in future years. It is possible, however, that the IRS could assert that our income is properly treated as portfolio income for purposes of those limitations. Such treatment is subject to the interpretation of complex Treasury regulations, and is dependent upon a number of factors, such as whether we are engaged in a trade or business, the extent to which we incur liabilities in connection with our activities, and the proper matching of the allocable expenses incurred in the production of income. There can be no assurance that an IRS challenge to our characterization of our income will not succeed. It also is possible that members may be subject to other limitations on the deductibility of our expenses and losses.

Your tax liability may exceed the cash you receive.

Your tax liabilities associated with an investment in the units for a given year may exceed the amount of cash we distribute to you during such year. As a member, you will be taxed on your allocable share of our taxable income whether or not you actually receive cash distributions from us. Your taxable income could exceed cash distributions you receive, for example, if you elect to reinvest into additional units the cash distributions you would otherwise have received. Taxable income in excess of cash distributions also could

result if we were to generate so-called “phantom income” (taxable income without an associated receipt of cash). Phantom income could be recognized from a number of sources, including, without limitation, any established loan loss reserves or fluctuation thereof, repayment of principal on loans incurred by the company as well as imputed income due to original issue discount, market discount, imputed interest and significant modifications to existing loans. Under very limited circumstances, you could receive a special distribution to enable you to pay taxes on specified types of income (See “MATERIAL FEDERAL INCOME TAX CONSEQUENCES” and “SUMMARY OF NINTH AMENDED AND RESTATED LIMITED LIABILITY COMPANY OPERATING AGREEMENT – Distribution”). We take the position that we are engaged in a lending trade or business, as a result of which all or a portion of the income earned by members with respect to their investment in our units will be treated as ordinary income.

We expect to generate unrelated business taxable income.

Tax-exempt investors (such as an employee pension benefit plan or an IRA) may be subject to tax to the extent that income from the units is treated as unrelated business taxable income, or UBTI. We may realize UBTI from the sale of loans if we are deemed to be a “dealer” in the business of selling loans to customers in the ordinary course of our trade or business and a particular loan or loans are deemed to be “dealer property.” In addition, we borrow funds on a limited basis, which can cause a portion of our income to be treated as UBTI. We may also receive income from services rendered in connection with making or securing loans, which is likely to constitute UBTI. Furthermore, any rental income that we receive from a lease of personal property would constitute UBTI unless the personal property is leased along with real property and the rents received from the personal property are an incidental amount of the total rents received under the lease.  While we do not currently intend to own and lease personal property, it is possible we may do so as a result of a foreclosure upon a default. Although we will use reasonable efforts to prevent any borrowings and leases of personal property from causing any significant amount of income from the units to be treated as UBTI, we expect that some portion of our income will be UBTI. Prospective investors that are tax-exempt entities are urged to consult their own tax advisors regarding the suitability of an investment in units. In particular, an investment in units may not be suitable for charitable remainder trusts.

Tax audits could result in adjustments to your tax returns.

The IRS and state tax authorities could challenge certain federal and state income tax positions, respectively, taken by us if we are audited. Any adjustment to our return resulting from an audit by a tax authority would result in adjustments to your tax returns and might result in an examination of items in such returns unrelated to your investment in the units or an examination of tax returns for prior or later years. Moreover, we and our members could incur substantial legal and accounting costs in contesting any challenge by a tax authority, regardless of the outcome. Our manager generally will have the authority and power to act for, and bind the company in connection with, any such audit or adjustment for administrative or judicial proceedings in connection therewith.

You may be subject to state and local tax laws.

The state in which you reside may impose an income tax upon your share of our taxable income. Furthermore, states such as California, in which we will own property, generally impose income tax upon a member’s share of the company’s taxable income considered allocable to such states, whether or not a member resides in that state. As a result, a nonresident member may be required to file a tax return in California and any other such state. Differences may exist between federal income tax laws and state and local income tax laws. We may be required to withhold state taxes from distributions to members in certain instances. You are urged to consult with your own tax advisers with respect to state and local tax consequences of an investment in our units.

The IRS may argue that our allocations to you do not have substantial economic effect.

