10-K 1 vrtb12311410k.htm VESTIN REALTY MORTGAGE II, INC. DECEMBER 31, 2014 10-K vrtb12311410k.htm



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

FORM 10-K

(Mark one)

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

For the fiscal year ended December 31, 2014

Or

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

For the transition period from _________ to _________

Commission File Number: 000-51892
Company Logo
VESTIN REALTY MORTGAGE II, INC.
(Exact name of registrant as specified in its charter)


MARYLAND
 
61-1502451
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)

8880 W. SUNSET ROAD, SUITE 200, LAS VEGAS, NEVADA 89148
(Address of Principal Executive Offices)  (Zip Code)

Registrant’s telephone number, including area code 702.227.0965

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

Common Stock, $0.0001 Par Value
 
Nasdaq Global Select Market
(Title of each class)
 
(Name of each exchange on which registered)

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

None
(Title of class)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

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

Large accelerated filer [   ]
Accelerated filer [   ]
   
Non-accelerated filer [   ]
Smaller reporting company [X]

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

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

Class
   
Market Value as of
June 30, 2014
Common Stock, $0.0001 Par Value
 
$
11,378,531
       

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class
   
Number of Shares Outstanding
As of March 31, 2015
Common Stock, $0.0001 Par Value
   
2,578,420
       




TABLE OF CONTENTS

     
Page
PART I
     
 
 
 
 
       
PART II
     
 
 
 
 
 
 
       
PART III
     
 
 
 
 
 
       
PART IV
     
 
   
   




PART I

Special Note Regarding Forward-Looking Statements

This report includes certain statements that may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").  Such forward-looking statements may be identified by the use of such words as “expects,” “plans,” “estimates,” “intend,” “might,” “may,” “could,” “will,” “feel,” “forecasts,” “projects,” “anticipates,” “believes” and words of similar expression.  Forward-looking statements may relate to, without limitation, our business strategy, future operating results, future sources of funding for real estate investments by us, future capital expenditures, future economic conditions and other developments and trends in the commercial real estate industry and pending litigation involving us.   Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements.  These forward-looking statements are based on our current beliefs, intentions and expectations.  These statements are not guarantees or indicative of future performance.  Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties discussed in this Annual Report on Form 10-K and in our other securities filings with the Securities and Exchange Commission (“SEC”).  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties.  The forward-looking statements contained in this report are made only as of the date hereof.  We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

BUSINESS

General

Vestin Realty Mortgage II, Inc. (“VRM II”, the “Company”, “we”, “us” or “our”) formerly Vestin Fund II, LLC (“Fund II”) invests in loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our management agreement (“Management Agreement”).  In addition, we invest in, acquire, manage and sell real property and acquire entities involved in the ownership or management of real property.  We commenced operations in June 2001.  References in this report to the “Company,” “we,” “us,” or “our” refer to Fund II with respect to the period prior to April 1, 2006 and to VRM II with respect to the period commencing on April 1, 2006.

We operated as a real estate investment trust (“REIT”) through December 31, 2011.  We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder.  As a REIT, we were required to have a December 31 fiscal year end.  We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012.  Under the Code, we will not be able to make a new election to be taxed as a REIT during the four years following December 31, 2012.  Pursuant to our charter, upon the determination by the Board of Directors that we should no longer qualify as a REIT, the restrictions on transfer and ownership of shares set forth in Article VII of our charter ceased to be in effect and, accordingly, shares of the Company’s stock will no longer be subject to such restrictions.  In connection with the termination of our REIT status, we also amended our stockholders’ rights plan to provide that a stockholder, other than Michael Shustek, may own up to 20% of outstanding shares of common stock, and that Michael Shustek may own up to 35% of outstanding shares of common stock.

Michael Shustek owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, which is our manager (the “manager” or “Vestin Mortgage”). The business of brokerage and placement of real estate loans have been performed by affiliated or non-affiliated mortgage brokers, including Advant Mortgage, LLC, now known as MVP Mortgage (“MVP Mortgage”), a licensed Nevada mortgage broker, which is indirectly wholly owned by Mr. Shustek.

Pursuant to a management agreement, our manager is responsible for managing our operations and implementing our business strategies on a day-to-day basis.  Consequently, our operating results are dependent to a significant extent upon our manager’s ability and performance in managing our operations and servicing our loans.




Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC (“Fund I”) and Vestin Fund III, LLC (“Fund III”).  VRM I has investment objectives similar to ours, and Fund III is in the process of an orderly liquidation of its assets.

During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services.  Strategix Solutions also provides accounting and financial reporting services to VRM I, Fund III and MVP REIT.  Our CFO and other members of our accounting staff are employees of Strategix Solutions.  Strategix Solutions is managed and owned by our CFO.  As used herein, “management” means our manager, its executive officers and the individuals at Strategix Solutions who perform accounting and financial reporting services on our behalf.

In December 2013, we entered into a membership interest transfer agreement with MVP Capital Partners, LLC (“MVP Capital”) pursuant to which we increased our ownership interest from 40% to 60% in MVP Advisors, the manager of MVP REIT, Inc. At the same time, VRM I acquired from MVP Capital the remaining 40% interest in MVP Advisors.  Pursuant to the transfer agreement, we and VRM I did not pay any up-front consideration for the acquired interest but are responsible for our proportionate share of future expenses of MVP Advisors. In recognition of MVP Capital’s substantial investment in MVP Advisors for which MVP Capital received no up-front consideration, the transfer agreement further provides that once we and VRM I have been repaid in full for any capital contributions to MVP Advisors or for any expenses advanced on MVP Advisors’ behalf (“Capital Investment”), and once we and VRM I have received an annualized return on our Capital Investment of 7.5%, then MVP Capital will receive one-third of the net profits of MVP Advisors. MVP REIT is a SEC-registered, non-traded REIT that seeks to invest predominantly in parking facilities located throughout the United States and loans secured by real estate as its core assets.

Segments

We currently are authorized to operate three reportable segments, investments in real estate loans, investments in real property and investment in a real estate management company.  As of December 31, 2014, the Company operates all segments.

Our objective is to invest approximately 97% of our assets in real estate loans and real estate related investments, while maintaining approximately 3% as a working capital cash reserve.

The consolidated financial statements include the accounts of VRM II; Building A, LLC, Building C, LLC, Wolfpack Properties, LLC; Devonshire, LLC; SE Properties, LLC; ExecuSuites, LLC;  and MVP Realty Advisors, LLC (“MVP Advisors”) , as well as the Company’s assets that have been sold during 2014.  All significant intercompany transactions and balances have been eliminated in consolidation.
 
REAL ESTATE LOAN STRATEGIES

As of December 31, 2014, our loans were in the following states: California, Nevada, and Ohio.  The loans we invest in are selected for us by our manager from among loans originated by affiliated or non-affiliated mortgage brokers.  When a mortgage broker originates a loan for us, that entity identifies the borrower, processes the loan application, brokers and sells, assigns, transfers or conveys the loan to us.  We believe that our loans are attractive to borrowers because of the expediency of our manager’s loan approval process, which takes about ten to twenty days.

As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans has been higher than those generally experienced in the mortgage lending industry.  Because of our willingness to fund riskier loans, borrowers are generally willing to pay us an interest rate that is above the rates generally charged by other commercial lenders.


 
Acquisition and Investment Policies

Generally, the collateral on our real estate loans is the real property that the borrower is purchasing or developing, together with a guarantee from the principal owners of the borrower.  We sometimes refer to these real properties as the security properties.  While we may invest in other types of loans, most of the loans in which we invest have been made to real estate developers.

Our real estate investments are not insured or guaranteed by any governmental agency.

Our manager continuously evaluates prospective investments, selects the loans in which we invest and makes all investment decisions on our behalf.  In evaluating prospective real estate loan investments, our manager considers such factors as the following:

 
·
The ratio of the amount of the investment to the value of the property by which it is secured, or the loan-to-value ratio;

 
·
The potential for capital appreciation or depreciation of the property securing the investment;

 
·
Expected levels of rental and occupancy rates, if applicable;

 
·
Potential for rental increases, if applicable;

 
·
Current and projected revenues from the property, if applicable;

 
·
The status and condition of the record title of the property securing the investment;

 
·
Geographic location of the property securing the investment; and

 
·
The financial condition of the borrowers and their principals, if any, who guarantee the loan.

Our manager may obtain our loans from affiliated or non-affiliated mortgage brokers.  We may purchase existing loans that were originated by third party lenders or brokered by affiliates to facilitate our purchase of the loans.  Our manager or any affiliated mortgage broker will sell, assign, transfer or convey the loans to us without a premium, but may include its service fees and compensation.

Real Estate Loans to Affiliates

We will not invest in real estate loans made to our manager or any of our affiliates.  However, we may acquire an investment in a real estate loan payable by our Manager when our Manager has assumed the obligations of the borrower under that loan through a foreclosure on the property.

Investment of Loans From our Manager and Its Affiliates

In addition to those loans our manager selects for us, we invest in loans that were originated by affiliates as long as the loan(s) otherwise satisfies all of our lending criteria.  However, we will not acquire a loan from or sell a loan to a real estate program in which our manager or an affiliate has an interest except in compliance with applicable NASAA Guidelines or as otherwise approved by the independent members of our board of directors.


 
Types of Loans We Invest In

We primarily invest in loans that are secured by first or second trust deeds on real property.  Such loans fall into the following categories: raw and unimproved land, acquisition and development, construction, commercial property and residential loans.  Investments in loans will be determined by our manager pursuant to the terms of the Management Agreement.  The actual percentages invested among the various loan categories may vary as a result of changes in the size of our loan portfolio.

Collateral

Each loan is secured by a lien on either a fee simple or leasehold interest in real property as evidenced by a first deed of trust or a second deed of trust.

Prepayment Penalties and Exit Fees

Generally, the loans we invest in will not contain prepayment penalties but may contain exit fees payable when the loan is paid in full, by the borrower, to our manager or its affiliates as part of their compensation.  If interest rates decline, the amount we can charge as interest on our loans will also likely decline.  Moreover, if a borrower should prepay obligations that have a higher interest rate from an earlier period, we will likely not be able to reinvest the funds in real estate loans earning that higher rate of interest.  In the absence of a prepayment fee, we will receive neither the anticipated revenue stream at the higher rate nor any compensation for its loss.  As of December 31, 2014 none of our loans had a prepayment penalty or exit fee.  Depending upon the amount by which lower interest rates are available to borrowers, the amount of the exit fees may not be significant in relation to the potential savings borrowers may realize as a result of prepaying their loans.

Extensions to Term of Loan

Our original loan agreements generally permit extensions to the term of the loan by mutual consent.  Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing.  Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan.  In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal.

Interest Reserves

We may invest in loans that include a commitment for an interest reserve, which is usually established at loan closing.  The interest reserve may be advanced by us or other lenders with the amount of the borrower’s indebtedness increased by the amount of such advances.

