10-K 1 vrta12311410k.htm VESTIN REALTY MORTGAGE I, INC. DECEMBER 31, 2014 10-K vrta12311410k.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 000-51964
Company Logo
VESTIN REALTY MORTGAGE I, INC.
(Exact name of registrant as specified in its charter)

MARYLAND
  
20-4028839
(State or Other Jurisdiction of
  
(I.R.S. Employer
Incorporation or Organization)
  
Identification No.)

8880 WEST 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 Capital 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
  
$
8,619,329
       
 
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
    
1,380,278
       



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 I, Inc. (“VRM I”, the “Company”, “we”, “us”, or “our”) formerly Vestin Fund I, LLC (“Fund I”) 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”).  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 December 1999.  References in this report to the “Company,” “we,” “us,” or “our” refer to Fund I with respect to the period prior to April 1, 2006 and to VRM I with respect to the period commencing on May 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 assets.

Vestin Mortgage is also the manager of Vestin Realty Mortgage II, Inc. (“VRM II”), as the successor by merger to Vestin Fund II, LLC (“Fund II”) and Vestin Fund III, LLC (“Fund III”).  VRM II 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 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.

In December 2013, we acquired a 40% interest in MVP Realty Advisors, LLC (“MVP Advisor”), the manager of MVP REIT, Inc., pursuant to a membership interest transfer agreement, dated as of December 19, 2013, between MVP Capital Partners, LLC (“MVP Capital”) and us.  At the same time, VRM II increased its ownership interest in MVP Advisor from 40% to 60%. Pursuant to the transfer agreement, neither VRM I nor VRM II paid any up-front consideration for the acquired interest but VRM I and VRM II are responsible for our proportionate share of future expenses of MVP Advisor. In recognition of MVP Capital’s substantial investment in MVP Advisor for which MVP Capital received no up-front consideration, the transfer agreement further provides that once we and VRM II 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 II 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 Advisor.  This acquisition was approved by the independent members of our Board of Directors.  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.

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.

Segments

We are currently authorized to operate two reportable segments, investments in real estate loans and investments in real property.  As of December 31, 2014, the Company operates both segments.

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

REAL ESTATE LOAN STRATEGIES

As of December 31, 2014, our loans were in the following states: California and Nevada.  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 had an 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, all 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 real estate consisting of one assisted living community property and minority interests in six real estate properties consisting of office buildings. These properties are located in Oregon and 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, parking facilities, storage facilities, warehouses and distribution facilities, motel and hotel properties and recreation and leisure properties. We will not invest in unimproved land directly (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.

Focus on Strong Property and Submarket Fundamentals

We will seek to acquire properties that present strong characteristics that we believe are essential for a successful real estate investment. These include, among other factors:

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 no employees.  Our manager has provided and will continue to provide most of the employees necessary for our operations, except as described in this report regarding Strategix Solutions, LLC.  As of December 31, 2014, the Vestin entities had a total of six 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., the parent company of our manager, through December 31, 2016.

During April 2009, we entered into an accounting services agreement with Strategix Solutions, a Nevada limited liability company, for the provision of accounting and financial reporting services.  Strategix Solutions also provides accounting and financial reporting services to VRM II and Fund III.  Our CFO and other members of our accounting staff are employees of Strategix Solutions.  Strategix Solutions is owned by our CFO, Ms. Gress.

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 II 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.vestinrealtymortgage1.com.  We make available free of charge through http://phx.corporate-ir.net/phoenix.zhtml?c=193757&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 28% ownership interest.


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

Investments in Real Estate
 
 
Property Description
  
Location(s)
   Aggregate Purchase Price    
Percentage Owned
     Occupancy at December 31, 2014  
 VREO XXV retirement community units  Oregon   $ 4,140,000       100 %     100 %
 
VREO XXV.  During May 2012, we, VRM II and Fund III foreclosed on a loan with a balance of approximately $6.0 million, of which our portion was approximately $4.4 million. The property includes 23 cottage units in a retirement community located in Eugene, Oregon.

During August 2014, we purchased the remaining 26% interest in a VREO XXV from VRM II and Fund III for approximately $1.3 million.

Investments in Real Property reported as Equity Method Investee

Property Description Location(s)
Year Built
Leasable Square Feet
Acquisition Closing Date
 Aggregate PurchasePrice
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
28%
100.00%
  
Building C office building
Las Vegas, Nevada
2008
47,500
07/31/14
$15,000,000
28%
88.57%
  
Building A office building
Las Vegas, Nevada
2008
47,500
08/29/14
$15,000,000
28%
95.55%
  
Devonshire office building
Las Vegas, Nevada
2008
22,000
04/30/14
$6,400,000
28%
75.76%
  
SE Properties office building
Las Vegas, Nevada
2008
22,000
04/30/14
$6,100,000
28%
100.00%
  
ExecuSuites office building
Las Vegas, Nevada
2008
22,000
04/30/14
$6,100,000
28%
76.44%
  

LEGAL PROCEEDINGS

Please refer to Note Q- Legal Matters Involving The Manager and Note P - Legal Matters Involving The Company in Part II, Item 8 Consolidated 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.
 
 
-8-
 
 
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 Capital Market under the symbol VRTA and began trading on June 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 Capital Market.

2014
  
High
    
Low
  
             
First Quarter
   $ 8.00     $ 5.52  
Second Quarter
   $ 6.84     $ 5.44  
Third Quarter
   $ 10.44     $ 5.73  
Fourth Quarter
   $ 6.45     $ 3.43  

2013
  
High
    
Low
  
             
First Quarter
   $ 5.00     $ 4.00  
Second Quarter
   $ 8.76     $ 4.08  
Third Quarter
   $ 8.12     $ 5.92  
Fourth Quarter
   $ 8.20     $ 6.08  

Holders

As of March 31, 2015, there were approximately 298 holders of record of 1,380,278 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 losses, we do not expect our Board of Directors to reinstate 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

The following is a summary of our stock purchases 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 of (or Approximate Dollar Value) of Shares that May Yet Be Purchase Under the Plans or Programs
  
January 1 – January 31, 2014
     --     $ --       --     $ 3,385,269  
February 1 – February 29, 2014
     --       --       --       3,385,269  
March 1 – March 31, 2014
     --       --       --       3,385,269  
April 1 – April 30, 2014
     --       --       --       3,385,269  
May 1 – May 31, 2014
     --       --       --       3,385,269  
June 1 – June 30, 2014
     --       --       --       3,385,269  
July 1 – July 31, 2014
     --       --       --       3,385,269  
August 1 – August 31, 2014
     7,828       6.36       7,828       3,335,525  
September 1 – September 30, 2014
     25,957       7.84       25,957       3,132,562  
October 1 – October 31, 2014
     --       --       --       3,132,562  
November 1 – November 30, 2014
     4,353       5.69       4,353       3,107,772  
December 1 – December 31, 2014
     9,747       6.77       9,747       3,048,599  
Total
     47,885     $ 7.19       47,885     $ 3,048,599  




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

We were formed in May 2006 and our primary business objective at that time was to generate income while preserving principal by investing in real estate loans. At our annual meeting held on December 15, 2011, a majority of the shareholders voted to amend our Bylaws to expand our investment policy to include investments in and acquisition, management and sale of real property or the acquisition of entities involved in the ownership or management of real property.  A majority of the shareholders also voted to amend our charter to change the terms of our existence from its expiration date of December 31, 2019 to perpetual existence. As a result we have begun to acquire, manage, renovate, reposition, sell or otherwise invest in real property or acquire entities involved in the ownership or management of real property. We operated as a REIT through December 31, 2011.  On March 28, 2012, we announced that we have terminated our election to be treated as a REIT under the Code, effective for the tax year ended December 31, 2012.

We believe there is a significant market opportunity to make real estate loans to owners and developers of real property whose financing needs are not met by other real estate lenders.  The loan underwriting standards utilized by our manager and the mortgage brokers we utilize are less strict than those used by many institutional real estate lenders.  In addition, one of our competitive advantages is our ability to approve loan applications more quickly than many institutional lenders.  As a result, in certain cases, we may make real estate loans that are riskier than real estate loans made by many institutional lenders such as commercial banks.  However, in return, we seek a higher interest rate and our manager takes steps to mitigate the lending risks such as imposing a lower loan-to-value ratio.  While we may assume more risk than many institutional real estate lenders, in return, we seek to generate higher yields from our real estate loans.

We will seek to acquire properties that present strong characteristics that we believe are essential for a successful real estate investment. These investments could include a variety of asset types in the United States such as office, parking facilities, retail, industrial, hotels, multi-family, etc., leisure and recreational facilities, etc.  We will 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.

During the year ended December 31, 2014, we funded five loans totaling approximately $7.5 million.  During the year ended December 31, 2013, we funded four loans totaling approximately $2.3 million.  As of December 31, 2014, our loan-to-value ratio was 56.00%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals.  An increase in loan defaults accompanied by declines in real estate values, as evidenced by updated appraisals generally prepared on an “as-is-basis,” will have a material adverse effect on our financial condition and operating results.

 
As of December 31, 2014, we have made loans of approximately $1,425,000 to our 40% owned subsidiary, MVP Advisor, the manager of MVP REIT.  We acquired our ownership interest in MVP Advisor in December 2013 from the sponsor of MVP REIT, MVP Capital. 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 Advisor 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 Advisor have not been significant.  We may not realize interest income from the loan to MVP Advisor or any return on our investment in MVP Advisor until it is able to generate sufficient fees to service the interest on our loan and generate a return on our investment.  We have not forgiven the balance due from MVP Advisor; however the decision by MVP Advisor to forgive certain amounts due from MVP REIT creates uncertainty as to when we will be repaid the amounts loaned to MVP Advisor. Based on this uncertainty, we have determined to fully impair the balance of this investment and note receivable.  During the year ended December 31, 2014, we impaired approximately $1,285,000 of the amounts loaned MVP Advisor.  During the year ended December 31, 2013, we impaired approximately $140,000 of the amounts loaned to MVP Advisor.

On January 14, 2014, we, VRM II and MVP REIT sold MVP PF Baltimore 2013, LLC to a third party for $1,550,000 which resulted in a nominal loss.  As of March 31, 2014, we had invested approximately $4.5 million in real property, which represented a 44% ownership interest in five parking facilities, subject to triple net leases. On April 30, 2014, following MVP REIT’s exercise of the Purchase Right and approval by our Board of Directors along with the Board of Directors for VRM II and MVP REIT, MVP REIT acquired our and VRM II’s interest in the five parking facilities and VRM II’s interest in a storage facility, net of the assumed debt secured by the real estate.  In exchange, we and VRM II 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. As a result of this transaction, MVP REIT holds 100% interest in the five parking facilities and 100% interest in the storage facility. We and VRM II together hold a 100% interest in the four office properties.  The five parking facilities have been reported as Discontinued Operations in the accompanying statement of operations.

During March 2014, VRM II 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 II 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 II 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 acquired within the past twelve (12) months. No commissions were paid in connection with the purchase.

See Note F – Investment in Equity Method Investee and Note Receivable from MVP Realty Advisors to the Consolidated Financial Statements included in Part II, Item 8 Consolidated Financial Statements of this Annual Report on Form 10-K for more information regarding the property exchanges.