For U.S. federal income tax purposes, allocations to you of our items of income, gain, loss, deduction and credit will be governed by our operating agreement if such allocations have “substantial economic effect.” Because our operating agreement generally allocates profits and losses (and taxable items) in the same manner as cash distributions are made, we believe these allocations should be respected. However, there can be no assurance that the IRS will not challenge the allocations and will not attempt to reallocate profits and losses (and taxable items) among the members. Any successful challenge by the IRS to such allocations could have a material adverse effect on your investment in our units.

Recent tax legislation may have unanticipated effects on us.

On December 22, 2017, the tax legislation commonly referred to as the Tax Cuts and Jobs Act was signed into law, generally applying in taxable years beginning after December 31, 2017. The Tax Cuts and Jobs Act makes significant changes to the U.S. federal income tax rules for taxation of U.S. individuals, pass through entities, and corporations, reducing the federal income tax rates applicable to taxable U.S. investors on ordinary dividends on our stock. In the case of individuals, the income tax brackets are adjusted, the top federal income rate is reduced to 37%, special rules reduce taxation of certain income earned through pass-through entities and REITs, but not regulated investment companies, and various deductions are eliminated or limited. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. For taxable years beginning after December 31, 2017, the top corporate income tax rate is reduced to 21%, which could make taxable corporations viable alternatives to other types of entities for individual investors. The long-term impact of the tax changes on the demand for the loans we intend to make is not yet certain.

Changes in tax laws could have an adverse effect on your investment.

Changes in federal, state or local tax law could have an adverse effect on the rate of return on your investment in our units or on the market value of our assets. You are urged to consult with your own tax advisor with respect to the impact of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our units.

Proceeds

From investors - admitted

$

63,913,357

From members under our DRIP

6,232,594

From premiums paid by RMC⁽¹⁾

289,104

Gross proceeds from unit sales

$

70,435,055

(1)

If a member acquired units through an unsolicited sale (i.e., without a broker/dealer) the member’s capital account is credited with their capital contribution plus a premium paid by RMC equal to the amount of the sales commissions that otherwise would have been paid to a broker-dealer by RMC. This premium is reported in the year paid as taxable income to the member.

•

make additional loans;

•

fund working capital reserves;

•

pay RMC up to 4.5% of proceeds from the sale of units for organization and offering expenses; and

•

fund a formation loan to RMC at up to 7% of proceeds from sale of units.

Units redeemed

2017

2016

Q1

$

400,310

$

232,208

Q2

53,152

159,917

Q3

346,800

208,520

Q4

478,884

343,972

Total

$

1,279,146

$

944,617

•

project future cash flows for a certain discrete projection period;

•

discount these cash flows to present value at a rate of return that considers the relative risk of achieving the cash flows and the time value of money;

•

estimate the residual value of cash flows subsequent to the discrete projection period; and

•

combine the present value of the residual cash flows with the discrete projection period cash flows to indicate the fair market value.

•

physical depreciation;

•

functional obsolescence; and

•

economic obsolescence.

2017

2016

Secured loans – end of period balance

$

54,768,689

$

40,123,393

Secured loans – average daily balance

$

47,410,000

$

31,725,000

Interest on loans, gross

$

4,031,706

$

2,719,075

Portfolio interest rate⁽¹⁾

8.5

%

8.6

%

Effective yield rate⁽²⁾

8.5

%

8.6

%

Amortization of loan administrative fees, net

$

—

$

35,071

Percent of average daily balance⁽²⁾

0.0

%

0.1

%

Interest on loans, net

$

4,031,706

$

2,684,004

Percent of average daily balance⁽²⁾

8.5

%

8.5

%

Provision for loan losses

—

—

Percent of average daily balance⁽²⁾

0.0

%

0.0

%

Total operations expense⁽⁷⁾

$

185,599

$

90,552

Net Income

$

3,869,045

$

2,608,480

Percent of average members’ capital⁽³⁾⁽⁴⁾

7.0

%

6.9

%

Member Distributions

$

3,596,449

$

2,426,108

Percent of average members’ capital^(3)(4)(5)

6.5

%

6.5

%

Members’ capital, gross – end of period balance

$

66,450,424

$

45,405,776

Members’ capital, gross – average daily balance

$

55,007,000

$

37,100,000

Member Redemptions⁽⁶⁾

$

1,279,146

$

944,617

(1)

Stated note interest rate, weighted daily average

(2)

Percent of secured loans – average daily balance

(3)

Percent of members’ capital, gross – average daily balance

(4)

Percent based on the net income available to members (excluding 1% allocated to the manager)

(5)

Members Capital Distributed during 2017 is net of O&O costs allocated to members during the year.