Balloon Payment

As of December 31, 2014, most of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term.  There are no specific criteria used in evaluating the credit quality of borrowers for real estate loans requiring balloon payments.  Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due.  As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due.  To the extent that a borrower has an obligation to pay real estate loan principal in a large lump sum payment, its ability to repay the loan may be dependent upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial amount of cash.  As a result, these loans can involve a higher risk of default than loans where the principal is paid at the same time as the interest payments.




REAL ESTATE INVESTMENT STRATEGIES

As of December 31, 2014, we had investments in six real estate properties consisting of office buildings. These properties are located in Nevada. In addition, we may invest in other real property, including but not limited to, office buildings, shopping centers, business and industrial parks, manufacturing facilities, multifamily properties, warehouses and distribution facilities, storage facilities, parking facilities, motel and hotel properties and recreation and leisure properties. We will not invest in unimproved land (although we may invest in loans secured by unimproved land) or construction or development of properties. We intend to lease properties owned by us and to hold properties until such time as we believe it is the optimal time to capitalize on the capital appreciation of our properties.
 
We invest principally in properties that generate current income.  Potential gain on sale of appreciated properties will be a secondary objective.

Because we hold a small number of properties at this time, we have higher fixed operating expenses as a percentage of gross income. In addition, our operating results and amounts available for distributions to stockholders are at greater risk of being affected by, and the value of your investment will vary more widely with, the performance of any one or more of the properties in our portfolio.
 
Maximizing Value of Acquired Properties

We seek to reposition properties that we acquire through strategic renovation and, where appropriate, re-tenanting such properties.  Repositioning of properties may be accomplished by (1) stabilizing occupancy; (2) upgrading and renovating existing structures; and (3) investing significant efforts in recruiting tenants whose goods and services meet the needs of the surrounding neighborhood.  [We currently do not intend to engage in significant development or redevelopment of properties as the costs of development and redevelopment may exceed the cost of properties that we acquire.  In addition, we seek to acquire properties that present strong characteristics that we believe are essential for a successful real estate investment.

Leasing

The terms and conditions of any lease we enter into with our tenants may vary substantially. However, we expect that our leases will conform to the standard market practices in the geographic area where the property is located. We expect to execute new tenant leases and tenant lease renewals, expansions and extensions with terms that are dictated by the current market conditions. If it is economically practical, we may verify the creditworthiness of each tenant. If we verify the creditworthiness of each tenant, we may use industry credit rating services for any guarantors of each potential tenant. We may also obtain relevant financial data from potential tenants and guarantors, such as income statements, balance sheets and cash flow statements. We may require personal guarantees from shareholders of our corporate tenants.  However, there can be no guarantee that we will be able to identify suitable tenants, or that the tenants selected will not default on their leases or that we can successfully enforce any guarantees.  Disruptions in the real estate and financial markets and deteriorating economic conditions could increase vacancy rates for certain classes of commercial property, including office properties, due to increased tenant delinquencies and/or defaults under leases, generally lower demand for rentable space, as well as potential oversupply of rentable space. We will incur expenses, such as for maintenance costs, insurance costs and property taxes, even though a property is vacant. The longer the period of significant vacancies for a property, the greater the potential negative impact on our revenues and results of operations.

Financing Sources

We will seek financing from a variety of sources to fund our potential acquisitions.  Such sources may include cash on hand, cash flow from operating activities and cash proceeds from any public offering or private placement of equity or debt securities.  We may also seek to obtain a revolving credit facility and other secured or unsecured loans to fund acquisitions.  We cannot provide any assurance that we will be successful in obtaining any financing for all or any of our potential acquisitions.


 
Borrowing

We may incur indebtedness.  Our indebtedness should not exceed 70% of the fair market value of our real estate loans and real estate investments.  This indebtedness may be with recourse to our assets.

Competition

We have significant competition with respect to both our acquisition of real property and our mortgage lending business.  Our competitors include REITs, insurance companies, commercial banks, private investment funds, hedge funds, specialty finance companies and other investors, many of which have significantly greater resources than us. We may not be able to compete successfully for investments. In addition, the number of entities and the amount of funds competing for suitable investments may increase. If we pay higher prices for investments our returns will be lower and the value of our assets may not increase or may decrease significantly below the amount we paid for such assets.
 
We will compete with numerous other persons while seeking to attract tenants to real property we acquire. These persons or entities may have greater experience and financial strength than us. There is no assurance that we will be able to attract tenants on favorable terms, if at all. For example, our competitors may be willing to offer space at rental rates below our rates, causing us to lose existing or potential tenants and pressuring us to reduce our rental rates to retain existing tenants or convince new tenants to lease space at our properties. Each of these factors could adversely affect our results of operations, financial condition, value of our investments and ability to pay distributions.

Regulation

We are managed by Vestin Mortgage, subject to the oversight of our board of directors, pursuant to the terms and conditions of our management agreement.  MVP Mortgage, an affiliate of Vestin Mortgage, operates as a mortgage broker and is subject to extensive regulation by federal, state and local laws and governmental authorities.  Mortgage brokers we may use conduct their real estate loan businesses under a license issued by the State of Nevada Mortgage Lending Division.  Under applicable Nevada law, the division has broad discretionary authority over the mortgage brokers’ activities, including the authority to conduct periodic regulatory audits of all aspects of their operations.

We, our manager, and certain affiliates are also subject to the Equal Credit Opportunity Act of 1974, which prohibits creditors from discriminating against loan applicants on the basis of race, color, sex, age or marital status, and the Fair Credit Reporting Act of 1970, which requires lenders to supply applicants with the name and address of the reporting agency if the applicant is denied credit.  We are also subject to various other federal and state securities laws regulating our activities.  In addition, our manager is subject to the Employee Retirement Income Security Act of 1974.

The NASAA Guidelines have been adopted by various state agencies charged with protecting the interests of investors.  Administrative fees, loan fees, and other compensation paid to our manager and its affiliates would be generally limited by the NASAA Guidelines.  These Guidelines also include certain investment procedures and criteria, which are required for new loan investments.  We are not required to comply with NASAA Guidelines; however, we voluntarily comply with applicable NASAA Guidelines unless a majority of our unaffiliated directors determines that it is in our best interest to diverge from such NASAA Guidelines.

Because our business is regulated, the laws, rules and regulations applicable to us are subject to modification and change.  There can be no assurance that laws, rules or regulations will not be adopted in the future that could make compliance much more difficult or expensive, restrict our ability to invest in or service loans, further limit or restrict the amount of commissions, interest and other charges earned on loans, or otherwise adversely affect our business or prospects.




Employees

We have 25 employees through our majority owned subsidiary MVP Realty Advisors.  Our manager has provided and will continue to provide most of the employees necessary for our operations, not related to MVP Realty Advisors except as described in this report regarding Strategix Solutions, LLC.  As of December 31, 2014, the Vestin entities had a total of 6 full-time and no part-time employees.  Except as hereinafter noted, all employees are at-will employees and none are covered by collective bargaining agreements.  John Alderfer, our former CFO, is a party to an employment, non-competition, confidentiality and consulting contract with Vestin Group, Inc., through December 31, 2016.

During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services.  Strategix Solutions also provides accounting and financial reporting services to VRM I, Fund III and MVP REIT.  Our CFO and other members of our accounting staff are employees of Strategix Solutions.  Strategix Solutions is managed and owned by our CFO, Ms. Gress.  As of December 31, 2014, Strategix Solutions dedicates to us a total of three full time employees.

We believe that our success depends, in large part, upon our manager and its affiliates’ ability to retain highly skilled managerial, operational and marketing professionals. Our executive officers and our manager’s key real estate, finance and securities professionals are also officers, directors, managers and/or key professionals of VRM I and other affiliated entities.  Accordingly, they will face conflicts of interest relating to performing services on our behalf and such conflicts may not be resolved in our favor.  Our manager and other affiliated entities have and will continue to receive substantial fees from us, which were not determined at arms’ length. These fees could influence the advice given to us by the key personnel of our manager and its affiliates.

Available Information

Our Internet website address is www.vestinrealtymortgage2.com.  We make available free of charge through http://phx.corporate-ir.net/phoenix.zhtml?c=193758&p=irol-sec our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practical after such material is electronically filed with or furnished, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, to the United States Securities and Exchange Commission (“SEC”).  Further, a copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.  Information on the operations of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.  The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.  Information contained on our website does not constitute a part of this Report on Form 10-K.

PROPERTIES

Our manager shares office facilities through a sublease, in Las Vegas, Nevada, with its affiliate, Vestin Group.  In March 2010, Vestin Group entered into a ten–year lease agreement for office facilities in Las Vegas, Nevada which we hold a 72% ownership interest.
Investments in Real Estate

The following table provides information regarding each of the properties we owned an interest in as of December 31, 2014:

 Property Description  Location(s)
Year Built
Leasable Square Feet
Acquisition Closing Date
Aggregate Purchase Price
Percentage Owned
Occupancy at December 31, 2014
Wolfpack Properties LLC single-tenant office building
Las Vegas, Nevada
2008
22,000
04/30/14
$6,500,000
72%
100.00%
Building C office building
Las Vegas, Nevada
2008
47,500
07/31/14
$15,000,000
72%
88.57%
Building A office building
Las Vegas, Nevada
2008
47,500
08/29/14
$15,000,000
72%
95.55%
Devonshire office building
Las Vegas, Nevada
2008
22,000
04/30/14
$6,400,000
72%
75.76%
SE Properties office building
Las Vegas, Nevada
2008
22,000
04/30/14
$6,100,000
72%
100.00%
ExecuSuites office building
Las Vegas, Nevada
2008
22,000
04/30/14
$6,100,000
72%
76.44%

LEGAL PROCEEDINGS

Please refer to Note Q - Legal Matters Involving The Manager and Note R - Legal Matters Involving The Company in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K for information regarding legal proceedings, which discussion is incorporated herein by reference.

MINE SAFETY DISCLOSURES

None.

PART II

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded on the Nasdaq Global Select Market under the symbol VRTB and began trading on May 1, 2006.  The price per share of common stock presented below represents the highest and lowest sales price for our common stock on the Nasdaq Global Select Market.

2013
 
High
   
Low
 
             
First Quarter
  $ 6.40     $ 4.32  
Second Quarter
  $ 10.60     $ 4.32  
Third Quarter
  $ 8.16     $ 5.88  
Fourth Quarter
  $ 8.76     $ 6.24  

2014
 
High
   
Low
 
             
First Quarter
  $ 7.40     $ 5.00  
Second Quarter
  $ 6.33     $ 3.82  
Third Quarter
  $ 6.37     $ 4.20  
Fourth Quarter
  $ 5.25     $ 3.00  

Holders

As of March 30, 2015, there were approximately 1,068 holders of record of 2,578,420 shares of our common stock.

 
Dividend Policy

During June 2008, our Board of Directors decided to suspend the payment of dividends.  No dividends were declared during the years ended December 31, 2014 or 2013.  In light of our accumulated loss, we do not expect to pay dividends in the foreseeable future.