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
   $ 409,000     $ 815,000     $ (406,000 )     (50 %)
Gain related to payoff of notes receivable, including
                                
recovery of allowance for doubtful notes receivable
     78,000       657,000       (579,000 )     (88 %)
Rental revenue
     711,000       686,000       25,000       4 %
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
     --       421,000       (421,000 )     (100 %)
            Total
   $ 1,198,000     $ 2,579,000     $ (1,381,000 )     (54 %)

During 2013, our investments in new real estate loans decreased; however, we began investing in a minority ownership of real estate properties and have maintained a significant amount of cash.  During 2014 our loan increased approximately $3.7 million. This increase occurred during the second half of 2014, which resulted in a decrease of interest income from Real Estate Loans compared to 2013.  The loan portfolio balance ranged from $8.7 million to $15.9 million during the first seven months of 2013.  This results in a decrease of interest income for the majority of 2014.  During 2013, we received 60,810 shares of common stock of MVP REIT in consideration of cancellation of certain unsecured notes guaranteed by SERE, Holdings LLC.  The unsecured notes had previously been written off.  The value of the gain was based upon the price charged by MVP REIT for its shares in its ongoing public offering.  The managing member of SERE, Holdings LLC is also the principal manager of L.L. Bradford and was a former officer of our manager from April 1999 through January 2005.  In 2013, we received payoffs on two loans which had an allowance for loan loss which resulted in a recovery of allowance for loan loss of approximately $0.4 million.  There were no similar transactions during 2014.

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

Operating Expenses:
  
2014
    
2013
    
$ Change
    
% Change
  
Management fees – related party
   $ 276,000     $ 276,000     $ --       --  
Provision for loan losses
     --       588,000       (588,000 )     (100 %)
Payroll
     54,000       52,000       2,000       4 %
Impairment of MVP Realty Advisors
     1,285,000       140,000       1,145,000       818 %
Acquisition expense
     1,000       15,000       (14,000 )     93 %
Operations and maintenance
     229,000       300,000       (71,000 )     (24 %)
Depreciation
     126,000       --       126,000       100 %
Interest expense
     2,000       4,000       (2,000 )     (50 %)
Professional fees
     468,000       437,000       31,000       7 %
Insurance
     204,000       215,000       (11,000 )     (5 %)
Consulting
     93,000       95,000       (2,000 )     (2 %)
Other
     186,000       95,000       91,000       96 %
            Total
   $ 2,924,000     $ 2,217,000     $ 707,000       32 %

Operating expenses were 32% higher during the year ended December 31, 2014 than during the year ended December 31, 2013.  During 2014, we impaired amounts we loaned MVP Realty Advisors (“MVP Advisor”) during the year ended December 31, 2014 totaling $1,285,000.  We have not forgiven the balance due from MVP Advisor however the decision by MVP Capital, the sponsor of MVP REIT, to forgive the full amount of its $3.6 million loan to MVP Advisor creates uncertainty as to when we will be repaid the amounts loaned to MVP Advisor. Based on this uncertainty, we have determined to fully impair the balance of this note receivable as of December 31, 2014. Under the terms of the Operating Agreement which governs MVP Advisor, any loans we may make to MVP Advisor must be paid in full and we shall have received distributions of profits equal to our capital contributions prior to MVP CP receiving any distributions from MVP Advisor. We will continue to review this investment and note receivable to determine whether future advances should be funded to MVP Advisor.  During 2013 there was also a provision for loan loss which was necessary due to the decrease in appraised value of a property upon which we held a second trust deed.  No such provision was necessary in 2014

See “Specific Loan Allowance” in Note D – Investments in Real Estate Loans and Note R – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Consolidated Financial Statements of this Annual Report on Form 10-K.

Non-operating income (loss):
  
2014
    
2013
    
$ Change
    
% Change
  
Gain on sale of marketable securities
   $ 1,000     $ 87,000     $ (86,000 )     (99 %)
Loss on sale of marketable securities- related party
     (86,000 )     --       (86,000 )     (100 %)
Dividend income
     40,000       15,000       25,000       167 %
Interest expense
     (54,000 )     --       (54,000 )     (100 %)
Reversal of settlement reserve
     --       16,000       (16,000 )     (100 %)
Recovery from settlement with loan guarantor
     102,000       --       102,000       100 %
Income from investment in equity method investee
     199,000       20,000       179,000       895 %
            Total
   $ 202,000     $ 138,000     $ 64,000       46 %

During the third quarter 2013, we sold shares of a publicly traded company which invests in loan collateralized by real estate for a realized gain of approximately $87,000.  During December 2014, management recognized a loss on VRM II’s stocks held in the amount of approximately $86,000.  During September 2010, we established reserves related to our Nevada Lawsuit settlement.  As of June 30, 2013 management determined that the remaining reserves of $16,000 are no longer necessary and have recognized this amount as a reversal of settlement reserve.  During January 2011, we, VRM II and VF III were awarded unsecured claims up to $3.6 million from a bankruptcy settlement with a guarantor of certain loans. Pursuant to the terms of the settlement we received payment of approximately $0.1 million during the nine months ended September 30, 2014.  No similar transaction occurred in 2013.  In 2014 we acquired a non-controlling interest in six office buildings along with VRM II.  The results of operations related to the non-controlling interest in these properties is recognized as income from investment in equity method investee as part of the non-operating income (loss) included in the statements of operations.

See Note R – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Consolidated 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 held for sale
   $ 196,000     $ 101,000     $ 95,000       94 %
Recovery from 1701 Commerce
     198,000       84,000       114,000       136 %
Income from investment in equity method investee held for sale
     60,000       12,000       48,000       400 %
Expenses related to real estate held for sale
     (89,000 )     (46,000 )     (43,000 )     93 %
            Total
   $ 365,000     $ 151,000     $ 214,000       142 %

During the year ended December 31, 2013 we recorded net gain of approximately $84,000 related to the sale of HFS in December 2011.  Additionally, during the third quarter of 2013, we acquired a non-controlling interest in six parking facilities along with VRM II and MVP REIT.  On January 14, 2014, we, VRM II and MVP REIT sold one of the parking facilities, MVP PF Baltimore 2013, LLC, to a third party for a loss of approximately $5,000.  In March 2014, the board approved the exchange of our interest in the five remaining parking facilities for interests in commercial office buildings; because of this approval the parking facilities have been reclassified as assets held for sale. The exchange was completed on April 30, 2014.  The results of operations related to the non-controlling interest in these properties held for sale is recognized as income from investment in equity method investee held for sale as a part of discontinued operations included in the statements of operations.

See Note F — Investments in Equity Method Investee and Note Receivable from MVP Realty Advisors and Note G – Investment in Equity Method Investee Held for Sale of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Consolidated 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% working capital reserve, we generally seek to use all of our available funds to invest in real estate loans.  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 our aggregate capital received by us and Fund I from the sale of shares or membership units.

During the year ended December 31, 2014, net cash flows provided by operating activities approximated $0.2 million.  Operating cash flows were used for the payment of normal operating expenses such as management fees, accounting fees and legal bills.  Cash flows related to investing activities consisted of cash used by loan investments in new real estate loans of approximately $7.5 million, investment in equity method investee of approximately $3.7 million, investment in VREO XXV of approximately $1.4 million and investment in MVP Advisor of approximately $1.3 million.  In addition, cash flows related to investing activities consisted of cash provided by payoffs and sales to third parties of real estate loans of approximately $3.8 million, proceeds from recovery from 1701 Commerce of approximately $0.7 million, proceeds from investments in equity method investees of approximately $1.2 million and proceeds from the sale of marketable securities of approximately $13,000.  Cash flows used in financing activities consisted of cash for payments on notes payable of approximately $0.2 million to finance our directors’ and officers’ insurance policy, proceeds from note payable of approximately $2.2 million and purchase of treasury stock of approximately $0.3 million.

At December 31, 2014, we had approximately $1.4 million in cash, $1.1 million in liquid marketable securities of related parties and approximately $20.8 million in total assets.  We intend to meet short-term working capital needs through a combination of proceeds from loan payoffs, loan sales, rental income, sales of real estate held for sale and/or borrowings.  We believe we have sufficient working capital to meet our operating needs during the next 12 months.

Our interest in MVP Advisor has required, and may continue to require, us to continue to direct a portion of our cash towards development of the business of MVP REIT, including in the form of loans totaling approximately $1,425,000 as of December 31, 2014.  To further support development of the business of MVP REIT, MVP Advisor 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. The return on our investment in MVP Advisor 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 Advisor, 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 publicly registered offering or deploy the capital and operate its business successfully, then our return on our investment in MVP Advisor and the ability of MVP Advisor to repay our loans could be adversely impacted.  During the year ended December 31, 2014, we impaired approximately $1,285,000 of the amounts loaned MVP Advisor.  During the year ended December 31, 2013, we impaired approximately $140,000 of the amounts loaned to MVP Advisor.

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.

On February 21, 2008, our Board of Directors authorized the repurchase of up to $5 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  During 2013 we used approximately $1,155,000 to acquire 628,206 shares of our common stock.  During 2014 we used approximately $337,000 to acquire 47,885 shares of our common stock.  As of December 31, 2014, we had no treasury stock.  We are not obligated to purchase any additional shares.  Under the Maryland General Corporation Law, shares of its own stock acquired by a corporation constitute authorized but unissued shares

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 met our 3% reserve.

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.  The effective interest rates on all product categories range from 7.0% to 9%. Revenue by product will fluctuate based upon relative balances during the period.

For additional information on our investments in real estate loans, refer to Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Consolidated 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 in the notes to our Consolidated Financial Statements in Part II, Item 8 Consolidated 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
   $ 53,000  
Weighted average interest rate assumption increased by 5.0% or 500 basis points
   $ 266,000  
Weighted average interest rate assumption increased by 10.0% or 1,000 basis points
   $ 533,000  
Weighted average interest rate assumption decreased by 1.0% or 100 basis points
   $ (53,000 )
Weighted average interest rate assumption decreased by 5.0% or 500 basis points
   $ (266,000 )
Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points
   $ (533,000 )

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
   $ 71,000  
Allowance for loan losses assumption increased by 5.0% of loan portfolio
   $ 353,000  
Allowance for loan losses assumption increased by 10.0% of loan portfolio
   $ 706,000  
Allowance for loan losses assumption decreased by 1.0% of loan portfolio
   $ (71,000 )
Allowance for loan losses assumption decreased by 5.0% of loan portfolio
   $ (353,000 )
Allowance for loan losses assumption decreased by 10.0% of loan portfolio
   $ (706,000 )

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 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.

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 Held for Sale

Real estate held for sale 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.  The carrying values of real estate held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

RECENT ACCOUNTING PRONOUNCEMENTS

No new accounting pronouncements have been defined that would materially impact our financial statements.
 
 
-18-
 
 
FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 


 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

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

We have audited the accompanying consolidated balance sheets of Vestin Realty Mortgage I, Inc. and subsidiaries (“the Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (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 I, 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 I, INC.
  