(6)

Scheduled member redemptions as of December 31, 2017 were $584,149, payable between 2018 and 2021. Scheduled member redemptions as of December 31, 2016 were $437,623.

•

charging less than the maximum allowable fees;

•

has not requested reimbursement of qualifying expenses; and/or

•

paying company expenses, such as professional fees, that could have been obligations of the company.

•

loan origination volumes;

•

the timing and gains received from loan sales; and

•

the effects of future interest rates negotiated with borrowers.

Interest on

loans, net

Provision

For Loan

Losses

Operations

Expense

Net

Income

For the Years Ended

2017

$

4,031,706

—

185,599

3,869,045

2016

2,684,004

—

90,552

2,608,480

Change

$

1,347,702

—

95,047

1,260,565

Change

Loan Balance Increase

$

1,369,482

—

38,441

1,331,041

Loan Portfolio Effective Yield Rate

(21,780

)

—

—

(21,780

)

Late Fees

—

—

—

7,910

Capital Balance Increase

—

—

398,604

(398,604

)

Manager's Fees/Costs Waived

—

—

(398,604

)

398,604

Manager Reimbursements

—

—

58,553

(58,553

)

Other

—

—

(1,947

)

1,947

Change

$

1,347,702

—

95,047

1,260,565

Mortgage

Servicing

Fees

Asset

Management

Fees, net

Costs

From

RMC, net

Professional

Services, net

Other

Total

For the Years Ended

2017

$

116,289

—

—

63,053

6,257

185,599

2016

77,848

—

—

4,500

8,204

90,552

Change

$

38,441

—

—

58,553

(1,947

)

95,047

Change

Loan Balance Increase

$

38,441

—

—

—

—

38,441

Capital Balance Increase

—

132,885

265,719

—

—

398,604

Manager's Fees/Costs Waived

—

(132,885

)

(265,719

)

—

—

(398,604

)

Manager Reimbursements

—

—

—

58,553

—

58,553

Other

—

—

—

—

(1,947

)

(1,947

)

Change

$

38,441

—

—

58,553

(1,947

)

95,047

•

Mortgage servicing fees

•

Asset management fees

•

Costs through RMC

•

Professional services

Interest on

loans, net

Provision

For Loan

Losses

Operations

Expense

Net

Income

For the three months ended

December 31, 2017

$

1,180,923

—

49,750

1,134,958

September 30, 2017

1,074,539

—

78,192

1,007,673

Change

$

106,384

—

(28,442

)

127,285

Change

Loan Balance Increase

$

106,384

—

3,867

102,517

Late Fees

—

—

—

(7,541

)

Capital Balance Increase

—

—

43,765

(43,765

)

Manager's Fees/Costs Waived

—

—

(43,765

)

43,765

Manager Reimbursements

—

—

(30,899

)

30,899

Other

—

—

(1,410

)

1,410

Change

$

106,384

—

(28,442

)

127,285

2017

2016

Members’ capital

Gross subscription proceeds

$

22,214,654

$

13,976,288

Organization and offering costs, net

(876,620

)

(572,259

)

Formation loan, net

(1,274,451

)

(778,060

)

Distributions and redemptions, net

(2,914,528

)

(2,022,018

)

Cash – members’ capital, net

17,149,055

10,603,951

Loan principal/advances/interest

Principal collected

$

27,081,592

$

19,737,102

Loans sold to Affiliates

999,995

-

Interest received, net

3,930,881

2,629,562

Other loan income

23,038

15,178

Loan funding & advances made, collected

(42,716,323

)

(32,502,176

)

Cash – loans, net

(10,680,817

)

(10,120,334

)

Operations expense

(155,640

)

(92,602

)

Deposit on line of credit

2,400

(5,000

)

Net change in cash

$

6,314,998

$

386,015

2017

2016

DRIP

$

1,987,151

$

1,366,278

Cash

1,609,298

1,059,830

Total

$

3,596,449

$

2,426,108

Percent of members’ capital, electing cash distribution

45

%

44

%

2017

2016

Capital redemptions-without penalty

$

747,234

$

934,829

Capital redemptions-subject to penalty

531,912

9,788

Total

$

1,279,146

$

944,617

•

sale of members’ units (net of reimbursement to RMC of organization and offering expenses), including units sold by reinvestment of distributions;

•

loan payoffs;

•

borrowers’ monthly principal and interest payments; and

•

to a lesser degree and, if obtained, a line of credit.