Recent Sales of Unregistered Securities

None

Equity Compensation Plan Information

None

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In October, 2014, our board agreed to increase the amount available to us to repurchase our stock by $500,000.  The Board had previously granted management the authority to repurchase up to $10,000,000 worth of our stock.

The following is a summary of our stock acquisitions during the year ended December 31, 2014, as required by Regulation S-K, Item 703.

Period
 
(a) Total Number of Shares Purchased
   
(b) Average Price Paid per Share
   
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
 
January 1 – January 31, 2014
    --     $ --       --     $ 191,773  
February 1 – February 28, 2014
    --       --       --       191,773  
March 1 – March 31, 2014
    --       --       --       191,773  
April 1 – April 30, 2014
    --       --       --       191,773  
May 1 – May 31, 2014
    --       --       --       191,773  
June 1 – June 30, 2014
    20,750       5.15       20,750       171,023  
July 1 – July 31, 2014
    13,064       5.04       13,064       157,959  
August 1 – August 31, 2014
    29,660       4.68       29,660       128,299  
September 1 – September 30, 2014
    20,169       5.57       20,169       108,130  
October 1 – October 31, 2014
    --       --       --       608,130  
November 1 – November 30, 2014
    14,472       5.07       14,472       534,789  
December 1 – December 31, 2014
    27,594       5.05       27,594       395,615  
Total
    125,709     $ 5.07       125,706     $ 395,615  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a financial review and analysis of our financial condition and results of operations for the years ended December 31, 2014 and 2013. This discussion should be read in conjunction with our financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this annual report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see “Special Note Regarding Forward-Looking Statements” above for a description of some of these risks and uncertainties.


 
RESULTS OF OPERATIONS

OVERVIEW

Our investment strategy is to invest substantially in a portfolio of real estate secured loans (including first and second mortgage loans, mezzanine loans, bridge loans, convertible mortgages, variable interest rate real estate secured loans, where a portion of the return is dependent upon performance-based metrics and other loans related to real estate), and direct investments in real property that meet our investment objectives.  We have recently increased our investments in office buildings.  In addition, we invest in companies that manage real estate or mortgage investment programs.

As of December 31, 2014, we have acquired, along with affiliated entities, six properties of which our share of the purchase price totaled $15.4 million, including closing costs.  During the year ended December 31, 2014, we funded nine loans totaling approximately $14.3 million.  During the year ended December 31, 2013, we funded six loans totaling approximately $8.1 million.  As of December 31, 2014, our loan-to-value ratio was 53.03%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals.

On January 14, 2014, we, VRM I and MVP REIT sold MVP PF Baltimore 2013, LLC to a third party for $1,550,000 which resulted in a nominal loss. On April 1, 2014, MVP REIT exercised the Purchase Right to acquire our and VRM I’s interest in five parking facilities and our interest in a storage facility, in each case, net of the assumed debt secured by the real estate. In exchange, we and VRM I received MVP REIT’s interest in four office properties, net of the assumed debt secured by the real estate. The difference between the net amount of the assets exchanged was paid in cash. Following this transaction, MVP REIT holds a 100% interest in the five parking facilities and storage facility. We and VRM I together hold 100% interest in the four office properties.  These transferred properties have been reported as Discontinued Operations in the accompanying statement of operations.  See “Note E – Assets held for sale” to the financial statements included in this Annual Report for more information regarding the property exchanges.

During March 2014, we acquired a 42% interest in Building C, LLC whose sole asset is an office property located in Las Vegas, NV from MVP REIT.  During July 2014, we and VRM I entered into an agreement to acquire the remaining 58% interest in Building C, LLC and 100% interest in Building A, LLC whose sole asset is an office building also located in Las Vegas, NV from MVP REIT. The cash consideration, net of assumed debt of approximately $16.9 million, totals approximately $10.3 million, of which our portion is approximately $3.7 million.  On July 31, 2014, we and VRM I completed the acquisition of the remaining 58% interest in Building C, LLC. The acquisition of the interests in Building A, LLC was completed on August 29, 2014. The purchase price for both buildings is equal to the amount paid by MVP to acquire the buildings as all of the buildings were acquired by MVP within the past twelve (12) months. No commissions were paid in connection with the purchase.

As of December 31, 2014, we have made loans of approximately $7.7 million to our 60% owned subsidiary, MVP Advisors, the manager of MVP REIT.  Our ownership of MVP Advisors increased from 40% to 60% during December 2013. MVP REIT is a SEC-registered, non-traded REIT that seeks to invest predominantly in parking facilities located throughout the United States and loans secured by real estate as its core assets.  We believe MVP Advisors has the opportunity to generate fees for the services it will render to MVP REIT.  However, MVP REIT is currently seeking to raise funds through its publicly registered offering and the fees paid to date to MVP Advisors have not been significant.  We may not realize interest income from the loan to MVP Advisors or any return on our investment in MVP Advisors until it is able to generate sufficient fees to service the interest on our loan and generate a return on our investment. On March 20, 2014, our board of directors agreed to continue funding MVP Advisors.  We recorded an impairment of this investment due to uncertainty as to when we will be repaid the amounts loaned.



 
Our financial results, including the sources of our revenues and expenses, for the year ended December 31, 2014 reflect, in significant part, the shift in our investment focus from real estate secured loans to direct investments in real estate and investments in a real estate management company.  For example, we had no rental income in 2013, but in 2014, it accounted for more than 50% of our total revenues as we redeploy assets from loans to investments in real estate.  Similarly, our interest expense increased significantly from $5,000 in 2013 to approximately $850,000 in 2014, as mortgage loan payments became due following our increase in real estate investments.  So long as such real estate investments remain part of our investment portfolio, we would expect that, in the near term, rental income will continue to be a significant source of revenue and interest expense will make up a greater portion of our total expenses.  While we do not anticipate any near term change in the composition of our revenues, we may, from time to time, decide to sell one or more of our investments, including our real property investments, and redeploy those assets in investments in real estate secured loans, direct investments in real property or other real property related investments.  Our advisor fee income related to our investment in MVP Advisors may become a more significant source of revenues in the future, depending upon the level of success achieved by MVP Advisors in its management of MVP REIT.

SUMMARY OF FINANCIAL RESULTS

Comparison of operating results for the year ended December 31, 2014, to the year ended December 31, 2013

Total Revenue:
 
2014
   
2013
   
$ Change
   
% Change
 
Interest income from investment in real estate loans
  $ 979,000     $ 1,151,000     $ (172,000 )     (15 %)
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
    560,000       50,000       510,000       1,020 %
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
    198,000       339,000       (141,000 )     (42 %)
Advisor fee
    379,000       17,000       362,000       2,129 %
Rental revenue
    2,661,000       --       2,661,000       100 %
            Total
  $ 4,777,000     $ 1,557,000     $ 3,220,000       207 %

Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans.  There was a net decrease in interest income due to reduction in loan portfolio in 2014 from 2013.  As we redeploy assets from loans to investments in real estate, we expect to recognize a lower interest income from investment in real estate loans in future periods than we have in previous periods. As an offset, we anticipate that as we increase our investments in real property, we expect that rental revenues will increase.  In 2014, we also sold a loan with a book value of approximately $2.4 million in consideration of approximately $3.0 million which resulted in the recognition of a gain on sale of real estate loan of approximately $0.6 million.

Advisor fee income is related to MVP Advisors, which advises MVP REIT, Inc. and earns certain fees for these services. Our ownership of MVP Advisors increased from 40% to 60% during December 2013. Our majority ownership of MVP Advisors requires us to consolidate the financial position and results of operations pursuant to GAAP. While we expect our investment in MVP Advisors to ultimately generate a return through management fees payable by MVP REIT to MVP Advisors, such fees may not be significant in the near term as MVP REIT recently commenced operations in December 2012, and in the long term, the amount of such fees will likely be dependent upon the success of MVP REIT’s public offering and its ability to successfully deploy the offering proceeds and operate its business.  During April 2014, MVP REIT exercised the Purchase Right to acquire our and VRM I’s interest in five parking facilities, net of the assumed debt secured by the real estate and our interest in a storage facility: in exchange we and VRM I received MVP REIT’s interest in four office properties, net of the assumed debt secured by the real estate.  During July and August 2014 we acquired two additional office buildings.  As a result of the acquisition of these office properties we realized rental revenues of $2,661,000 for the year ended December 31, 2014.


 
For additional information see Note D – Investments in Real Estate Loans and Note E – Assets Held for Sale of the Notes to the Consolidated Financial Statements included in Part II, Item 8  Financial Statements  of this Annual Report on Form 10-K.

Operating expenses:
 
2014
   
2013
   
$ Change
   
% Change
 
Management fees – related party
  $ 1,098,000     $ 1,089,000     $ 9,000       1 %
Operating and maintenance
    505,000       --       505,000       100 %
Impairment of investment in MVP Realty Advisors
    --       6,162,000       (6,162,000 )     (100 %)
Wages and benefits
    1,784,000       --       1,784,000       100 %
Interest expense
    857,000       5,000       852,000       17,040 %
Acquisition expense
    29,000       55,000       (26,000 )     (47 %)
Depreciation
    594,000       --       594,000       100 %
Forgiveness of debt – related party
    533,000       127,000       406,000       320 %
Professional fees
    1,237,000       1,228,000       9,000       1 %
Consulting
    413,000       191,000       222,000       116 %
Insurance
    267,000       282,000       (15,000 )     (5 %)
Commissions
    722,000       --       722,000       100 %
Travel
    686,000       --       686,000       100 %
Rent
    296,000       --       296,000       100 %
Other
    778,000       321,000       457,000       142 %
            Total
  $ 9,799,000       9,460,000       339,000       4 %

Before the change of ownership of MVP Advisors in December 2013, the Company recognized an impairment on MVP Advisors of approximately $6.2 million.  Certain operating expenses were higher during 2014 primarily due to increase in expenses related to the MVP Advisors consolidation.  During the year ended December 31, 2014, a forgiveness of debt was recognized due to the reduction of liabilities due from MVP REIT to MVP Advisors totaling approximately $0.5 million.

For additional information see  Note F – Investment in and Note Receivable from MVP Realty Advisors, Note E – Assets Held for Sale and Note R – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.