   
CONSOLIDATED BALANCE SHEETS
  
   
ASSETS
  
   
   
December 31, 2014
    
December 31, 2013
  
Assets
            
Cash and cash equivalents
   $ 1,395,000     $ 7,628,000  
Investment in marketable securities - related party
     1,126,000       1,457,000  
Investment in marketable securities
     --       13,000  
Investment in MVP REIT, net of allowance of $1,425,000 as of December 31, 2014 and $140,000 as of December 31, 2013
     --       --  
Investment in equity method investee
     6,932,000       --  
Investment in equity method investee – held for sale
     --       4,515,000  
Interest and other receivables, net of allowance of $0 at December 31, 2014 and 2013
     6,000       4,000  
Notes receivable, net of allowance of $650,000 at December 31, 2014 and $728,000 at December 31, 2013
     --       --  
Real estate held for sale
     --       320,000  
Investment in real estate loans, net of allowance for loan losses of $0 at December 31, 2014 and 2013
     7,063,000       3,365,000  
Investments in real estate and fixed assets
                
Land and improvements
     1,741,000       1,390,000  
Building and improvements
     2,450,000       2,450,000  
Furniture and fixtures
     14,000       12,000  
Total investments in real estate and fixed assets
     4,205,000       3,852,000  
Accumulated depreciation
     (120,000 )     --  
Total investments in real estate and fixed assets, net
     4,085,000       3,852,000  
Loan fees
     67,000       --  
Due from related parties
     --       54,000  
Other assets
     122,000       110,000  
Total assets
   $ 20,796,000     $ 21,318,000  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
  
                 
Liabilities
                
Accounts payable and accrued liabilities
   $ 115,000     $ 74,000  
Due to related parties
     30,000       --  
Notes payable
     2,260,000       18,000  
Total liabilities
     2,405,000       92,000  
                 
Commitments and contingencies
     --       --  
                 
Stockholders' equity
                
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued
     --       --  
Treasury stock, at cost, no shares at December 31, 2014 and 2013
     --       --  
Common stock, $0.0001 par value; 25,000,000 shares authorized; 1,380,278 shares issued and outstanding at December 31, 2014, and 1,428,163 shares issued and outstanding at December 31, 2013
     1,000       1,000  
Additional paid-in capital
     59,725,000       60,062,000  
Accumulated deficit
     (41,335,000 )     (40,137,000 )
Accumulated other comprehensive income
     --       285,000  
Total stockholders' equity before non-controlling interest – related parties
     18,391,000       20,211,000  
  Non-controlling interest – related parties
     --       1,015,000  
Total stockholders’ equity
     18,391,000       21,226,000  
Total liabilities and stockholders' equity
   $ 20,796,000     $ 21,318,000  


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

 
VESTIN REALTY MORTGAGE I, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

   
For the Years Ended
December 31,
  
   
2014
    
2013
  
Revenues
            
Interest income from investment in real estate loans
   $ 409,000     $ 815,000  
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
     78,000       657,000  
Rental revenue
     711,000       686,000  
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
     --       421,000  
Total revenues
     1,198,000       2,579,000  
Operating expenses
                
Management fees - related party
     276,000       276,000  
Provision for loan loss
     --       588,000  
Payroll
     54,000       52,000  
Impairment on MVP Realty Advisors
     1,285,000       140,000  
Acquisition expense
     1,000       15,000  
Operations and maintenance
     229,000       300,000  
Depreciation
     126,000       --  
Interest expense
     2,000       4,000  
Professional fees
     468,000       437,000  
Insurance
     204,000       215,000  
Consulting
     93,000       95,000  
Other
     186,000       95,000  
Total operating expenses
     2,924,000       2,217,000  
Income (loss) from operations
     (1,726,000 )     362,000  
Non-operating income (loss)
                
Gain on sale of marketable securities
     1,000       87,000  
Loss on sale of marketable securities – related party
     (86,000 )     --  
Dividend income
     40,000       15,000  
Interest expense
     (54,000 )     --  
Reversal of settlement reserve
     --       16,000  
Gain related to recovery from settlement with loan guarantor
     102,000       --  
Income from investment in equity method investee
     199,000       20,000  
Total other non-operating income, net
     202,000       138,000  
                 
Provision for income taxes
     --       --  
                 
Income (loss) from continuing operations
     (1,524,000 )     500,000  
                 
Discontinued operations, net of income taxes
                
Net gain on sale of real estate held for sale
     196,000       101,000  
Income from equity method investee held for sale
     60,000       12,000  
Recovery from 1701 Commerce
     198,000       84,000  
Expenses related to real estate held for sale
     (89,000 )     (46,000 )
Total income from discontinued operations
     365,000       151,000  
Net income (loss)
     (1,159,000 )     651,000  
Net income attributable to non-controlling interest – related parties
     39,000       86,000  
Net income (loss) attributable to common stockholders
   $ (1,198,000 )   $ 565,000  
                 
Basic and diluted income (loss) per weighted average common share
                
   Continuing operations
   $ (1.08 )     0.33  
   Discontinued operations
     0.23       0.04  
Total basic and diluted income (loss) per weighted average common share
   $ (0.85 )   $ 0.37  
Dividends declared per common share
   $ --     $ --  
Weighted average common shares
     1,415,953       1,510,437  

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




VESTIN REALTY MORTGAGE I, INC.
 
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME(LOSS)
 
 
 

   
For The Years Ended December 31,
  
   
2014
    
2013
  
             
Net income (loss)
   $ (1,159,000 )   $ 651,000  
                 
Distributions from assets held to non controlling interest entities
     (39,000 )        
Unrealized holding gain on available-for-sale securities
     --       1,000  
Unrealized holding gain (loss) on available-for-sale securities – related parties
     (285,000 )     128,000  
                 
Comprehensive income (loss)
     (1,483,000 )     780,000  
Loss: net income attributable to noncontrolling interest – related party
     39,000       86,000  
                 
Comprehensive income (loss) attributable to Vestin Realty Mortgage I, Inc.
   $ (1,522,000 )   $ 694,000  
                 

The accompanying notes are an integral part of these consolidated financial statements.
-23-
 
  VESTIN REALTY MORTGAGE I, INC.
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME
 
    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
     --     $ --       1,585,215     $ 1,000     $ 61,217,000     $ (40,702,000 )   $ 156,000     $ 1,137,000       21,809,000  
Comprehensive Income:
                                                                        
Net Income
     --       --       --       --       --       565,000       --       86,000       651,000  
Unrealized Gain on Marketable Securities
     --       --       --       --       --       --       1,000       --       1,000  
Unrealized Gain on Marketable Securities - Related Party
     --       --       --       --       --       --       128,000       --       128,000  
Comprehensive Income
     --       --       --       --       --       --       --       --       780,000  
Distribution from assets held to non controlling interest entities
     --       --       --       --       --       --       --       (208,000 )     (208,000 )
Purchase Treasury Stock
     157,052       (1,115,000 )     (157,052 )                                             (1,155,000 )
Retire Treasury Stock
     (157,052 )     1,155,000       --       --       (1,155,000 )     --       --       --       --  
Stockholders' Equity at
December 31, 2013
     --     $ --       1,428,163     $ 1,000     $ 60,062,000     $ (40,137,000 )   $ 285,000     $ 1,015,000       21,226,000  
Comprehensive Income:
                                                                        
Net Income
     --       --       --       --       --       (1,198,000 )     --       39,000       (1,159,000 )
Unrealized Loss on Marketable Securities - Related Party
     --       --       --       --       --       --       (285,000 )     --       (285,000 )
Distribution from assets held to non controlling interest entities
     --       --       --       --       --       --       --       (39,000 )     (39,000 )
Total Comprehensive Income
                                                                     (1,483,000 )
Purchase Treasury Stock
     47,885       (337,000 )     (47,885 )     --       --       --       --       --       (337,000 )
Purchase NCI portion of asset
                                                             (1,015,000 )     (1,015,000 )
Retire Treasury Stock
     (47,885 )     337,000       --       --       (337,000 )     --       --       --       --  
Stockholders' Equity at
December 31, 2014
     --     $ --       1,380,278     $ 1,000     $ 59,725,000     $ (41,335,000 )   $ --     $ --       18,391,000  
(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 on December 8, 2014.
The accompanying notes are an integral part of these consolidated financial statements.
-24-
 

VESTIN REALTY MORTGAGE I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
   
For the Years Ended
December 31,
  
   
2014
    
2013
  
Cash flows from operating activities:
            
Net income (loss)
   $ (1,159,000 )   $ 651,000  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                
Depreciation
     126,000       --  
Amortization
     4,000       --  
Gain on sale of marketable securities
     (1,000 )     (87,000 )
Loss on sale of marketable securities – related party
     86,000       --  
(Gain) loss on sale of real estate held for sale
     (196,000 )     (185,000 )
Dividend income
     (40,000 )     (15,000 )
Impairment on MVP Realty Advisors
     1,285,000       140,000  
Recovery of allowance for doubtful notes receivable included in other income
     (78,000 )     (657,000 )
Provision for loan loss
     --       588,000  
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
     --       (421,000 )
Gain related to recovery from settlement with loan guarantor
     (102,000 )     --  
Income from equity method investee
     (199,000 )     (20,000 )
Income from equity method investee held for sale
     (60,000 )     (12,000 )
Change in operating assets and liabilities:
                
Interest and other receivables
     (2,000 )     12,000  
Due to/from related parties, net
     373,000       (270,000 )
Deferred gain on sale of Hawaii Funeral Services
     --       (33,000 )
Other assets
     158,000       158,000  
Assets held for sale, net of liabilities
     --       (290,000 )
Accounts payable and accrued liabilities
     41,000       (39,000 )
Net cash provided by (used in) operating activities
   $ 236,000     $ (480,000 )
Cash flows from investing activities:
                
Investments in real estate loans
   $ (4,106,000 )   $ (2,317,000 )
Purchase of investments in real estate loans from:
                
VRM II
     (2,823,000 )     --  
Affiliates
     (600,000 )     --  
Proceeds from loan payoffs
     2,838,000       10,568,000  
Proceeds from sale of investments in real estate loans to:
                
VRM II
     --       1,200,000  
MVP REIT
     --       500,000  
Third parties
     992,000       375,000  
Proceeds related to sale of real estate held for sale
     302,000       349,000  
Proceeds from settlement with loan guarantor
     102,000       --  
Proceeds related to real estate held for sale – extension fees
     --       12,000  
Purchase of marketable securities
     --       (2,036,000 )
Proceeds from sale of marketable securities
     13,000       2,111,000  
Proceeds from distributions from investment in equity method investee
     1,219,000       --  
Investment in VREO XXV, LLC
     (1,370,000 )     --  
Proceeds from recovery from 1701 Commerce
     691,000       84,000  
Exchange interest in equtiy method investee - related party
     (382,000 )     --  
Purchase of fixed assets
     (4,000 )     --  
Investment in equity method investees – related party
     (3,759,000 )     (3,107,000 )
Investment in equity method investee – held for sale
     --       (1,376,000 )
Investment in MVP Realty Advisors
     (1,285,000 )     (140,000 )
Proceeds from dividends
     --       5,000  
Proceeds from note receivable
     78,000       123,000  
Net cash provided by (used in) investing activities
   $ (8,094,000 )   $ 6,351,000  

The accompanying notes are an integral part of these consolidated financial statements.
-25-
 


 
VESTIN REALTY MORTGAGE I, INC
  
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
  
 
   
For the Years Ended
December 31,
  
    2014     2013  
Cash flows from financing activities:
            