•

to reimburse RMC for O&O expenses (as of December 31, 2017, approximately $3,182,696 was to be reimbursed to RMC) contingent upon future sales of units; and

•

Redemptions of members’ capital scheduled as of December 31, 2017, of $584,149, to be paid between 2018 and 2021.

Report of Independent Registered Public Accounting Firm

Balance Sheets – December 31, 2017 and 2016

Statements of Income for the Years Ended December 31, 2017 and 2016

Statements of Changes in Members’ Capital for the Years Ended December 31, 2017 and 2016

Statements of Cash Flows for the Years Ended December 31, 2017 and 2016

Notes to Financial Statements

2017

2016

ASSETS

Cash and cash equivalents

$

8,509,852

$

2,194,854

Loans

Principal

54,768,689

40,123,393

Advances

13,989

24,550

Accrued interest

409,867

287,767

Loan balances secured by deeds of trust

55,192,545

40,435,710

Loan administrative fees, net

9,008

30,282

Total loans

55,201,553

40,465,992

Other assets

—

5,000

Total assets

$

63,711,405

$

42,665,846

LIABILITIES, INVESTORS IN APPLICANT STATUS, AND MEMBERS’ CAPITAL

Liabilities

Accounts payable and accrued liabilities

$

180

$

89

Investors in applicant status

3,270,312

1,408,185

Members’ capital, net

64,218,001

43,777,010

Receivable from manager (formation loan)

(3,777,088

)

(2,519,438

)

Members’ capital, net, less formation loan

60,440,913

41,257,572

Total liabilities, investors in applicant status and members’ capital

$

63,711,405

$

42,665,846

Revenues, net

2017

2016

Interest income

$

4,031,706

$

2,684,004

Late fees

22,938

15,028

Total revenues

4,054,644

2,699,032

Provision for loan losses

—

—

Operations Expense

Mortgage servicing fees

116,289

77,848

Asset management fees, net (Note 3)

—

—

Costs from Redwood Mortgage Corp., net (Note 3)

—

—

Professional services, net (Note 3)

63,053

4,500

Other

6,257

8,204

Total operations expense

185,599

90,552

Net income

$

3,869,045

$

2,608,480

Members (99%)

3,830,355

2,582,395

Manager (1%)

38,690

26,085

$

3,869,045

$

2,608,480

Members' Capital, net

Investors In

Applicant

Status

Members’

Capital

Manager’s

Capital

Unallocated

Organization

and Offering

Expenses

Members’

Capital, net

Balance at December 31, 2016

$

1,408,185

$

45,405,776

$

69,965

$

(1,698,731

)

$

43,777,010

Contributions on application

22,061,531

—

—

—

—

Contributions admitted to members' capital

(20,204,759

)

20,204,759

20,332

—

20,225,091

Premiums paid on application by RMC

132,699

—

—

—

—

Premiums admitted to members' capital

(127,344

)

127,344

—

—

127,344

Net income

—

3,830,355

38,690

—

3,869,045

Earnings distributed to members

—

(3,596,449

)

(26,085

)

—

(3,622,534

)

Earnings distributed used in DRIP

—

1,987,151

—

—

1,987,151

Members’ redemptions

—

(1,279,146

)

—

—

(1,279,146

)

Organization and offering expenses

—

—

—

(919,870

)

(919,870

)

Organization and offering expenses allocated

—

(229,366

)

—

229,366

—

Manager reimbursement for unallocated organization and offering cost on redemptions

—

—

—

43,252

43,252

Early withdrawal penalties

—

—

—

10,658

10,658

Balance at December 31, 2017

$

3,270,312

$

66,450,424

$

102,902