Non-operating income (loss):
 
2014
   
2013
   
$ Change
   
% Change
 
Gain related to recovery of allowance on note payable – related party
    1,774,000       --       1,774,000       100 %
Recovery from settlement with loan guarantor
    78,000       163,000       (85,000 )     (52 %)
Loss on marketable securities – related party
    (120,000 )     --       (120,000 )     100 %
Dividend income
    --       13,000       (13,000 )     (100 %)
Income (loss) on investment in equity method investee
    66,000       (45,000 )     111,000       247 %
Reversal of settlement reserve
    --       374,000       (374,000 )     (100 %)
Gain on sale of marketable securities
    42,000       737,000       (695,000 )     (94 %)
            Total
  $ 1,840,000     $ 1,242,000     $ 598,000       48 %

During the year ended December 31, 2014, we received payments on balances owed from MVP REIT which resulted in a recovery of allowance on note receivable of approximately $1.8 million.  In March 2014 we received a settlement which resulted in recovery from a loan guarantor of approximately $78,000.  During September 2010, we established reserves related to our Nevada Lawsuit settlement.  As of June 30, 2013, management determined that the remaining Nevada Lawsuit settlement reserves of $374,000 are no longer necessary and have recognized this amount as other income.  The purchase and subsequent sale of marketable securities occurred during the year ended December 31, 2014 and 2013, resulting in a gain of approximately $42,000 and $737,000, respectively. During December 2014, management recognized a loss of approximately 120,000 on VRM I’s common stock.

For additional information see Note I – Investment in Marketable Securities, Note G – Investment in Equity Method Investee,  and Note R – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part II, Item 8  Financial Statements  of this Annual Report on Form 10-K.


 
Discontinued operations, net of income taxes:
 
2014
   
2013
   
$ Change
   
% Change
 
Net gain on sale of real estate owned held for sale
  $ 837,000     $ 158,000     $ 679,000       430 %
Expenses related to real estate owned held for sale
    (654,000 )     (501,000 )     (153,000 )     31 %
Recovery from fully impaired real estate held for sale
    2,259,000       954,000       1,305,000       138 %
Income from investment in equity method investee
    20,000       --       20,000       100 %
Income from assets held for sale, net of income taxes
    70,000       100,000       (30,000 )     (30 %)
            Total
  $ 2,532,000     $ 711,000     $ 1,821,000       256 %

Discontinued operations related to properties that have been foreclosed on and are recorded as assets held for sale.  During 2014, we recorded a net loss of approximately $0.1 million on the sale of Baltimore.  In 2014, MVP REIT exercised its Purchase Right to acquire our and VRM I’s interest in the five parking facilities and our interest in a storage facility.   Under the agreement between us, VRM I and MVP REIT, MVP REIT agreed that we and VRM I would receive a 7.5% return on our joint venture investments with MVP REIT. With this return, along with reimbursements of the loss on Baltimore and the incurred acquisition fees, we and VRM I received a greater amount of consideration than what was transferred to MVP REIT.  This transaction resulted in our net gain on sale of real estate owned held for sale of approximately $0.8 million.  During 2013 we recorded net gain of approximately $40,000 related to the sale of HFS in December 2011; $62,000 and $56,000 related to the sale of two REO properties.  During the years ended December 31, 2014 and 2013 we received settlements related to 1701 Commerce for $2.3 million and $1.0 million, respectively.

For additional information see Note J — Real Estate Owned Held For Sale and Note E – Assets Held for Sale of the Notes to the Financial Statements included in Part II, Item 8  Financial Statements  of this Annual Report on Form 10-K.

CAPITAL AND LIQUIDITY

Liquidity is a measure of a company’s ability to meet potential cash requirements, including ongoing commitments to fund lending activities and general operating purposes.  Subject to a 3% reserve, we generally seek to use all of our available funds to invest in real estate assets.  Distributable cash flow generated from such loans is paid out to our stockholders, in the form of a dividend.  We do not anticipate the need for hiring any employees, acquiring fixed assets such as office equipment or furniture, or incurring material office expenses during the next twelve months.  We may pay our manager an annual management fee of up to 0.25% of the aggregate capital received by Fund II and us from the sale of shares or membership units.

During the year ended December 31, 2014, net cash flows used in operating activities were approximately $4.7 million.  Operating cash flows were used for the payment of normal operating expenses such as management fees, accounting fees, legal bills and expenses related to real estate owned held for sale.  Cash flows related to investing activities consisted of cash used for investments in new real estate loans of approximately $14.3 million, investment in real estate of approximately $6.3 million, approximately $1.9 million for purchase of marketable securities and investment in equity method investee of $3.0 million.  In addition, cash flows related to investing activities consisted of cash provided by loan payoffs and sale of investments in real estate loans to third parties of approximately $17.4 million and proceeds from sale of marketable securities of approximately $7.7 million.  Cash flows used in financing activities consisted of purchase of treasury stock of approximately $0.7 million, proceeds from notes payable of approximately $7.8 million and cash for payments on notes payable of approximately $8.2 million.

At December 31, 2014, we had approximately $7.5 million in cash, $0.5 million in marketable securities – related party, and approximately $68.9 million in total assets.  We intend to meet short-term working capital needs through a combination of proceeds from loan payoffs, loan sales, rental revenue, sales of real estate owned held for sale and/or borrowings.  We believe we have sufficient working capital to meet our operating needs during the next 12 months.

We have no current plans to sell any new shares.  Although a small percentage of our shareholders had elected to reinvest their dividends, we suspended payment of dividends in June 2008 and at this time are not able to predict when dividend payments will resume.  Accordingly, we do not expect to issue any new shares through our dividend reinvestment program in the foreseeable future.


 
When economic conditions permit, we may seek to expand our capital resources through borrowings from institutional lenders or through securitization of our loan portfolio or similar arrangements.  No assurance can be given that, if we should seek to borrow additional funds or to securitize our assets, we would be able to do so on commercially attractive terms.  Our ability to expand our capital resources in this manner is subject to many factors, some of which are beyond our control, including the state of the economy, the state of the capital markets and the perceived quality of our loan and real estate portfolios.

During April 2012, we contributed $1,000 for a 40% interest in MVP Advisors. Mr. Shustek, through a wholly owned company named MVP Capital Partners, LLC (“MVP CP”) contributed $1,500 for a 60% interest in MVP Advisors. In December 2013, we and MVP CP entered into a membership interest transfer agreement (the “Transfer Agreement”), dated as of December 19, 2013, pursuant to which we acquired from MVP CP an additional 20% of the membership interests (the “Acquired Interests”) of MVP Advisor. The Company and VRM I now own 60% and 40%, respectively, of the aggregate membership interests of MVP Advisors.

Pursuant to the Transfer Agreement, we did not pay any up-front consideration for the Acquired Interests, but will be responsible for our proportionate share of future expenses of MVP Advisor. In recognition of MVP CP’s substantial investment in MVP Advisor for which MVP CP received no up-front consideration, the Transfer Agreement and the amended operating agreement of MVP Advisor further provide that once we and VRM I have been repaid in full for any capital contributions to MVP Advisor or for any expenses advanced on MVP Advisor’s behalf (“Capital Investment”), and once we and VRM I have received an annualized return on our Capital Investment of 7.5%, then MVP CP will receive one-third of the net profits of MVP Advisor.

Through our interest in MVP Advisor, we have directed, and may continue to direct, a portion of our cash towards development of the business of MVP REIT. As of June 30, 2013, we and MVP CP had loaned approximately $3.6 million and approximately $1.2 million, respectively, to MVP Advisors related to MVP REIT, Inc.  On June 30, 2013, MVP CP decided to forgive the full amount of its $1.2 million loan.  We have not forgiven the balance due from MVP Advisors. However the decision by MVP Advisors to forgive the full amount of its loans created uncertainty as to when we will be repaid the amounts loaned to MVP Advisors. Based on this uncertainty, we determined to treat as fully impaired the balance of this investment and note receivable. During the six months ended June 30, 2014, we provided additional advances to MVP Advisor of $1.0 million.  As of December 31, 2014, we had notes receivable from MVP Advisor of approximately $7.7 million, which amount has been fully allowed for. To further support development of the business of MVP REIT, MVP Advisors also has agreed to waive certain fees and expense reimbursements it otherwise would have been entitled to receive under the terms of its advisory agreement with MVP REIT. MVP Advisors ability to repay the loans and the return on our investment in MVP Advisors will likely depend upon the success of MVP REIT’s public offering and its ability to successfully deploy the offering proceeds. While we expect any such investments to ultimately generate a return through management fees payable by MVP REIT to MVP Advisors, such fees may not be significant in the near term as MVP REIT only recently commenced operations in December 2012, and over the next 12 months, there may be a diminution of our liquid assets.  If MVP REIT is unable to raise sufficient capital in its initial public offering or deploy the capital and operate its business successfully, then our return on our investment in MVP Advisors and the ability of MVP Advisors to repay our loans could be adversely impacted.

We maintain working capital reserves of approximately 3% in cash and cash equivalents, certificates of deposits and short-term investments or liquid marketable securities.  This reserve is available to pay expenses in excess of revenues, satisfy obligations of underlying properties, expend money to satisfy our unforeseen obligations and for other permitted uses of working capital.  As of March 30, 2015, we have met our 3% reserve requirement.

Investments in Real Estate Loans Secured by Real Estate Portfolio

We offer five real estate loan products consisting of commercial property, construction, acquisition and development, land, and residential loans.  The effective interest rates on all product categories range from 7% to 15%.  Revenue by product will fluctuate based upon relative balances during the period.  We had investments in 12 real estate loans, as of December 31, 2014, with a balance of approximately $7.6 million as compared to investments in 13 real estate loans as of December 31, 2013, with a balance of approximately $10.3 million.


 
For additional information on our investments in real estate loans, refer to Note D – Investments In Real Estate Loans of the Notes to the Financial Statements included in Part II, Item 8  Financial Statements of this Annual Report on Form 10-K.

Asset Quality and Loan Reserves

As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures and our losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry.  Problems in the sub-prime residential mortgage market have adversely affected the general economy and the availability of funds for commercial real estate developers.  We believe this lack of available funds has led to an increase in defaults on our loans.  Furthermore, problems experienced in U.S. credit markets from 2007 through 2009 reduced the availability of credit for many prospective borrowers.  While credit markets have generally improved, the commercial real estate markets in some of our principal areas of operation have not recovered, thereby resulting in continuing constraints on the availability of credit in these markets.  These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to pay back our loans.  Thus, we have had to work with some of our borrowers to either modify, restructure and/or extend their loans in order to keep or restore the loans to performing status.  Our manager will continue to evaluate our loan portfolio in order to minimize risk associated with current market conditions.

Real Estate Investments

Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are to be designated as “held for sale” on the balance sheet.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2014, we do not have any interests in off-balance sheet special purpose entities nor do we have any interests in non-exchange traded commodity contracts.

RELATED PARTY TRANSACTIONS

From time to time, we may acquire or sell investments in real estate loans from/to our manager or other related parties pursuant to the terms of our Management Agreement without a premium.  No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments.  The purpose is generally to diversify our portfolio by syndicating loans or investments in real estate, thereby providing us with additional capital to invest in real estate or make additional loans.  For further information regarding related party transactions, refer to Note K – Related Party Transactions of the Notes to the Consolidated Financial Statements included in Part II, Item 8  Financial Statements of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING ESTIMATES

Revenue Recognition

Interest income on loans is accrued by the effective interest method.  We do not accrue interest income from loans once they are determined to be non-performing.  A loan is considered non-performing when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due.