Principal payments on notes payable
   $ (179,000 )   $ (159,000 )
Proceeds from notes payable
     2,180,000       --  
Proceeds from distribution from assets held for sale
     (39,000 )     589,000  
Purchase of treasury stock
     (337,000 )     (1,155,000 )
Net cash provided by (used in) financing activities
   $ 1,625,000     $ (725,000 )
NET CHANGE IN CASH
     (6,233,000 )     5,146,000  
Cash, beginning of period
     7,628,000       2,482,000  
Cash, end of period
   $ 1,395,000     $ 7,628,000  
 
             
Supplemental disclosures of cash flows information:
            
Interest paid
   $ 56,000     $ 4,000  
                 
Non-cash investing and financing activities:
                
Adjustment to note receivable and related allowance
   $ --     $ 508,000  
Adjustment to allowance for loan losses related to sale and payment of investment in real estate loan
   $ --     $ 350,000  
Retirement of treasury stock
   $ 337,000     $ 1,155,000  
Acquisition of marketable securities – related party from settlement of notes receivable
   $ --     $ (534,000 )
Note payable relating to prepaid D & O insurance policy
   $ 170,000     $ 158,000  
Realized gain on marketable securities
   $ 1,000     $ --  
Unrealized gain on marketable securities
   $ --     $ 1,000  
Unrealized gain (loss) on marketable securities - related party
   $ (285,000 )   $ 128,000  




VESTIN REALTY MORTGAGE I, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

NOTE A — ORGANIZATION

Vestin Realty Mortgage I, Inc. (“VRM I”, the “Company”, “we”, “us”, or “our”) formerly Vestin Fund I, LLC (“Fund I”) 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”).  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 December 1999.  References in this report to the “Company,” “we,” “us,” or “our” refer to Fund I with respect to the period prior to April 1, 2006 and to VRM I with respect to the period commencing on May 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”). On January 7, 2011, Vestin Mortgage converted from a corporation to a limited liability company.  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 assets.

Vestin Mortgage is also the manager of Vestin Realty Mortgage II, Inc. (“VRM II”), as the successor by merger to Vestin Fund II, LLC (“Fund II”) and Vestin Fund III, LLC (“Fund III”).  VRM II 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, 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 acquired a 40% interest in MVP Realty Advisors, LLC (“MVP Advisor”), the manager of MVP REIT, Inc., pursuant to a membership interest transfer agreement, dated as of December 19, 2013, between MVP Capital Partners, LLC (“MVP Capital”) and us.  Pursuant to the transfer agreement, we did not pay any up-front consideration for the acquired interest but will be responsible for our proportionate share of future expenses of MVP Advisor. In recognition of MVP Capital’s substantial investment in MVP Advisor for which MVP Capital received no up-front consideration, the transfer agreement further provides that once we and VRM II 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 II 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 Advisor.  This acquisition was approved by the independent members of our Board of Directors.  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 have been prepared in accordance with the 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.

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.

Derivative Instruments

The Company may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions.


 
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed and qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment, any changes in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the consolidated statement of operations. If the derivative is designated and qualifies for hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.

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.

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

Interest is recognized as revenue on performing loans when earned according to the terms of the loans, using the effective interest method.  We do not accrue interest income on loans once they are determined to be non-performing.  A loan is 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.  Cash receipts will be allocated to interest income, except when such payments are specifically designated by the terms of the loan as principal reduction.  Interest is fully allowed for on impaired loans and is recognized on a cash basis method.

All leases are accounted for as non-cancelable operating leases. We recognize rental revenue on a straight-line basis over the term of the lease. Rental income related to the leases is recognized on an accrual basis in accordance with the terms of the leases. Advanced receipts of rental income are deferred and classified as liabilities until earned.

 
Reclassifications

Certain amounts in the 2013 consolidated financial statements regarding investment in equity method investee have been reclassified to conform to the December 31, 2014 presentation.  Additionally, commencing April 1, 2014, our investment in VREO XXV, LLC is considered held for use.

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.  Original 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 Accounting Standards Codification (“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 as a charge-off or a reduction to the allowance for loan losses.  Generally, subsequent recoveries of amounts previously charged off are added back to the allowance and included 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 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 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 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.

Secured Borrowings

Secured borrowings provide an additional source of capital for our lending activity.  Secured borrowings allow us to increase the diversification of our loan portfolio and to invest in loans that we might not otherwise invest in.  We do not receive any fees for entering into secured borrowing arrangements; however, we may receive revenue for any differential of the interest spread, if applicable.  Loans in which unaffiliated investors have participated through inter-creditor agreements (“Inter-creditor Agreements”) are accounted for as secured borrowings.

The Inter-creditor Agreements provide us additional funding sources for real estate loans whereby an unaffiliated investor (the “Investor”) may participate on a non-pari-passu basis in certain real estate loans with us and/or VRM II (collectively, the “Lead Lenders”).  In the event of borrower non-performance, the Inter-creditor Agreements generally provide that the Lead Lenders must repay the Investor’s loan amount either by (i) continuing to remit to the Investor the interest due on the participated loan amount; (ii) substituting an alternative loan acceptable to the Investor; or (iii) repurchasing the participation from the Investor for the outstanding balance plus accrued interest.

Additionally, an Investor may participate in certain loans with the Lead Lenders through Participation Agreements.  In the event of borrower non-performance, the Participation Agreement may allow the Investor to be repaid up to the amount of the Investor’s investment prior to the Lead Lender being repaid.  Real estate loan financing under the Participation Agreements are also accounted for as a secured borrowing.  We do not receive any revenues for entering into secured borrowing arrangements.

Investment in Marketable Securities and Investment in Marketable Securities – Related Party

Investment in marketable securities and investment in marketable securities– related party consists of stock in VRM II and MVP REIT.  The securities are stated at fair value as determined by the closing market price 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 basis and its fair value.

 
According to the SEC Staff Accounting Bulletin, Topic 5: Miscellaneous Accounting, M - Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities, there are numerous factors to be considered in such an evaluation and their relative significance will vary from case to case.  The following are a few examples of the factors that, individually or in combination, indicate that a decline is other than temporary and that a write-down of the carrying value is required:

 
·
The length of the time and the extent to which the market value has been less than cost;

 
·
The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; or

 
·
The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

Basic and Diluted Earnings Per Common Share

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

Treasury Stock

On February 21, 2008, our Board of Directors authorized the repurchase of up to $5 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  We are not obligated to purchase any shares.  Subject to applicable securities laws, including SEC Rule 10b-18, repurchases may be made at such times and in such amounts, as our management deems appropriate.  The repurchases will be funded from our available cash.  Under the Maryland General Corporation Law, shares of its own stock acquired by a corporation constitute authorized but unissued shares.

Segments

We are currently authorized to operate two reportable segments, investments in real estate loans and investments in real property.  As of December 31, 2014, the Company operates both segments.

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

Reverse Split

On December 8, 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.


 
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.

Principles of Consolidation

Our consolidated financial statements include the accounts of VRM I and VREO XXV, LLC, in which we have a controlling interest.  All significant intercompany balances and transactions 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 were 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 and marketable securities – related party and investment in real estate loans are further described in Note N – Fair Value.

Financial instruments with concentration of credit and market risk include cash, interest and other receivables, marketable securities and 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 which, at times, may exceed federally-insured limits.  To date, we have not experienced any losses.  As of December 31, 2014 and 2013 we had approximately $0.9 and $8.0 million, respectively, in funds in excess of the federally-insured limits.

As of December 31, 2014, 29% and 71% of our loans were in California and Nevada, respectively, compared to 26%, 60% and 14% of our loans in Arizona, Nevada and Texas at December 31, 2013, respectively.  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.

As of December 31, 2014 and 2013, all of our loans were loans in which we participated with other lenders, most of whom are our affiliates.

As of December 31, 2014, the aggregate amount of loans to our three largest borrowers represented approximately 79% of our total investment in real estate loans.  These real estate loans consisted of two commercial loans secured by property located in Nevada and one construction loan secured by property located in California.  All are first lien positions with interest rates between 7.00% and 9.00%, and an aggregate outstanding balance of approximately $5.6 million.  As of December 31, 2014, all three of our largest loans were 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, 2013, there were three loans, totaling approximately $2.7 million, representing approximately 79.8%, of our portfolio’s total value, which had a common guarantor.  As of December 31, 2014, these loans did not exist.

As of December 31, 2014, there were two loans, totaling approximately $1.1 million, representing approximately 15.7% of our portfolio’s total value, which had a common guarantor.  As of December 31, 2013, these loans did not exist.

 
For additional information regarding the above loans, see Note D – Investments In Real Estate Loans.

NOTE D — INVESTMENTS IN REAL ESTATE LOANS

As of December 31, 2014 and 2013, all 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.

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 investment in real estate loans that had interest reserves.

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 7.0% to 9.0% 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
     5     $ 5,043,000       7.60 %     71.40 %     51.35 %
Construction
     1       2,020,000       9.00 %     28.60 %     67.63 %
Total
     6     $ 7,063,000       8.00 %     100.00 %     56.00 %

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
     5     $ 3,271,000       7.99 %     97.20 %     65.24 %
Land
     1       94,000       6.00 %     2.80 %     49.67 %
Total
     6     $ 3,365,000       7.94 %     100.00 %     64.81 %

*
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 8.00% and 7.94%, respectively.  Please see “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
     6     $ 7,063,000       100.00 %     6     $ 3,365,000       100.00 %
Second deeds of trust
     --       --       --       --       --       --  
Total
     6     $ 7,063,000       100.00 %     6     $ 3,365,000       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
   $ --  
January 2015 – March 2015
     5,955,000  
April 2015 – June 2015
     1,108,000  
July 2015 – September 2015
     --  
Thereafter
     --  
         
Total
   $ 7,063,000  

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
   $ --       --     $ 875,000       26.01 %
California
     2,020,000       28.60 %     --       --  
Nevada
     5,043,000       71.40 %     2,006,000       59.60 %
Texas
     --       --       484,000       14.39 %
Total
   $ 7,063,000       100.00 %   $ 3,365,000       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
   $ 7,063,000     $ 3,365,000  
Less:
                
Allowance for loan losses
     --       -  
Balance per consolidated balance sheets
   $ 7,063,000     $ 3,365,000  

Non-Performing Loans

As of December 31, 2014 and 2013, we had no loans 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).

 
Asset Quality and Loan Reserves

Losses may occur from investing in real estate loans.  The amount of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.

The conclusion that a real estate loan is uncollectible or that collectability is doubtful is a matter of judgment.  On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment.  The fact that a loan is temporarily past due does not necessarily mean that the loan is non-performing.  Rather, all relevant circumstances are considered by our manager to determine impairment and the need for specific reserves.  Such evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters:

 
·
Prevailing economic conditions;

 
·
Historical experience;

 
·
The nature and volume of the loan portfolio;

 
·
The borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;

 
·
Evaluation of industry trends; and

 
·
Estimated net realizable value of any underlying collateral in relation to the loan amount.

Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses on an individual loan basis; we do not have a general allowance for loan losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.

As of December 31, 2014 and 2013, our ratio of total allowance for loan losses to total loans with an allowance for loan loss is 0%.

Our manager evaluated our loans and, based on current estimates with respect to the value of the underlying collateral, believes that such collateral is sufficient to protect us against further losses of principal.  However, such estimates could change or the value of the underlying real estate could decline.  Our manager will continue to evaluate our loans in order to determine if any other allowance for loan losses should be recorded.
 
Specific Reserve Allowances

As of December 31, 2014 and 2013, we had no specific reserve allowance.  The following table is a roll-forward of the allowance for loan losses for the year ended December 31, 2013 by loan type.

Loan Type
  
Balance at
12/31/2012
    
Specific Reserve Allocation
    
Loan Pay Downs and Settlements
    
Write Off
    
Transfers to REO and Notes Receivable
    
Balance at
12/31/2013
  
                                     
Commercial
   $ 183,000     $ 588,000     $ (771,000 )   $ --       --     $ --  
Total
   $ 183,000     $ 588,000     $ (771,000 )   $ --       --     $ --  

During December 2013, we accepted a discounted loan payoff.  The discount of approximately $0.4 million was previously recognized through a provision for loan loss.
 
Extensions

As of December 31, 2014 and 2013, our manager had granted extensions on three outstanding loans, totaling approximately $10.9 and $7.5 million, respectively, of which our portion was approximately $3.5 and $1.9 million, respectively, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent, or as part of a TDR.  Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing.  Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan.  In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal.

NOTE E — INVESTMENTS IN REAL ESTATE & FIXED ASSETS

During May 2012, we, VRM II and Fund III foreclosed on a loan with a balance of approximately $6.0 million, of which our portion was approximately $4.4 million. The property includes 23 cottage units in a retirement community located in Eugene, Oregon. The property includes operations, which will be reported as an asset held for sale from the date of this foreclosure. During May and December 2013 we, VRM II and VF III received distributions in the amount of $797,000 of which our portion was $589,000.

At the time of foreclosure, we estimated the fair value of the non-controlling interest at $1.1 million, which is 25% owned by Fund III and 1% by VRM II.

Immediately upon foreclosure, we committed to a plan to sell all interests in VREO XXV, at which point we began classifying the related assets of VREO XXV as assets held for sale, and the related liabilities as liabilities related to assets held for sale. Additionally, we classified VREO XXV’s results as discontinued operations. During April 2014, we terminated the previous plan to sell the interests in VREO XXV due to the better than previously expected results of operations of the investment. Additionally, the related assets and liabilities have been retroactively reclassified from assets and related liabilities held for sale to classifications consistent with assets and related liabilities held for use. The results of operations related to this investment have also been retroactively reclassified from the discontinued operations section on the statement of operations to revenues and expenses from continuing operations. Lastly, during July 2014, we received debt financing collateralized by the underlying real estate of this investment. The proceeds from this financing were used to acquire the remaining ownership from Fund III and VRM II. The fair value assigned to this acquisition of the remaining interest was determined by using a recent appraisal.

During August 2014, we purchased the remaining 26% interest in a VREO XXV, LLC from VRM II and VF III for approximately $1.3 million.

NOTE F — INVESTMENT IN EQUITY METHOD INVESTEE AND NOTE RECEIVABLE FROM MVP REALTY ADVISORS

MVP Realty Advisors

The Company and MVP Capital entered into a membership interest transfer agreement (the “Transfer Agreement”), dated as of December 19, 2013, pursuant to which the Company has acquired 40% of the membership interests (the “Acquired Interests”) of MVP Advisor. The Company and VRM II, Inc. now own 40% and 60%, respectively, of the aggregate membership interests of MVP Advisor. The Company previously disclosed an agreement in principle with MVP Capital to acquire the Acquired Interests in a Form 8-K filed with the Securities and Exchange Commission on November 27, 2013.

 
Pursuant to the Transfer Agreement, the Company did not pay any up-front consideration for the Acquired Interests, but will be responsible for its proportionate share of future expenses of MVP Advisor. In recognition of MVP Capital’s substantial investment in MVP Advisor for which MVP Capital received no up-front consideration, the Transfer Agreement and the amended operating agreement of MVP Advisor further provide that once the Company and VRM II 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 they have received an annualized return on their Capital Investment of 7.5%, then MVP Capital will receive one-third of the net profits of MVP Advisor.

As of December 31, 2014 we have made loans of approximately $1,425,000 to MVP Advisor, the manager of MVP REIT.  We believe MVP Advisor 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 initial public offering and the fees paid to date to MVP Advisor have not been significant.  We may not realize interest income from the loan to MVP Advisor until it is able to generate sufficient fees to service the interest on our loan.  We have not forgiven the balance due from MVP Advisor; however the decision by MVP Advisor to forgive certain amounts creates uncertainty as to when we will be repaid the amounts loaned to MVP Advisor. Based on this uncertainty, we have determined to fully impair the balance of this investment and note receivable.  During the year ended December 31, 2014, we impaired approximately $1,285,000 of the amounts loaned to MVP Advisor.  During the year ended December 31, 2013, we impaired approximately $140,000 of the amounts loaned to MVP Advisor.

Office Buildings acquired April 30, 2014

On April 30, 2014, following MVP REIT’s exercise of its purchase right (the “Purchase Right”) and the receipt of approval from the board of directors of the Company, MVP REIT and VRM II, MVP REIT completed its acquisition of the Company’s and VRM II’s interest in five parking facilities and VRM II’s interest in a storage facility, net of the assumed debt secured by the real estate.  In exchange, the Company and VRM II received MVP REIT’s interest in four office properties, net of the assumed debt secured by the real estate.  The Company and VRM II transferred to MVP REIT all of their respective ownership interests in the following properties: the Ft. Lauderdale, Memphis Court, Memphis Poplar, Kansas City and St. Louis Parking Facilities and the Red Mountain Storage Facility (the “Transferred Properties”).  MVP REIT assumed all indebtedness incurred by the Company and VRM II in connection with their acquisition of interests in the Transferred Properties. In addition, pursuant to the terms of the Purchase Right, MVP REIT paid to the Company and VRM II an amount equal to their respective investments in the Transferred Properties plus a 7.5% annual cumulative return less any distributions received by the Company and VRM II (the “Contractual Return”). Prior to the closing of the property exchanges, the Company had a 44% ownership interest in each of the parking facilities and no ownership interest in the storage facility that constitute the Transferred Properties.

Under the terms of the property exchanges, the Company and VRM II received from MVP REIT its entire interest in four office buildings located at 8860 West Sunset Road, Las Vegas, Nevada (“Wolfpack”), 8905 Post Road, Las Vegas, Nevada (“SE Properties”), 8925 Post Road, Las Vegas, Nevada (“Devonshire”) and 8945 Post Road, Las Vegas, Nevada (“ExecuSuites”) (collectively, the “Acquired Properties”).  The Company and VRM II assumed their respective pro rata share of the indebtedness incurred by MVP REIT in connection with its acquisition of the Acquired Properties.  As a result, VRM I and VRM II each now owns 28% and 72% ownership interests, respectively, in the Acquired Properties following the closing of the property exchanges.

 
For purposes of the property exchanges, the value of the properties exchanged was based upon their purchase price as all of the real estate assets were acquired during the previous nine months. The aggregate purchase price for the Company’s and VRM II’s interests in the Transferred Properties is approximately $14 million and the related indebtedness is approximately $5 million, resulting in a net value for purposes of the exchange of approximately $9 million.  In addition, MVP REIT was obligated to pay the Company and VRM II, in the aggregate, approximately $500,000 as their Contractual Return on the Transferred Properties.  The aggregate purchase price for the interests in the Acquired Properties to be transferred to the Company and VRM II is approximately $25 million and the related indebtedness is approximately $14 million, resulting in a net value for purposes of the exchange of approximately $11 million.  In light of the difference between the net value to be received by the Company and VRM II and the net value transferred by the Company and VRM II, the Company and VRM II paid MVP REIT, in the aggregate, approximately $1.4 million.

We performed an allocation as of the acquisition date for asset transfer as follows:

Cash
   $ 101,000  
Property and equipment
     24,961,000  
Current assets
     22,000  
Accounts payable and accrued liabilities
     (57,000 )
Notes payable
     (14,335,000 )
         
     Net assets
   $ 10,692,000  

The following is a summary of the results of operations related to the investment in equity method investee for the asset transfer properties for the year ended December 31, 2014:
 
   
For the year ended December 31, 2014
  
       
Revenue
     1,652,000  
Expenses
     (1,221,000 ) 
Net Income
     431,000  
% of ownership
     28 %
Equity method income
     121,000  

Building C, LLC & Building A, LLC

During March 2014, VRM II 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 II 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 II 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 acquired within the past twelve (12) months. No commissions were paid in connection with the purchase.

We performed an allocation as of the acquisition date for Building C as follows:

Property and equipment
   $ 14,836,000  
Current assets
     102,000  
Notes payable
     (8,414,000 )
         
     Net assets
   $ 6,524,000  


 
We performed an allocation as of the acquisition date for Building A as follows:

Property and equipment
   $ 14,900,000  
Current assets
     128,000  
Notes payable
     (8,452,000 )
         
     Net assets
   $ 6,576,000  

The following is a summary of the results of operations related to the investment in equity method investee for Building C for the year ended December 31, 2014:
   
For The year ended December 31, 2014
  
       
Revenue
     575,000  
Expenses
     (410,000 )
Net Income
     165,000  
% of ownership
     28 %
Equity method income
     47,000  

The following is a summary of the results of operations related to the investment in equity method investee for Building A for the year ended December 31, 2014:
   
For The year ended December 31, 2014
  
       
Revenue
     434,000  
Expenses
     (323,000 )
Net Income
     111,000  
% of ownership
     28 %
Equity method income
     31,000  

NOTE G — INVESTMENT IN EQUITY METHOD INVESTEE HELD FOR SALE

On January 14, 2014, we, VRM II 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 30, 2014, we completed the property exchange with MVP REIT pursuant to which we exchanged our interests in the parking properties for certain interests in commercial office buildings.  See Note F – Investment in Equity Method Investee and Note Receivable from MVP Realty Advisors for additional information.

NOTE H — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY

In February 2014, VRM II 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.

As of December 31, 2014 and 2013, we owned 134,270 shares of VRM II’s common stock, representing approximately 5.20% of the total outstanding shares.  The closing price of VRM II’s common stock on December 31, 2014, was $4.04 per share.

 
During the year ended December 31, 2014, the trading price for VRM II’s common stock ranged from $3.43 to $6.45 per share.  At December 31, 2014, our manager evaluated the near-term prospects of VRM II in relation to the severity and duration of the unrealized loss.  Based on that evaluation and current market conditions, we have determined there was an other-than-temporary impairment on our investment in VRM II as of December 31, 2014.  We realized a loss on our investment to its fair value of $4.04 per share as of December 31, 2014, totaling approximately $0.5 million and recognizing an impairment of approximately $0.1 million.

As of December 31, 2014 and 2013, we owned 66,379 and 61,961 shares of common stock, respectively, of MVP REIT.  The shares were assigned to us by SERE Holdings, LLC in consideration of the cancellation of certain unsecured notes.  We recorded a gain of approximately $534,000 upon receipt of such shares, and the shares are recorded on our balance sheet as Investment in MVP REIT valued at $584,000.  Such amount was determined based upon the offer price for such shares in MVP REIT’s pending public offering. During the year ended December 31, 2014 we received 4,418 shares through MVP REIT’s distribution reinvestment program.