The following table presents a sensitivity analysis, averaging the balance of our loan portfolio at the end of the last six quarters, to show the impact on our financial condition at December 31, 2014, from fluctuations in weighted average interest rate charged on loans as a percentage of the loan portfolio:

Changed Assumption
 
Increase (Decrease) in Interest Income
 
Weighted average interest rate assumption increased by 1.0% or 100 basis points
  $ 117,000  
Weighted average interest rate assumption increased by 5.0% or 500 basis points
  $ 587,000  
Weighted average interest rate assumption increased by 10.0% or 1,000 basis points
  $ 1,174,000  
Weighted average interest rate assumption decreased by 1.0% or 100 basis points
  $ (117,000 )
Weighted average interest rate assumption decreased by 5.0% or 500 basis points
  $ (587,000 )
Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points
  $ (1,174,000 )

The purpose of this analysis is to provide an indication of the impact that the weighted average interest rate fluctuations would have on our financial results.  It is not intended to imply our expectation of future revenues or to estimate earnings.  We believe that the assumptions used above are appropriate to illustrate the possible material impact on the consolidated financial statements.

Allowance for Loan Losses

We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment in our investment in real estate loans portfolio.  Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan.  Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans.  Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses.  Subsequent recoveries of amounts previously charged off are added back to the allowance or included as income.

The following table presents a sensitivity analysis to show the impact on our financial condition at December 31, 2014, from increases and decreases to our allowance for loan losses as a percentage of the loan portfolio:

Changed Assumption
 
Increase (Decrease) in Allowance for Loan Losses
 
Allowance for loan losses assumption increased by 1.0% of loan portfolio
  $ 76,000  
Allowance for loan losses assumption increased by 5.0% of loan portfolio
  $ 382,000  
Allowance for loan losses assumption increased by 10.0% of loan portfolio
  $ 764,000  
Allowance for loan losses assumption decreased by 1.0% of loan portfolio
  $ (76,000 )
Allowance for loan losses assumption decreased by 5.0% of loan portfolio
  $ (382,000 )
Allowance for loan losses assumption decreased by 10.0% of loan portfolio
  $ (764,000 )


 
Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property.  As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the mortgage lending industry.  We, our manager and MVP Mortgage generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.

We may discover additional facts and circumstances as we continue our efforts in the collection and foreclosure processes.  This additional information often causes management to reassess its estimates.  In recent years, we have revised estimates of our allowance for loan losses.  Circumstances that may cause significant changes in our estimated allowance include, but are not limited to:

 
·
Declines in real estate market conditions that can cause a decrease in expected market value;

 
·
Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;

 
·
Lack of progress on real estate developments after we advance funds.  We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances.  After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;

 
·
Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed upon property; and

 
·
Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.

Real Estate Owned Held for Sale

Real estate owned held for sale and other real estate owned includes real estate acquired through foreclosure or deed in lieu and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property’s estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions.  The carrying values of real estate owned held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note P – Recent Accounting Pronouncements of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements  of this Annual Report on Form 10-K.


 
FINANCIAL STATEMENTS


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Vestin Realty Mortgage II, Inc.

We have audited the accompanying consolidated balance sheets of Vestin Realty Mortgage II, Inc. and subsidiaries (“the Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vestin Realty Mortgage II, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

De Joya Griffith, LLC


/s/ De Joya Griffith, LLC
Henderson, NV
March 25, 2015



VESTIN REALTY MORTGAGE II, INC.
 
CONSOLIDATED BALANCE SHEETS
 
   
ASSETS
 
   
December 31, 2014
   
December 31, 2013
 
Assets
           
Cash and cash equivalents
  $ 7,541,000     $ 7,663,000  
Investment in marketable securities
    --       5,658,000  
Investment in marketable securities - related party
    461,000       941,000  
Accounts receivable
    126,000       --  
Interest and other receivables, net of allowance of $0 at December 31, 2014 and $3,197,000 at December 31, 2013
    3,000       5,000  
Notes receivable, net of allowance of $6,543,000 at December 31, 2014 and $6,091,000 at December 31, 2013
    --       --  
Real estate owned held for sale
    --       1,234,000  
Real estate loans, net of allowance for loan losses of $2,450,000 at December 31, 2014 and $2,450,000 at December 31, 2013
    5,187,000       7,849,000  
Investment in equity method investee
    --       1,195,000  
Investment in real estate
               
  Land and improvements
    14,333,000       --  
  Building and improvements
    40,754,000       --  
  Furniture and fixtures
    76,000       --  
  Accumulated depreciation
    (569,000 )     --  
   Total investments in real estate, net
    54,594,000       --  
Escrow fees
    334,000       --  
Deferred rental assets
    141,000       --  
Assets held for sale
    --       13,567,000  
Other assets
    528,000       160,000  
Total assets
  $ 68,915,000     $ 38,272,000  
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Liabilities
               
Accounts payable and accrued liabilities
  $ 703,000     $ 853,000  
Notes payable
    30,994,000       23,000  
Due to related parties
    1,136,000       228,000  
Liabilities related to assets held for sale
    --       25,000  
Total liabilities
    32,833,000       1,129,000  
Commitments and contingencies
               
Stockholders’ equity
               
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued
    --       --  
Treasury stock, at cost, 0 shares at December 31, 2014 and 2013
    --       --  
Common stock, $0.0001 par value; 100,000,000 shares authorized; 2,578,420 shares issued and outstanding at December 31, 2014 and 2,709,174 shares issued and outstanding at December 31, 2013.
    --       --  
Additional paid-in capital
    267,081,000       267,745,000  
Accumulated deficit
    (238,165,000 )     (237,060,000 )
Accumulated other comprehensive income
    --       331,000  
Total stockholders’ equity before non-controlling interest
    28,916,000       31,016,000  
Non-controlling interest
    7,166,000       6,127,000  
Total stockholders’ equity
    36,082,000       37,144,000  
                 
Total liabilities and stockholders’ equity
  $ 68,915,000     $ 38,273,000  
 

The accompanying notes are an integral part of these consolidated financial statements.
 
-20-

 
VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
 For the Years Ended December 31,
 
 
   
2014
   
2013
 
Revenues
           
Interest income from investment in real estate loans
  $ 979,000     $ 1,151,000  
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
    560,000       50,000  
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
    198,000       339,000  
Advisor fee
    379,000       17,000  
Rental revenue
    2,661,000       --  
Total revenues
    4,777,000       1,557,000  
Operating expenses
               
Management fees - related party
    1,098,000       1,089,000  
Operating and maintenance
    505,000       --  
Impairment on MVP Realty Advisors
    --       6,162,000  
Wages and benefits
    1,784,000       --  
Interest expense
    857,000       5,000  
Acquisition expense
    29,000       55,000  
Depreciation
    594,000       --  
Forgiveness of debt – related party
    533,000       127,000  
Professional fees
    1,237,000       1,228,000  
Consulting fees
    413,000       191,000  
Insurance
    267,000       282,000  
Commissions
    722,000       --  
Travel
    686,000       --  
Rent
    296,000       --  
Other
    778,000       321,000  
Total operating expenses
    9,799,000       9,460,000  
Loss from operations
    (5,022,000 )     (7,903,000 )
Non-operating income (loss)
               
Gain related to recovery of allowance on note receivable – related party
    1,774,000       --  
Recovery from settlement with loan guarantor
    78,000       163,000  
Dividend income
    --       13,000  
Income (loss) on investment in equity method investee
    66,000       (45,000 )
Gain on sale of marketable securities
    42,000       737,000  
Loss on marketable securities – related party
    (120,000 )     --  
Reversal of settlement reserve
    --       374,000  
Total other non-operating income, net
    1,840,000       1,242,000  
Provision for income taxes
    --       --  
Loss from continuing operations
    (3,182,000 )     (6,661,000 )
Discontinued operations, net of income taxes
               
Net gain on sale of real estate owned held for sale
    837,000       158,000  
Expenses related to real estate owned held for sale
    (654,000 )     (501,000 )
Income from investment in equity method investee
    20,000       --  
Recovery from fully impaired real estate held for sale
    2,259,000       954,000  
Income from assets held for sale, net of income taxes
    70,000       100,000  
Total income from discontinued operations
    2,532,000       711,000  
Net loss
    (650,000 )     (5,950,000 )
Allocation of income to non-controlling interest – related party
    455,000       44,000  
Net loss attributable to common stockholders
  $ (1,105,000 )   $ (5,994,000 )
Basic and diluted income (loss) per weighted average common share
               
Continuing operations
  $ (1.20 )   $ (2.30 )
Discontinued operations
    0.78       0.23  
Total basic and diluted loss per weighted average common share
  $ (0.42 )   $ (2.07 )
Dividends declared per common share
  $ --     $ --  
Weighted average common shares outstanding
    2,670,143       2,894,514  

The accompanying notes are an integral part of these consolidated financial statements.
 
-21-



VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
 

   
For The Years
Ended December 31,
 
   
2014
   
2013
 
             
Net loss
  $ (650,000 )   $ (5,950,000 )
                 
Unrealized holding gain (loss) on available-for-sale securities – related party
    (341,000 )     322,000  
Unrealized holding gain (loss) on available-for-sale securities – non related party
    10,000        (10,000 )
                 
Comprehensive loss
    (981,000 )     (5,638,000 )
Less: net income attributable to noncontrolling interest
    455,000       44,000  
                 
Comprehensive loss attributable to Vestin Realty Mortgage II, Inc.
  $ (1,436,000 )   $ (5,672,000 )


The accompanying notes are an integral part of these consolidated financial statements.
 
-22-


VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE LOSS
    Treasury Stock     Common Stock                                
   
Shares
   
Amount
   
Shares (1)
   
Amount
   
Additional
Paid-in-
Capital
   
Accumulated Deficit
   
Accumulated Other Comprehensive Income
   
Noncontrolling Interest – Related Party
   
Total
 
Stockholders' Equity at
December 31, 2012
    --     $ --       3,017,451     $ --     $ 270,151,000     $ (231,066,000 )   $ 9,000     $ --     $ 39,094,000  
                                                                         
Net Income (Loss)
    --       --       --       --       --       (5,994,000 )     --       44,000       (5,950,000 )
Unrealized Gain on Marketable Securities - Related Party
    --       --       --       --       --       --       322,000       --       322,000  
Comprehensive Loss
                                                                    (5,628,000 )
Non-controlling interest
    --       --       --       --       --       --       --       6,083,000       6,083,000  
Retire Treasury Stock
    (308,277 )     2,405,000       --       --       (2,406,000 )     --       --       --       --  
Purchase of Treasury Stock
    308,277       (2,405,000 )     (308,277 )     --       --       --       --       --       (2,405,000 )
Stockholders' Equity at
December 31, 2013
    --     $ --       2,709,174     $ --     $ 267,745,000     $ (237,060,000 )   $ 331,000     $ 6,127,000     $ 37,144,000  
                                                                         
Net Income (Loss)
    --       --       --       --       --       (1,105,000 )     --       455,000       (650,000 )
Unrealized Gain on Marketable Securities - Related Party
    --       --       --       --       --       --       (331,000 )     --       (331,000 )
Comprehensive loss
    --       --       --       --       --       --       --       --       (981,000 )
Distributions to non controlling interest
    --       --       --       --       --       --       --       (62,000 )     (62,000 )
Reverse split
    --       --       --       --       (2,000 )     --       --       --       (2,000 )
Non-controlling interest
    --       --       --       --       --       --       --       646,000       646,000  
Retire Treasury Stock
    (130,754 )     663,000       --       --       (662,000 )     --       --       --       --  
Purchase of Treasury Stock
    130,754       (663,000 )     (130,754 )     --       --       --       --       --       (663,000 )
Stockholders' Equity at
December 31, 2014
    --     $ --       2,578,420     $ --     $ 267,081,000     $ (238,165,000 )   $ --     $ 7,166,000     $ 36,082,000  
 
(1) Per share data is based on the average number of shares outstanding during the periods, except for the book value and market price which are based on the information at the end of the periods. All per share data has been adjusted to retroactively reflect the 1 for 4 reverse stock split effected in January 2014.
 