NOTE I — INVESTMENT IN MARKETABLE SECURITIES

During January 2014, we sold 1,062 shares of a publicly traded company that invests in loans collateralized by real estate for a realized gain of approximately $1,000.

NOTE J — REAL ESTATE OWNED HELD FOR SALE

At December 31, 2014 and 2013 we held one and two properties, respectively, with no total carrying value and a carrying value of approximately $0.3 million, respectively, which were acquired through foreclosure and recorded as investments in REO.  Our REO are accounted for at the lower of cost or fair value less costs to sell with fair value based on appraisals and knowledge of local market conditions.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.

As of December 31, 2014 our REO property consisted of raw land on which there were no operations.

We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.

Beginning balance, January 1, 2014
   $ 320,000  
Real estate held for sale acquired through foreclosure
     --  
Additional investment in REO
     --  
Write down
     --  
Sale
     (320,000 )
Ending balance, December 31, 2014
   $ --  

Beginning balance, January 1, 2013
   $ 580,000  
Proceeds on nonrefundable extension fee
     (12,000 )
Sale
     (248,000 )
Ending balance, December 31, 2013
   $ 320,000  

During June 2014, we, VRM II and Fund III sold a REO property to an unrelated third party for approximately $1.7 million, of which our portion was approximately $0.3 million.  A net loss of approximately $18,000 was recorded.
 
NOTE K — 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, such acquisitions and sales are made without any mark up or mark down.  No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments.  The purpose is generally to diversify our portfolio by syndicating loans and real estate investments, thereby providing us with additional capital to make additional loans and investments in real estate.

Transactions with the Manager

Our manager is entitled to receive from us an annual management fee of up to 0.25% of our aggregate capital contributions received by us and Fund I from the sale of shares or membership units, paid monthly.  The amount of management fees paid to our manager for the year ended December 31, 2014 and 2013 was $276,000 for each period.

As of December 31, 2014 and 2013, our manager owned 25,000 of our common shares, representing approximately 1.8% of our total outstanding common stock.  For the year ended December 31, 2014 and 2013, we declared no dividends payable to our manager.

Accounting services

During the years ended December 31, 2014 and 2013, Accounting Solutions, an entity partially owned by Ms. Gress, the Company’s Chief Financial Officer, received fees of approximately $17,000 and $19,000, respectively, for accounting services.

During the years ended December 31, 2014 and 2013, Strategix Solutions, an entity partially owned by Ms. Gress, the Company’s Chief Financial Officer, received fees of approximately $78,000 and $78,000, respectively, for accounting services.
 
Transactions with Other Related Parties

As of December 31, 2014 and 2013, we owned 134,270 common shares of VRM II, representing approximately 5.20% of their total outstanding common stock.  At December 31, 2014, our manager evaluated the near-term prospects of VRM II in relation to the severity and duration of the unrealized loss.  Based on that evaluation and current market conditions, we have determined there was an other-than-temporary impairment on our investment in VRM II as of December 31, 2014.  We reversed our unrealized other comprehensive losses and realized a loss on our investment equal to its fair value of $4.04 per share as of December 31, 2014, totaling approximately $0.5 million and recognizing an impairment of approximately $0.1 million.  For the year ended December 31, 2014 and 2013 we recognized no in dividend income from VRM II.

As of December 31, 2014 and 2013, VRM II owned 134,545 of our common shares, approximately 9.74% of our total outstanding common stock.  For the years ended December 31, 2014 and 2013, we declared no in dividends payable to VRM II.

As of December 31, 2014 and 2013 we owned 66,379 and 61,961, respectively, of MVP REIT common stock. During the year ended December 31, 2014 we received 4,418 shares through MVP REIT’s distribution reinvestment program.  For the year ended December 31, 2013 we recognized $10,000 in dividend income, and for the year ended December 31, 2014, we recognized $40,000 in dividend income, from MVP REIT.

As of December 31, 2014 and 2013, we owned a 40% interest in MVP Advisor, the advisor of MVP REIT.


 
On April 30, 2014, we completed the property exchange with MVP REIT pursuant to which we exchanged our and VRM II’s interests in parking properties for MVP REIT’s interests in commercial office buildings.  See Note F - Investments in Equity Method Investee and Note Receivable from MVP Realty Advisors for additional information.

On July 31, and August 29, 2014, we and VRM II completed the purchase of two commercial office buildings with MVP REIT.  See Note F - Investments in Equity Method Investee and Note Receivable from MVP Realty Advisors for additional information.

We have made loans of approximately $1,425,000 to MVP Advisor, the manager of MVP REIT.  We believe MVP Advisor 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 initial public offering and the fees paid to date to MVP Advisor have not been significant.  We may not realize interest income from the loan to MVP Advisor until it is able to generate sufficient fees to service the interest on our loan.  We have not forgiven the balance due from MVP Advisor; however the decision by MVP Advisor to forgive certain amounts creates uncertainty as to when we will be repaid the amounts loaned to MVP Advisor. Based on this uncertainty, we have determined to fully impair the balance of this investment and note receivable.  During the year ended December 31, 2014, we impaired approximately $1,285,000 of the amounts loaned MVP Advisor.  During the year ended December 31, 2013, we impaired approximately $140,000 of the amounts loaned to MVP Advisor.

On April 30, 2014, we completed the property exchange with MVP REIT pursuant to which we exchanged our and VRM II’s interests in parking properties for MVP REIT’s interests in commercial office buildings.  See Note F Investments in Equity Method Investee and Note Receivable from MVP Realty Advisors for additional information.

During March 2014, VRM II acquired a 42% interest in Building C, LLC for $3.0 million.  During July 2014 we and VRM II acquired the remaining 58% interest for a total of approximately $3.8 million, of which our portion was approximately $1.8 million.

During August 2014, we and VRM I acquired 72% and 28%, respectively of Building A, LLC for a total of $6.5 million of which our portion was approximately $4.7 million.

As of December 31, 2014 we owed VRM II approximately $30,000 and December 31, 2013 we had receivables from VRM II of approximately $54,000.

During August 2014, we purchased approximately $2.8 million in real estate loans from VRM II.

During August 2014, we purchased the remaining 26% interest in a VREO XXV, LLC from VRM II and Fund III for approximately $1.3 million.

NOTE L — NOTES RECEIVABLE

During February 2012, we, VRM II and Fund III received a payment in full satisfaction of an investment in real estate loan secured by a first deed of trust and a partial payment of an investment in real estate loan secured by a second deed of trust on the same real estate.  The remaining balance due on the second deed of trust was previously fully allowed for, of approximately $0.7 million was moved to notes receivable and remains fully allowed for.  As of December 31, 2014 the balance is approximately $0.6 million

NOTE M — NOTES PAYABLE

During July 2014, VREO XXV issued a promissory note to Mohave State Bank for $2.3 million.  This note bears an annual interest rate of 5.0%, is secured by property and is payable in monthly principal and interest payments of approximately $13,000, with a lump sum payment of approximately $2.0 million due at maturity in July of 2019.

 
In April 2014, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 2.99%.  The agreement required a down payment of $30,000 and nine monthly payments of approximately $17,000 beginning on May 27, 2014.  As of December 31, 2014, the outstanding balance of the note was approximately $17,000.  Interest expense for the year ended December 31, 2014 amounted to approximately $2,000.  During January 2015, the outstanding balance of the note was paid in full.

In April 2013, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 4.25%.  The agreement required a down payment of $53,000 and nine monthly payments of approximately $18,000 beginning on May 27, 2013.  As of December 31, 2013, the outstanding balance of the note was approximately $18,000.  Interest expense for the year ended December 31, 2013 amounted to approximately $3,000.  During January 2014, the outstanding balance of the note was paid in full.

As of December 31, 2014, future principal payments on the notes payable are as follows:

2015
   $ 65,000  
2016
     50,000  
2017
     53,000  
2018
     56,000  
2019
     2,036,000  
Thereafter
     --  
Total
   $ 2,260,000  

NOTE N — FAIR VALUE

As of December 31, 2014, financial assets and liabilities utilizing Level 1 inputs included investment in marketable securities and marketable securities - related party.  We had no assets or liabilities utilizing Level 2 inputs, and assets and liabilities utilizing Level 3 inputs included investments in real estate loans and investments in equity method investees held for sale.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Accordingly, our degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, an asset or liability will be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.  Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date.  We use prices and inputs that are current as of the measurement date, including during periods of market dislocation, such as the recent illiquidity in the auction rate securities market.  In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments.  This condition may cause our financial instruments to be reclassified from Level 1 to Level 2 or Level 3 and/or vice versa.

Our valuation techniques will be consistent with at least one of the three possible approaches: the market approach, income approach and/or cost approach.  Our Level 1 inputs are based on the market approach and consist primarily of quoted prices for identical items on active securities exchanges.  Our Level 2 inputs are primarily based on the market approach of quoted prices in active markets or current transactions in inactive markets for the same or similar collateral that do not require significant adjustment based on unobservable inputs.  Our Level 3 inputs are primarily based on the income and cost approaches, specifically, discounted cash flow analyses, which utilize significant inputs based on our estimates and assumptions.

 
The following tables present the valuation of our financial assets as of December 31, 2014 and 2013, measured at fair value on a recurring basis by input levels:

   
Fair Value Measurements at Reporting Date Using
        
   
Quoted Prices in Active Markets For Identical Assets (Level 1)
    
Significant Other Observable Inputs (Level 2)
    
Significant Unobservable Inputs (Level 3)
    
Balance
at 12/31/14
    
Carrying Value on Balance Sheet at 12/31/14
  
Assets
                              
Investment in equity method investee
   $ --     $ --     $ 6,932,000     $ 6,932,000     $ 6,932,000  
Investment in marketable securities - related party
   $ 1,126,000     $ --     $ --     $ 1,126,000     $ 1,126,000  
Investment in real estate loans
   $ --     $ --     $ 7,063,000     $ 7,063,000     $ 7,063,000  
 
 
   
Fair Value Measurements at Reporting Date Using
  
   
Quoted Prices in Active Markets For Identical Assets (Level 1)
    
Significant Other Observable Inputs (Level 2)
    
Significant Unobservable Inputs (Level 3)
    
Balance at 12/31/2013
    
Carrying Value on Balance Sheet at 12/31/2013
  
 Assets                              
 Investment in equity method investee – held for sale   $ --     $ --     $ 4,515,000     $ 4,515,000     $ 4,515,000  
 Investment in marketable securities - related party   $ 1,457,000     $ --     $ --     $ 1,457,000     $ 1,457,000  
 Investment in marketable securities   $ 13,000     $ --     $ --     $ 13,000     $ 13,000  
 Investment in real estate loans   $ --     $ --     $ 3,353,000     $ 3,353,000     $ 3,365,000  
 
The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2014 to December 31, 2014.  There were no liabilities measured at fair value on a recurring basis using significant unobservable inputs as of January 1, 2014 to December 31, 2014.

   
Investment in real estate loans
  
       
Balance on January 1, 2014
   $ 3,353,000  
Purchase and additions of assets
        
New mortgage loans and mortgage loans bought
     4,106,000  
Purchase from affiliate
     2,823,000  
Purchase from third party
     600,000  
Sales, pay downs and reduction of assets
        
Collections of principal and sales of investment in real estate loans
     (2,838,000 )
Sale of assets to third parties
     (992,000 )
Temporary change in estimated fair value based on future cash flows
     11,000  
         
Balance on  December 31, 2014, net of temporary valuation adjustment
   $ 7,063,000  
 
   
Investment in equity method investee
  
       
Balance on January 1, 2014
   $ --  
Investment in equity method investee
     6,932,000  
         
Balance on December 31, 2014, net of temporary valuation adjustment
   $ 6,932,000  

   
Investment in equity method investee – held for sale
  
       
Balance on January 1, 2014
   $ 4,515,000  
Sale of investment in equity method investee held for sale
     (4,515,000 )
         
Balance on December 31, 2014, net of temporary valuation adjustment
   $ --  

The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2013 to December 31, 2013:

   
Investment in real estate loans
  
       
Balance on January 1, 2013
   $ 13,870,000  
Change in temporary valuation adjustment included in net income
        
       Net decrease in allowance for loan losses
     183,000  
Purchase and additions of assets
        
New mortgage loans and mortgage loans bought
     2,317,000  
Sales, pay downs and reduction of assets
        
Collections of principal and sales of investment in real estate loans
     (10,918,000 )
Sale of assets to related parties
     (1,700,000 )
Sale of assets to third parties
     (375,000 )
Temporary change in estimated fair value based on future cash flows
     (24,000 )
         
Balance on December 31, 2013, net of temporary valuation adjustment
   $ 3,353,000  

NOTE O — SEGMENT INFORMATION

Company management reviews financial and operating performance in the following two separate operating segments:  (1) investment in real estate loans and (2) investments in real property.  Selling, general and administrative expenses, primarily consisting of compensation of employees, seminar expense, professional fees and overhead costs not directly related to a specific operating segment, are reflected in the table below as corporate activities.


 
The following are certain financial data for the Company’s operating segments for the periods:

   
For the years
  
   
ended December 31,
  
   
2014
    
2013
  
Revenues
            
Investment in real estate loans
   $ 487,000     $ 1,893,000  
Rental revenue
     711,000       686,000  
Total revenues
     1,198,000       2,579,000  
Operating expenses
                
Investment in real estate loans
   $ 276,000     $ 864,000  
Investment in real property
     355,000       300,000  
Corporate activities
     2,293,000       1,053,000  
Total expenses
   $ 2,924,000     $ 2,217,000  

 
Total Assets
  
December 31, 2014
    
December 31, 2013
  
Investment in real estate loans
   $ 7,069,000     $ 3,369,000  
Investment in real property
     11,084,000       8,367,000  
Corporate assets
     2,643,000       9,582,000  
Total assets
   $ 20,796,000     $ 21,318,000  

NOTE P — RECENT ACCOUNTING PRONOUNCEMENTS

No new accounting pronouncements have been defined that would materially impact our financial statements.

NOTE Q — LEGAL MATTERS INVOLVING THE MANAGER

The United States Securities and Exchange Commission (the “Commission”), conducted an investigation of certain matters related to us, our manager, Vestin Capital, VRM II, and Fund III.  We fully cooperated during the course of the investigation.  On September 27, 2006, the investigation was resolved through the entry of an Administrative Order by the Commission (the “Order”).  Our manager, Vestin Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin Capital (collectively, the “Respondents”), consented to the entry of the Order without admitting or denying the findings therein.

In the Order, the Commission found that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 through the use of certain slide presentations in connection with the sale of units in Fund III and in our predecessor, Vestin Fund II, LLC.  The Respondents consented to the entry of a cease and desist order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from association with any broker or dealer for a period of six months, which expired in March 2007.  In addition, the Respondents agreed to implement certain undertakings with respect to future sales of securities.  We are not a party to the Order.

Other than the matters described in Note R – Legal Matters Involving The Company below, our manager believes that it is not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our manager’s financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on the manager’s net income in any particular period.



 
NOTE R — LEGAL MATTERS INVOLVING THE COMPANY

On February 7, 2012, we, VRM II and Fund III entered into a Deed in Lieu Agreement with a borrower in lieu of the foreclosure of our subordinated secured loan which had matured on December 31, 2011, with a principal balance, net of allowance for loan loss, of approximately $9.9 million, of which our portion was approximately $0.1 million.  Pursuant to the Deed in Lieu Agreement, our subsidiary 1701 Commerce, LLC (“1701 Commerce”) received a deed to the secured property operated as the Sheraton Hotel and Spa Fort Worth, Texas (the “Hotel”).  On March 26, 2012, 1701 Commerce filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of Texas, Ft. Worth Division, to seek relief from a pending foreclosure of the Hotel by the senior mortgage lien holder and to preserve and protect 1701 Commerce’s equity and the interests of other Hotel creditors.  Due to the uncertainty and disputes involving the Hotel, we recorded this investment as Other Real Estate Owned on our balance sheet until August 23, 2012. The Hotel was sold on July 17, 2013 for the sum of $49,300,000.  The net proceeds of the sale and the cash on hand as of the date of the sale were used to pay all 1701 Commerce creditors 100% of their claim plus interest, with the balance distributed to us and our two partners, VRM II and Fund III. On February 4, 2015, the court entered its final decree closing the case.

We hold an interest of approximately 8%, VRM II holds an interest of approximately 90% and Fund III holds an interest of approximately 2% in 1701 Commerce.

In addition to the matters described above, we are involved in a number of other legal proceedings concerning matters arising in the ordinary course of our business activities.  We believe we have meritorious defenses to each of these actions and intend to defend them vigorously.  Other than the matters described above, we believe that we are not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our operations in any particular period.

NOTE S— INCOME TAXES

We operated as a REIT through December 31, 2011. We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2013.

The components of the provision for income tax benefit are as follows for the year ended:

   
12/31/2014
    
12/31/2013
  
Current Taxes
            
    Federal
     --       --  
    State
     --       --  
    Total Current Taxes
     --       --  
Change in Deferred Taxes
     407,000       192,000  
Change in Valuation Allowance
     (407,000 )     (192,000 )
                 
Provision for income tax expense (benefit)
     --       --  



The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2014:

Deferred Tax Assets:
      
   Recovery of allowance for doubtful notes receivable
     221,000  
   Impairment on investment in MVP Realty Advisors
     485,000  
   Impairment on investment in marketable securities-related party
     29,000  
   Net operating loss carryforward
     13,576,000  
   Total Deferred Tax Assets
     14,311,000  
   Valuation allowance
     (14,311,000 )
   Deferred Tax Assets, net of valuation allowance
     --  
   Non-current portion
     --  
   Current portion
     --  

The effective tax rate used for calculation of the deferred taxes as of December 31, 2014 was 34%.  The Company has established a valuation allowance against deferred tax assets of $14,311,000 due to the uncertainty regarding realization, comprised primarily of a reserve against the deferred tax assets attributable to the net operating loss carryforward timing differences.

As of December 31, 2011 we were organized and conducted our operations to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”) and to comply with the provisions of the Internal Revenue Code with respect thereto.  A REIT is generally not subject to federal income tax on that portion of its REIT taxable income (“Taxable Income”) which is distributed to its stockholders, provided that at least 90% of Taxable Income is distributed and provided that certain other requirements are met.  Our Taxable Income may substantially exceed or be less than our net income as determined based on GAAP, because, differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write-downs on real estate held for sale, amortization of deferred financing cost, capital gains and losses, and deferred income.
 

NOTE T — SUBSEQUENT EVENTS

The following subsequent events have been evaluated through the date of this filing with the SEC.
 
On February 9, 2015, the Company received a deficiency notification from NASDAQ that it failed to maintain, for the last thirty (30) business days, a minimum of $5,000,000 in its Market Value of Publicly Held Shares to remain on the NASDAQ Global Capital Markets.  The NASDAQ rules provide the Company with a compliance period of 180 calendar days in which to regain compliance. The Company did not believe it could regain compliance and has applied to transfer the Company’s securities to The Nasdaq Capital Market.  The Company has been informed this change occured in March, 2015.
 
On March 2, 2015 MVP Realty Advisors, LLC (“MVPRA”) entered into an agreement with NAMANCO Productions, Inc. (“Namanco”) for the services of Joseph W. Namath.  The term of the agreement is ten years consisting of a performance term of five years and a bonus term of five years.  Each year MVPRA and Namanco must agree to extend the agreement for an additional year.  For each year of the performance term, MVPRA will pay to Namanco for the services of Namath the sum of $120,000 per appearance for the first six appearances and 150,000 for each appearance thereafter.  MVPRA has agreed to a minimum of six appearances for each year in which the agreement is in effect.  Namanco is paid $60,000 per month as an advance against the minimum six appearances.  Michael Shustek is responsible for all payments due during the bonus term.


CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure.  In connection with the preparation of this Report on Form 10-K, management carried out an evaluation, under the supervision and with the participation of our CEO and CFO, as of December 31, 2014, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Exchange Act.  Based upon management’s evaluation, our CEO and CFO concluded that, as of December 31, 2014, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within our company have been or will be detected.  Even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation.  Furthermore, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.  Our management, including our CEO and CFO, does not expect that our controls and procedures will prevent all errors.

The certifications of our CEO and CFO required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States.  Internal control over financial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of our Company are being made only in accordance with authorizations of management and directors of our Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our Company's assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 
Management has conducted an assessment, including testing, of the effectiveness of our internal control over financial reporting as of December 31, 2014.  In making its assessment of internal control over financial reporting, management used the criteria in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based on this assessment, management, with the participation of the Chief Executive and Chief Financial Officers, believes that, as of December 31, 2014, the Company’s internal control over financial reporting is effective based on those criteria.

Changes in Internal Control Over Financial Reporting

As required by Rule 13a-15(d) under the Exchange Act, our management, including our CEO and CFO, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter of 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, there has been no such change during the fourth fiscal quarter of 2014.

OTHER INFORMATION

None.

PART III

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

We are managed on a day-to-day basis by Vestin Mortgage, a company majority-owned by of Michael V. Shustek.

Directors and Executive Officers

The following table sets forth the names, ages as of March 30, 2015 and positions of the individuals who serve as our directors and executive officers as of March 30, 2015:

Name
Age
Title
     
Michael V. Shustek
56
President, Chief Executive Officer and Director
Tracee Gress (4)
44
Chief Financial Officer
Frederick J. Leavitt (1)(2)(3)
44
Director
Donovan Jacobs(1)(2)(3)
58
Director
Kenneth A Seltzer (1)(2)(3)
62
Director

 
(1)
Member of the audit committee.

 
(2)
Member of the nominating committee.

 
(3)
Member of the compensation committee.

 
(4)
During April 2009, we entered into an accounting services agreement with Strategix Solutions, a Nevada limited liability company, for the provision of accounting and financial reporting services.  Strategix Solutions also provides accounting and financial reporting services to VRM II and Fund III.  Our CFO and other members of our accounting staff are employees of Strategix Solutions.  Strategix Solutions is owned by our CFO Ms. Gress.  As of December 31, 2014, Strategix Solutions dedicated to us a total of three employees, including Tracee Gress, our CFO.

 
The following table sets forth the names, ages as of March 30, 2015 and positions of the individuals who serve as directors, executive officers and certain significant employees of Vestin Mortgage (our manager) or our affiliates:

Name
Age
Title
     
Michael V. Shustek
56
President, Chief Executive Officer and Chairman
Tracee Gress
44
Chief Financial Officer
Michael J. Whiteaker
65
Vice President of Regulatory Affairs

Directors, Executive Officers and certain significant employees of Vestin Realty Mortgage I, Vestin Mortgage (our manager), Vestin Originations or our affiliates.