The accompanying notes are an integral part of these consolidated financial statements.
 
-23-


VESTIN REALTY MORTGAGE II, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
   
For the Years
Ended December 31,
 
   
2014
   
2013
 
Cash flows from operating activities:
           
Net loss
  $ (650,000 )   $ (5,950,000 )
Adjustments to reconcile net loss to net cash used in operating activities:
            --  
Gain on sale of real estate owned held for sale
    (837,000 )     (158,000 )
Gain on sale of marketable securities
    (42,000 )     (737,000 )
Loss on marketable securities – related party
    120,000       --  
Loss (income) on equity method investee
    (66,000 )     45,000  
Income from investment in equity method investee – held for sale
    (20,000 )     --  
Gain from recovery from settlement with loan guarantor
    (78,000 )     (50,000 )
Gain related to recovery of allowance on notes receivable – related party
    (1,774,000 )     --  
Forgiveness of debt – related party
    533,000       (127,000 )
Impairment of investment in MVP Realty Advisors
    --       6,104,000  
Recovery from fully impaired real estate held for sale
    (2,259,000 )     (954,000 )
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
    (198,000 )     (339,000 )
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
    (560,000 )     (50,000 )
Depreciation
    579,000       20,000  
Change in operating assets and liabilities:
               
Interest and other receivables
    2,000       17,000  
Accounts receivable
    (66,000 )     --  
Deferred rental assets
    (141,000 )     --  
Assets held for sale, net of liabilities
    242,000       (29,000 )
Due to/from related parties, net
    846,000       548,000  
Escrow fees
    (269,000 )     --  
Deferred gain on sale of Hawaii Funeral Services, LLC
    --       (6,000 )
Other assets
    115,000       157,000  
Accounts payable and accrued liabilities
    (227,000 )     (130,000 )
Net cash used in operating activities
  $ (4,750,000 )   $ (1,639,000 )

The accompanying notes are an integral part of these consolidated financial statements.
 
-24-




VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Cash flows from investing activities:
           
Investments in real estate loans
  $ (14,269,000 )   $ (8,145,000 )
Purchase of investments in real estate loans from:
               
VRM I
    --       (1,200,000 )
Other related parities
    --       (1,000,000 )
Third parities
    (498,000 )     --  
Proceeds from loan payoffs
    6,546,000       18,650,000  
Sale of investments in real estate loans to:
               
VRM I
    2,823,000       --  
MVP REIT
    --       1,500,000  
Third parties
    8,060,000       7,276,000  
Proceeds related to real estate owned held for sale
            1,437,000  
Proceeds from recovery of allowance for loan loss
    560,000       50,000  
Investment in and note receivable from MVP Realty Advisors, LLC
    (1,365,000 )     (4,570,000 )
Investment in assets held for sale
            (1,595,000 )
Investment in equity method investee
    (3,000,000 )     (1,241,000 )
Land improvements
    --       (12,000 )
Purchase of investments in real estate
    (6,263,000 )     --  
Payments on assets transferred, net
    (958,000 )     --  
Payments on purchase of assets
    (212,000 )        
Payment of noncontrolling interest portion of proceeds related to real estate held for sale
    (764,000 )        
Proceeds related to real estate held for sale
    2,552,000       --  
Proceeds from sale of VREO XXV, LLC
    39,000       --  
Proceeds from recovery of fully impaired real estate held for sale
    2,259,000       954,000  
Proceeds on nonrefundable extension fees on real estate owned held for sale
    --       61,000  
Proceeds from note receivable
    198,000       278,000  
Proceeds from settlement with loan guarantor
    78,000       --  
Proceeds from gain related to recovery of allowance for notes receivable – related party
    1,774,000       --  
Additional investment from noncontrolling interest investors
    84,000          
Proceeds from sale of marketable securities
    7,675,000       6,120,000  
Purchase of marketable securities
    (1,946,000 )     (11,068,000 )
Investment in real estate
    --       (5,882,000 )
Net cash provided by investing activities
  $ 3,373,000     $ 1,613,000  
                 
Cash flows from financing activities:
               
Principal payments on notes payable
  $ (8,190,000 )   $ (210,000 )
Proceeds from notes payable
    7,750,000       --  
Proceeds from VRM I
            140,000  
Proceeds from note payable on assets held for sale
    4,143,000       --  
Payment of noncontrolling interest portion of proceeds from note payable
    (1,763,000 )     --  
Distribution to noncontrolling interest portion of office buildings
    (60,000 )     --  
Distribution from real estate owned held for sale
    --       6,000  
Purchase of treasury stock
    (662,000 )     (2,345,000 )
Other
    (2,000 )     --  
Net cash provided by (used in) financing activities
  $ 1,216,000     $ (2,409,000 )
                 
NET CHANGE IN CASH
    (122,000 )     2,435,000  
Cash, beginning of period
    7,663,000       10,098,000  
Cash, end of period
  $ 7,541,000     $ 7,663,000  



 
VESTIN REALTY MORTGAGE II, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 
   
   
For the Years
Ended December 31,
 
   
2014
   
2013
 
Supplemental disclosures of cash flows information:
           
Interest paid
  $ 400,000     $ 5,000  
                 
Non-cash investing and financing activities:
               
Retirement of treasury stock
  $ 662,000     $ 2,406,000  
Note payable relating to prepaid D & O insurance
  $ 262,000     $ 208,000  
Non-controlling interest portion of investment in real estate
  $ --     $ 4,518,000  
Adjustment to accrued interest and related allowance
  $ 175,000     $ (650,000 )
Unrealized loss on marketable securities
  $ 10,000     $ (10,000 )
Unrealized gain on marketable securities - related party
  $ (341,000 )   $ 322,000  

 
Assets
 
Transferred Assets
 
Cash transferred
  $ 1,392,000  
Other assets
    171,000  
Land and improvements
    11,200,000  
Building and improvements
    736,000  
49% Non-controlling interest portion of Red Mountain
    1,208,000  
    Total assets transferred
    14,707,000  
Liabilities
       
Accrued liabilities
    10,000  
Notes payable
    4,278,000  
    Total liabilities transferred
    4,288,000  
Net assets transferred
  $ 10,419,000  

 
Assets
 
Acquired assets
 
Cash
  $ 101,000  
Other assets
    22,000  
Land and improvements
    6,275,000  
Building and improvements
    18,521,000  
Tenant improvements
    165,000  
    Total assets acquired
    25,084,000  
Liabilities
       
Accounts payable and accrued liabilities
    58,000  
Note payable
    14,335,000  
    Total liabilities acquired
    14,393,000  
Acquisition-date fair value of the total consideration acquired
  $ 10,691,000  
 
VESTIN REALTY MORTGAGE II, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014

NOTE A — ORGANIZATION

Vestin Realty Mortgage II, Inc. (“VRM II”, the “Company”, “we”, “us” or “our”) formerly Vestin Fund II, LLC (“Fund II”) invests in loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our management agreement (“Management Agreement”) as mortgage assets (“Mortgage Assets”).  In addition, we invest in, acquire, manage or sell real property and acquire entities involved in the ownership or management of real property.  We commenced operations in June 2001.  References in this report to the “Company,” “we,” “us,” or “our” refer to Fund II with respect to the period prior to April 1, 2006 and to VRM II with respect to the period commencing on April 1, 2006.

We operated as a real estate investment trust (“REIT”) through December 31, 2011.  We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder.  As a REIT, we were required to have a December 31 fiscal year end.  We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012.  Under the Code, we will not be able to make a new election to be taxed as a REIT during the four years following December 31, 2012.  Pursuant to our charter, upon the determination by the Board of Directors that we should no longer qualify as a REIT, the restrictions on transfer and ownership of shares set forth in Article VII of our charter ceased to be in effect and, accordingly, shares of the Company’s stock will no longer be subject to such restrictions.  In connection with the termination of our REIT status, we also amended our stockholders’ rights plan to provide that a stockholder, other than Michael Shustek, may own up to 20% of outstanding shares of common stock, and that Michael Shustek may own up to 35% of outstanding shares of common stock.

Michael Shustek owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, which is our manager (the “manager” or “Vestin Mortgage”). The business of brokerage and placement of real estate loans have been performed by affiliated or non-affiliated mortgage brokers, including Advant Mortgage, LLC (“MVP Mortgage”), a licensed Nevada mortgage broker, which is indirectly wholly owned by Mr. Shustek.

Pursuant to a management agreement, our manager is responsible for managing our operations and implementing our business strategies on a day-to-day basis.  Consequently, our operating results are dependent to a significant extent upon our manager’s ability and performance in managing our operations and servicing our loans.

Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC (“Fund I”) and Vestin Fund III, LLC (“Fund III”).  VRM I has investment objectives similar to ours, and Fund III is in the process of an orderly liquidation of its assets.

The consolidated financial statements include the accounts of VRM II; Building A, LLC, Building C, LLC, Wolfpack Properties, LLC; Devonshire, LLC; SE Properties, LLC; ExecuSuites, LLC;  and MVP Realty Advisors, LLC (“MVP Advisors”) as well as the results of operations for the Company’s assets that have been sold during 2014.  All significant intercompany transactions and balances have been eliminated in consolidation

During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services.  Strategix Solutions also provides accounting and financial reporting services to VRM II and Fund III.  Our CFO and other members of our accounting staff are employees of Strategix Solutions.  Strategix Solutions is owned by our CFO, Ms. Gress.  As used herein, “management” means our manager, its executive officers and the individuals at Strategix Solutions who perform accounting and financial reporting services on our behalf.


 
In December 2013, we entered into a membership interest transfer agreement with MVP Capital Partners, LLC (“MVP Capital”) pursuant to which we increased our ownership interest from 40% to 60% in MVP Advisors, the manager of MVP REIT, Inc. At the same time, VRM I acquired from MVP Capital the remaining 40% interest in MVP Advisors.  Pursuant to the transfer agreement, we and VRM I did not pay any up-front consideration for the acquired interest but will be responsible for our proportionate share of future expenses of MVP Advisors. In recognition of MVP Capital’s substantial investment in MVP Advisors for which MVP Capital received no up-front consideration, the transfer agreement further provides that once we and VRM I have been repaid in full for any capital contributions to MVP Advisors or for any expenses advanced on MVP Advisors’ behalf (“Capital Investment”), and once we and VRM I have received an annualized return on our Capital Investment of 7.5%, then MVP Capital will receive one-third of the net profits of MVP Advisors. MVP REIT is a SEC-registered, non-traded REIT that seeks to invest predominantly in parking facilities located throughout the United States and loans secured by real estate as its core assets.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  In the opinion of management, all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included.

Management Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Investments in Real Estate Loans

We may, from time to time, acquire or sell investments in real estate loans from or to our manager or other related parties pursuant to the terms of our Management Agreement without a premium.  The primary purpose is to either free up capital to provide liquidity for various reasons, such as loan diversification, or place excess capital in investments to maximize the use of our capital.  Selling or buying loans allows us to diversify our loan portfolio within these parameters.  Due to the short-term nature of the loans we make and the similarity of interest rates in loans we normally would invest in, the fair value of a loan typically approximates its carrying value.  Accordingly, discounts or premiums typically do not apply upon sales of loans and therefore, generally no gain or loss is recorded on these transactions, regardless of whether to a related or unrelated party.

Investments in real estate loans are secured by deeds of trust or mortgages.  Generally, our real estate loans require interest only payments with a balloon payment of the principal at maturity.  We have both the intent and ability to hold real estate loans until maturity and therefore, real estate loans are classified and accounted for as held for investment and are carried at amortized cost.  Loans sold to or purchased from affiliates are accounted for at the principal balance and no gain or loss is recognized by us or any affiliate.  Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and are updated, when new appraisals are received or when management’s assessment of the value has changed, to reflect subsequent changes in value estimates.  Such appraisals are generally dated within 12 months of the date of loan origination and may be commissioned by the borrower.

 
The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The Company’s impaired loans include troubled debt restructuring, and performing and non-performing loans in which full payment of principal or interest is not expected.  The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of its collateral.

Loans that have been modified from their original terms are evaluated to determine if the loan meets the definition of a Troubled Debt Restructuring (“TDR”) as defined by ASC 310-40.  When the Company modifies the terms of an existing loan that is considered a TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement.  If the modification calls for deferred interest, it is recorded as interest income as cash is collected.

Allowance for Loan Losses

We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment.  Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan.  Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans.  Actual losses on loans are recorded first as a reduction to the allowance for loan losses.  Generally, subsequent recoveries of amounts previously charged off are recognized as income.

Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property.  As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the real estate lending industry.  We and our manager generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process; there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.

Additional facts and circumstances may be discovered as we continue our efforts in the collection and foreclosure processes.  This additional information often causes management to reassess its estimates.  In recent years, we have revised estimates of our allowance for loan losses.  Circumstances that have and may continue to cause significant changes in our estimated allowance include, but are not limited to:

 
·
Declines in real estate market conditions, which can cause a decrease in expected market value;

 
·
Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;

 
·
Lack of progress on real estate developments after we advance funds.  We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances.  After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;

 
·
Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed property; and

 
·
Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.


 
Discontinued Operations

We have reclassified for all periods presented in the accompanying consolidated statements of operations, the amounts related to discontinued operations and real estate held for sale, in accordance with the applicable accounting criteria.  In addition, the assets and liabilities related to the discontinued operations are reported separately in the accompanying consolidated balance sheets as real estate held for sale, assets held for sale, and liabilities related to assets held for sale.

Real Estate Owned Held for Sale

Real estate owned held for sale (“REO”) includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions.  While pursuing foreclosure actions, we seek to identify potential purchasers of such property.  We generally seek to sell properties acquired through foreclosure as quickly as circumstances permit, taking into account current economic conditions.  The carrying values of REO are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

Management classifies real estate as REO when the following criteria are met:

 
·
Management commits to a plan to sell the properties;

 
·
The property is available for immediate sale in its present condition subject only to terms that are usual and customary;

 
·
An active program to locate a buyer and other actions required to complete a sale have been initiated;

 
·
The sale of the property is probable;

 
·
The property is being actively marketed for sale at a reasonable price; and

 
·
Withdrawal or significant modification of the sale is not likely.

Classification of Operating Results from Real Estate Held for Sale

Generally, operating results and cash flows from long-lived assets held for sale are to be classified as discontinued operations as a separately stated component of net income.  Our operations related to REO are separately identified in the accompanying consolidated statements of operations.

Acquisitions

The Company records the acquired tangible and intangible assets and assumed liabilities of acquisitions of all operating properties and those development and redevelopment opportunities that meet the accounting criteria to be accounted for as business combinations at fair value at the acquisition date. The Company assesses and considers fair value based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates that the Company deems appropriate. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The acquired assets and assumed liabilities for an operating property acquisition generally include but are not limited to: land, buildings and improvements, construction in progress and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market operating leases and ground leases, acquired in-place lease values and tenant relationships, if any.

 
The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings and improvements, tenant improvements, and leasing costs are based upon current market replacement costs and other relevant market rate information.

The fair value of the above-market or below-market component of an acquired in-place operating lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) management's estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease for above-market operating leases and the initial non-cancellable term plus the term of any below-market fixed rate renewal options, if applicable, for below-market operating leases. The amounts recorded for above-market operating leases are included in deferred leasing costs and acquisition-related intangibles, net on the balance sheet and are amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable leases. The amounts recorded for below-market operating leases are included in deferred revenue and acquisition-related liabilities, net on the balance sheet and are amortized on a straight-line basis as an increase to rental income over the remaining term of the applicable leases plus the term of any below-market fixed rate renewal options, if applicable. Our below-market operating leases generally do not include fixed rate or below-market renewal options.

The fair value of acquired in-place leases is derived based on management's assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Factors considered by us in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, current market conditions, and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand at market rates. In estimating costs to execute similar leases, the Company considers leasing commissions, legal and other related expenses. The amount recorded for acquired in-place leases is included in deferred leasing costs and acquisition-related intangibles, net on the balance sheet and amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases. If a lease were to be terminated or if termination were determined to be likely prior to its contractual expiration (for example resulting from bankruptcy), amortization of the related unamortized in-place lease intangible would be accelerated.

The determination of the fair value of any debt assumed in connection with a property acquisition is estimated by discounting the future cash flows using interest rates available for the issuance of debt with similar terms and remaining maturities.

The determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of operating property acquisitions requires us to make significant judgments and assumptions about the numerous inputs discussed above. The use of different assumptions in these fair value calculations could significantly affect the reported amounts of the allocation of our acquisition related assets and liabilities and the related amortization and depreciation expense recorded for such assets and liabilities. In addition, because the value of above and below market leases are amortized as either a reduction or increase to rental income, respectively, our judgments for these intangibles could have a significant impact on our reported rental revenues and results of operations.

Costs directly associated with all operating property acquisitions and those development and redevelopment acquisitions that meet the accounting criteria to be accounted for as business combinations are expensed as incurred. Our acquisition expenses are directly related to our acquisition activity and if our acquisition activity was to increase or decrease, so would our acquisition costs. Costs directly associated with development acquisitions accounted for as asset acquisitions are capitalized as part of the cost of the acquisition. During the year ended December 31, 2014, the Company did not capitalize any such acquisition costs.


 
Impairment of Long Lived Assets

When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.

Cash and Cash Equivalents

Cash and cash equivalents include interest-bearing and non-interest bearing bank deposits, money market accounts, short-term certificates of deposit with original maturities of three months or less, and short-term instruments with a liquidation provision of one month or less.

Revenue Recognition

The Company recognizes interest income from loans on an accrual basis over the expected terms of the loans using the effective interest method.  The Company may recognize fees, discounts, premiums, anticipated exit fees and direct cost over the terms of the loans as an adjustment to the yield.  The Company may recognize fees on commitments that expire unused at expiration.  The Company may recognize interest income from available-for-sale securities on an accrual basis over the life of the investment on a yield-to-maturity basis.

The Company’s revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since some of the Company’s leases will provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease.

The Company will continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company will record an increase in the Company’s allowance for uncollectible accounts or record a direct write-off of the receivable in the Company’s consolidated statements of operations.

MVP Advisors is entitled to receive a monthly asset management fee at an annual rate equal to 0.85% of the fair market value of (i) all assets then held by MVP REIT or (ii) MVP REIT’s proportionate share thereof in the case of an investment made through a joint venture or other co-ownership arrangement, excluding (only for clause (ii)) debt financing obtained by MVP REIT or made available to MVP REIT. The fair market value of real property shall be based on annual “AS-IS”, “WHERE-IS” appraisals, and the fair market value of real estate-related secured loans shall be equal to the face value of the such loan, unless it is non-performing, in which case the fair market value shall be equal to the book value of such loan. The asset management fee will be reduced to 0.75% if MVP REIT is listed on a national securities exchange.  Asset management fees for the year ended December 31, 2014 were approximately $350,000.

MVP Advisors receives a monthly debt financing fee at an annual rate equal to 0.25% of the aggregate debt financing obtained by MVP REIT or made available to MVP REIT, such as mortgage debt, lines of credit, and other term indebtedness, including refinancing’s.  In the case of a joint venture, MVP REIT pays this fee only on MVP REIT’s pro rata share.  Debt financing fees for the year ended December 31, 2014 were approximately $29,000.


 
Advertising Costs

Advertising costs incurred in the normal course of operations are expensed as incurred.  The Company had no advertising expense for the year ended December 31, 2014.

Investments in Real Estate and Fixed Assets

Investments in real estate and fixed assets are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 40 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.

Investment in Marketable Securities

Investment in marketable securities consists of stock in VRM I, a related party.  The securities are stated at fair value as determined by the closing market prices as of December 31, 2014 and 2013.  All securities are classified as available-for-sale.

We are required to evaluate our available-for-sale investment for other-than-temporary impairment charges.  We will determine when an investment is considered impaired (i.e., decline in fair value below its amortized cost), and evaluate whether the impairment is other than temporary (i.e., investment value will not be recovered over its remaining life).  If the impairment is considered other than temporary, we will recognize an impairment loss equal to the difference between the investment’s cost and its fair value.

Basic and Diluted Earnings Per Common Share

Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been exercised.  We had no outstanding common share equivalents during the years ended December 31, 2014 and 2013.

Common Stock Dividends

During June 2008, our Board of Directors decided to suspend the payment of dividends.  Our Board of Directors will closely monitor our operating results in order to determine when dividends should be reinstated; however, we do not expect our Board of Directors to reinstate dividends in the foreseeable future.

Treasury Stock

On March 21, 2007, our Board of Directors authorized the repurchase of up to $10 million worth of our common stock. On November 17, 2014, The Board of Directors authorized the repurchase of an additional $500,000.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  We are not obligated to purchase any shares.  Subject to applicable securities laws, including SEC rule 10b-18, repurchases may be made at such times and in such amounts, as our management deems appropriate.  The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program.  The repurchases will be funded from our available cash.


 
On June 7, 2012, our Board of Directors (“Board”) approved the adoption of a prearranged stock repurchase plan intended to qualify for the safe harbor under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”). Due to the postponement of the merger between VRM I and us, the 10b5-1 plan has been terminated.  We record our treasury stock using the cost method.  Under the Maryland General Corporation Law, shares of its own stock acquired by a corporation constitute authorized but unissued shares.

Segments

We currently are authorized to operate three reportable segments, investments in real estate loans, investments in real property and investment in a real estate management company.  As of December 31, 2014, the Company operates all segments.

Our objective is to invest approximately 97% of our assets in real estate loans and real estate related investments, while maintaining approximately 3% as a working capital cash reserve.

Reclassifications

Amounts listed in connection with assets held for sale, including liabilities related to assets held for sale, in the December 31, 2013 consolidated financial statements have been reclassified to conform to the December 31, 2014 presentation.

Reverse Split

On February 5, 2014, the Company effected a 1 for 4 reverse split of its common stock. All share and per share information in the consolidated financial statements and accompanying notes have been adjusted to retroactively reflect the 1 for 4 reverse stock split.

Principles of Consolidation

Our consolidated financial statements include the accounts of VRM II; Building A, LLC, Building C, LLC, Wolfpack Properties, LLC; Devonshire, LLC;  SE Properties, LLC; ExecuSuites, LLC; and MVP Advisors, as well as the results of operations of the Company’s assets that have been sold during 2014.  All significant intercompany transactions and balances have been eliminated in consolidation.
 
Business Combinations
 
In December 2007, the Financial Accounting Standards Board (FASB) revised the authoritative guidance for business combinations, establishing principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired (including goodwill), the liabilities assumed, and any noncontrolling interest in the acquiree. Subsequently, on April 1, 2009, the FASB amended and clarified certain aspects of its authoritative guidance on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. We apply the FASB authoritative guidance to all business combinations for which the acquisition date is on or after January 1, 2009, and to certain future income tax effects related to our prior business combinations, should they arise.
Non-controlling Interests

The FASB issued authoritative guidance for non-controlling interests in December 2007, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as an unconsolidated investment, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income to be reported at amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest.

Income Taxes

The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements.  Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized.  In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.  A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition.  In the event the Company was to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods.  Also, included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

Financial instruments consist of cash, interest and other receivables, notes receivable, accounts payable and accrued liabilities, due to/from related parties and notes payable.  The carrying values of these instruments approximate their fair values due to their short-term nature.  Marketable securities – related party and investment in real estate loans are further described in Note M – Fair Value.

Financial instruments with concentration of credit and market risk include cash, interest and other receivables, marketable securities - related party, notes receivable, accounts payable and accrued liabilities, due to/from related parties, notes payable, and loans secured by deeds of trust.

We maintain cash deposit accounts and certificates of deposit that, at times, may exceed federally-insured limits.  To date, we have not experienced any losses.  As of December 31, 2014 and December 31, 2013 we had approximately $5.5 and $6.9 million of funds in excess of the federally-insured limits.

As of December 31, 2014, 98% of our loans were loans in which we participated with other lenders, most of whom are our affiliates.


 
As of December 31, 2014, 69% and 27% of our loans were in Nevada and California, respectively, compared to 53% and 28% respectively, at December 31, 2013.  As a result of this geographical concentration of our real estate loans, the continuation of depressed conditions in certain of the local real estate markets in these states has had a material adverse effect on us.

At December 31, 2014, the aggregate amount of loans to our three largest borrowers represented approximately 74% of our total investment in real estate loans.  These real estate loans consisted of commercial and construction loans, secured by properties located in California and Nevada, with a first lien position.  Their interest rates are between 7% and 15%, and the aggregate outstanding balance is approximately $5.7 million.  As of December 31, 2014, our largest loan, totaling approximately $2.4 million is secured by property in Nevada with an interest rate of 15% and is considered non-performing.  The second loan totaling approximately $2.1 million and secured by property in California is a performing loan with an interest rate of 9%. The third loan totaling approximately $1.2 million and secured by property located in Nevada, is a performing loan with an interest rate of 7%.

At December 31, 2013, the aggregate amount of loans to our three largest borrowers represented approximately 67% of our total investment in real estate loans.  These real estate loans consisted of commercial and land loans, secured by properties located in California and Nevada, with a first lien position.  Their interest rates are between 7.75% and 15%, and the aggregate outstanding balance is approximately $6.9 million.  As of December 31, 2013, our largest loan, totaling approximately $2.8 million and secured by property located in California, is a performing loan with an interest rate of 11%.  The second loan is secured by property in Nevada with an interest rate of 15% and is considered non-performing.  The third loan is secured by property in Nevada with an interest rate of 7.75% and is considered performing.

The success of a borrower’s ability to repay its real estate loan obligation in a large lump-sum payment may be dependent upon the borrower’s ability to refinance the obligation or otherwise raise a substantial amount of cash.  With the weakened economy, credit continues to be difficult to obtain and as such, many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have been otherwise adversely impacted.  In addition, an increase in interest rates over the loan rate applicable at origination of the loan may have an adverse effect on our borrower’s ability to refinance.

Common Guarantors

As of December 31, 2014 and 2013, two and five loans totaling approximately $0.5 million and $3.6 million, respectively, representing approximately 6.8% and 34.9%, respectively, of our portfolio’s total value, had a common guarantor.  At December 31, 2014 and 2013 all of these loans were considered performing.

As of December 31, 2014, there were two loans, totaling approximately $1.1 million, representing approximately 14.3%, of our portfolio’s total value, which had a common guarantor.  As of December 31, 2013, these loans did not exist.

NOTE D — INVESTMENTS IN REAL ESTATE LOANS

As of December 31, 2014 and 2013, most of our loans provided for interest only payments with a “balloon” payment of principal payable and any accrued interest payable in full at the end of the term.  As of December 31, 2014 and 2013, three loans had variable interest rates adjusted quarterly at a rate of prime plus 3.30% (6.55% as of December 31, 2014 and 2013). The balance on these loans was approximately $0.3 million as of December 31, 2014 and 2013.

In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time.  At December 31, 2014 and 2013, we had two and no investments in real estate loans that had interest reserves, respectively.



 
Loan Portfolio

As of December 31, 2014, we had five available real estate loan products consisting of commercial, construction, acquisition and development, land and residential.  The effective interest rates on all product categories range from 7% to 15% which includes performing loans that are being fully or partially accrued and will be payable at maturity.  Revenue by product will fluctuate based upon relative balances during the period.

Investments in real estate loans as of December 31, 2014, were as follows:

 
Loan Type  
Number of Loans
   
Balance *
   
Weighted Average Interest Rate
   
Portfolio Percentage
   
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
 
Commercial
    11     $ 5,579,000       10.88 %     73.04 %     43.43 %
Construction
    1       2,058,000       9.00 %     26.96 %     67.63 %
Total
    12     $ 7,637,000       10.37 %     100.00 %     53.03 %

Investments in real estate loans as of December 31, 2013, were as follows:
Loan Type
 
Number of Loans
   
Balance *
   
Weighted Average Interest Rate
   
Portfolio Percentage
   
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
 
                               
Commercial
    10     $ 6,395,000       10.66 %     62.09 %     65.58 %
Land
    3       3,904,000       9.66 %     37.91 %     39.52 %
Total
    13     $ 10,299,000       10.28 %     100.00 %     52.62 %

*
Please see Balance Sheet Reconciliation below.

The “Weighted Average Interest Rate” as shown above is based on the contractual terms of the loans for the entire portfolio including non-performing loans.  The weighted average interest rate on performing loans only, as of December 31, 2014 and 2013, was 10.37% and 10.28%, respectively.  Please see “Non-Performing Loans” and “Asset Quality and Loan Reserves” below for further information regarding performing and non-performing loans.

Loan-to-value ratios are generally based on the most recent appraisals and may not reflect subsequent changes in value and include allowances for loan losses.  Recognition of allowance for loan losses will result in a maximum loan-to-value ratio of 100% per loan.

The following is a schedule of priority of real estate loans as of December 31, 2014 and 2013:

 
 
Loan Type
 
Number of Loans
   
December 31, 2014
Balance*
   
Portfolio
Percentage
   
Number of Loans
   
December 31, 2013 Balance*
   
Portfolio
Percentage
 
First deeds of trust
    11     $ 7,342,000       96.14 %     12     $ 10,004,000       97.13 %
Second deeds of trust
    1       295,000       3.86 %     1       295,000       2.87 %
Total
    12     $ 7,637,000       100.00 %     13     $ 10,299,000       100.00 %

*
Please see Balance Sheet Reconciliation below.


 
The following is a schedule of contractual maturities of investments in real estate loans as of December 31, 2014:

Non-performing and past due loans
  $ 2,450,000  
January 2015 –March 2015
    3,780,000  
April 2015 – June 2015
    1,093,000  
Thereafter
    314,000  
         
Total
  $ 7,637,000  

The following is a schedule by geographic location of investments in real estate loans as of December 31, 2014 and 2013:

   
December 31, 2014 Balance *
   
Portfolio Percentage
   
December 31, 2013 Balance *
   
Portfolio Percentage
 
                         
Arizona
  $ --       --     $ 553,000       5.37 %
California
    2,059,000       26.96 %     2,848,000       27.65 %
Nevada
    5,264,000       68.93 %     5,429,000       52.71 %
Ohio
    314,000       4.11 %     318,000       3.09 %
Texas
    --       --       1,151,000       11.18 %
Total
  $ 7,637,000       100.00 %   $ 10,299,000       100.00 %

*
Please see Balance Sheet Reconciliation below.

Balance Sheet Reconciliation

The following table reconciles the balance of the loan portfolio to the amount shown on the accompanying Consolidated Balance Sheets.

   
December 31, 2014
   
December 31, 2013
 
Balance per loan portfolio
  $ 7,637,000     $ 10,299,000  
Less:
               
Allowance for loan losses (a)
    (2,450,000 )     (2,450,000 )
Balance per consolidated balance sheets
  $ 5,187,000     $ 7,849,000  

 
(a)
Please refer to Specific Reserve Allowance below.

Non-Performing Loans

As of December 31, 2014 and 2013, we had one loan considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due).  This loan is currently carried on our books at a value of $0, net of allowance for loan losses of approximately $2.5 million.  This loan has been placed on non-accrual of interest status.

At December 31, 2014, the following loan types were non-performing:

Loan Type
 
Number Of Non-Performing Loans
   
Balance at
December 31, 2014
   
Allowance for Loan Losses
   
Net Balance at
December 31, 2014
 
Commercial
    1     $ 2,450,000     $ (2,450,000 )