Michael V. Shustekhas been a director of our manager, Vestin Mortgage, LLC, and Chairman of the board of directors, Chief Executive Officer and a director of Vestin Group since April 1999 and a Director and CEO of us and Vestin Realty Mortgage II, Inc. (“VRM II”) since January 2006. In February 2004, Mr. Shustek became the President of Vestin Group. Mr. Shustek also serves on the loan committee of Vestin Mortgage, LLC, and its affiliates. In 2003, Mr. Shustek became the Chief Executive Officer of Vestin Mortgage, LLC. In 1995, Mr. Shustek founded Del Mar Mortgage, and has been involved in various aspects of the real estate industry in Nevada since 1990. In 1993, he founded Foreclosures of Nevada, Inc., a company specializing in non-judicial foreclosures. In 1993, Mr. Shustek also started Shustek Investments, a company that originally specialized in property valuations for third-party lenders or investors. In 2012, Mr. Shustek became a Director and the CEO of MVP REIT, Inc.

In 1997, Mr. Shustek was involved in the initial founding of Nevada First Bank, with the largest initial capital base of any new state charter in Nevada’s history. Mr. Shustek has co-authored two books, entitled “Trust Deed Investments,” on the topic of private mortgage lending, and “If I Can Do It, So Can You.” Mr. Shustek is a guest lecturer at the University of Nevada, Las Vegas, where he also has taught a course in Real Estate Law and Ethics. Mr. Shustek received a Bachelor of Science degree in Finance at the University of Nevada, Las Vegas. Mr. Shustek is also the Chairman of our Board of Directors. As VRM I’s founder and CEO, Mr. Shustek is highly knowledgeable with regard to VRM I’s business operations and loan portfolio. In addition, his participation on the Board of Directors is essential to ensure efficient communication between the Board and management.

Tracee Gress was appointed as our Chief Financial Officer (CFO) on January 14, 2013.  In addition, Ms. Gress was appointed as the Chief Financial Officer of VRM II and the equivalent of our Chief Financial Officer of Fund III.  Ms. Gress’ services are furnished to us pursuant to an accounting services agreement entered into by our manager and Strategix Solutions. Ms. Gress has been with Strategix Solutions since January 2013 and, prior to January 2013, Ms. Gress was an accountant with L.L. Bradford & Company, LLC from August 2008 to January 2013.  Ms. Gress is a Certified Public Accountant and has audited various public and private companies.  Additionally, she has also acted as Chief Financial Officer for various private companies.  She received a Bachelor of Business Administration degree in Accounting from the University of Nevada, Las Vegas.

Michael J. Whiteaker has been Vice President of Regulatory Affairs since May 1999.  Mr. Whiteaker is experienced in the banking and finance regulatory fields, having served with the State of Nevada, Financial Institution Division from 1982 to 1999 as its Supervisory Examiner, responsible for the financial and regulatory compliance audits of all financial institutions in Nevada.  Mr. Whiteaker has worked extensively on matters pertaining to both state and federal statutes, examination procedures, policy determination and credit administration for commercial and real estate loans.  From 1973 to 1982, Mr. Whiteaker was Assistant Vice President of Nevada National Bank, responsible for a variety of matters including loan review.  Mr. Whiteaker has previously served on the Nevada Association of Mortgage Brokers, Legislative Committee and is a past member of the State of Nevada, Mortgage Advisory Council.



 
Independent Directors of Vestin Realty Mortgage I

Donovan J. Jacobs was an employee of Vestin Group from 2000 to 2004 and from September 2005 to October 2006 and has been a member of our board since January 2008.  At Vestin Group, he was responsible for opening and managing three Vestin Mortgage branch offices.  He is also a director of VRM I since 2013.  Since 1992, Mr. Jacobs has been practicing law in San Diego, California where he represents police officers in both administrative and civil actions.  Mr. Jacobs is a retired San Diego Police Officer, where he served for 13 years.  Mr. Jacobs holds a lifetime teaching credential from the State of California and has taught law and police science at Miramar College, Southwestern College and Central Texas College.  Mr. Jacobs has authored two books on narcotics investigations, “Street Crime Investigations” and “Street Cop.”  Mr. Jacobs received his Bachelor’s Degree from San Diego State and his Juris Doctor from Thomas Jefferson School of Law.  Mr. Jacobs was admitted to the California Bar in 1992.  Mr. Jacobs’s legal knowledge, and his familiarity with the business and legal communities in California, provide an important perspective as the Board addresses issues related to the management of our loan portfolio and REO.

Kenneth A. Seltzer is the president of the accounting firm of Kenneth A. Seltzer, CPA A.P.C. since 1993 and a member of our board since January 2008. His firm specializes in compilations for small and medium size businesses as well as federal and state tax reporting.  In addition, his firm has performed accounting engagements for bankruptcy cases in the State of Nevada.  Mr. Seltzer is a CPA in the State of Nevada and a graduate of California State University, Northridge.  Mr. Seltzer’s experience as an accountant provides the Board with an important perspective on financial reporting and internal controls.

Fredrick J. Leavitt was re-elected on our board of directors in December 2013.  He had been a member of our board of directors since 2006 until he resigned in January 2008.  He was a director for Vestin Group from November 2004 to December 2005.  He is also a director of VRM II since January 2006.  Since August of 1993 Mr. Leavitt has been an accountant for the United States Department of the Interior where his responsibilities include the review and audit of various states, local and municipality governments for compliance with federal laws and regulations as well as preparation of financial statements for Executive Branch and Congressional review.  Additionally, Mr. Leavitt sits on various audit committees involving the utility industry.  Mr. Leavitt is a CPA and a graduate of University of Nevada Las Vegas.  The Board also determined that Mr. Leavitt meets the audit committee financial expert requirements of NASDAQ Marketplace Rule 4350(d)(2)(A).  Mr. Leavitt’s experience as an accountant provides the Board with an important perspective on financial reporting and internal controls.

CORPORATE GOVERNANCE

Board Composition

Our board of directors is authorized to have up to 15 directors.  Our board of directors is currently comprised of four directors.  In accordance with our articles of charter and bylaws, our board of directors is divided into three classes, class I, class II and class III, with each class serving staggered three-year terms.  The members of the classes are divided as follows:

 
·
The class I director is Mr. Seltzer, and his term will expire at the 2016 annual meeting of stockholders;

 
·
The class II directors are Mr. Jacobs, and his terms will expire at the 2017 annual meeting of stockholders; and

 
·
The class III directors are Mr. Shustek and Mr. Leavitt, and their terms will expire at the 2015 annual meeting of stockholders.

 
The authorized number of directors may be changed only by resolution of the board of directors.  Any additional directors resulting from an increase in the number of directors will be distributed between the three classes so that, as nearly as possible, each class will consist of one third of the directors.  This classification of our board of directors may have the effect of delaying or preventing changes in our control or management.  Our directors will hold office until their successors have been elected and qualified or until their earlier death, resignation, disqualification or removal for cause by the affirmative vote of the holders of at least a majority of our outstanding stock entitled to vote on election of directors.

During the year ended December 31, 2014, the Board held three meetings, the Audit Committee held three meetings, the Compensation Committee held no meetings and the Nominating Committee held no meetings.  During 2014, no director attended less than 75% of the aggregate number of meetings held by the Board, and each committee of which such director was a member.  Directors are encouraged to attend annual meetings of our stockholders.  At the last annual meeting of stockholders, all of the three then-current directors attended.

Board Leadership

Michael V. Shustek serves as our CEO and as the Chairman of our Board of Directors.  Mr. Shustek was the founder of our Company and has served as its CEO since inception.  Our Board of Directors believes that Mr. Shustek is best situated to serve as Chairman of the Board because he is the director most familiar with our business and loan portfolio and is therefore best positioned to lead Board discussions relating to strategic priorities and opportunities.  In this regard, the Board noted Mr. Shustek’s extensive experience in secured real estate lending and his familiarity with our assets and operations.  The Board of Directors believes that under these circumstances, the combined role of CEO and Chairman promotes effective strategy development and execution.

We have not appointed a lead independent director, viewing this position as unnecessary given the small size of our Board of Directors.

Board Committees

Our board of directors has appointed an audit committee, a nominating committee and a compensation committee.  There are no family relationships among any of our directors or executive officers.

As of March 30, 2015, the Board constituted the following committees:

Audit Committee
Kenneth A Seltzer (Chairman)
Donovan Jacobs
Fredrick J. Leavitt

Compensation Committee
Donovan Jacobs (Chairman)
Kenneth A Seltzer
Fredrick J. Leavitt

Nominating Committee
Fredrick J. Leavitt (Chairman)
Kenneth A. Seltzer
Donovan Jacobs

 
Audit committee – The Audit Committee is responsible for the appointment, compensation, retention and oversight of the Company’s independent accountants.  In addition, the Audit Committee reviews with the Company’s management and its independent accountants financial information that will be provided to stockholders and others, the systems of internal controls which management and our board of directors have established and our audit and financial reporting processes.  The Audit Committee operates under a written Audit Committee Charter adopted by our board of directors which is available at http://www.vestinrealtymortgage1.com/VRT_About/CommitteeCharters.aspx.  Our Audit Committee, consisting of Mr. Seltzer (chair), Mr. Jacobs and Mr. Leavitt, met in March 2015 in connection with the audit of our 2014 financial statements, and the audit committee members held a total of four meetings in fiscal 2014. Our Audit Committee oversees our accounting and financial reporting processes, internal systems of control, independent auditor relationships and the audits of our financial statements.  This committee’s responsibilities include, among other things:

 
·
Selecting and hiring our independent auditors;

 
·
Evaluating the qualifications, independence and performance of our independent auditors;

 
·
Approving the audit and non-audit services to be performed by our independent auditors;

 
·
Reviewing the design, implementation, adequacy and effectiveness of our internal controls and our critical accounting policies;

 
·
Overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters; and

 
·
Reviewing with management and our auditors any earnings announcements and other public announcements regarding our results of operations.

Our independent auditors and internal financial personnel regularly meet privately with our audit committee and have unrestricted access to this committee.  Our board of directors has determined that each of these directors meet the independence standards for audit committee members and that Mr. Seltzer meets the financial expertise requirements set forth in Section 407 of the Sarbanes Oxley Act of 2002.

Nominating Committee – Our Nominating Committee was formed to assist our board of directors by identifying individuals qualified to become directors.  During fiscal 2014, the Nominating Committee, consisting of Mr. Leavitt (chair), Mr. Seltzer and Mr. Jacobs, held no meetings.

The Nominating Committee operates under a charter adopted by our board of directors which is available at http://www.vestinrealtymortgage1.com/VRT_About/CommitteeCharters.aspx  Responsibilities of the Nominating Committee include, among other things:

 
·
Evaluating the composition, size, operations and governance of our board of directors and making recommendations regarding future planning and the appointment of directors;

 
·
Evaluating the independence of our directors and candidates for election to the Board; and

 
·
Evaluating and recommending candidates for election to our board of directors.

 
Compensation Committee – Our Compensation Committee operates under a charter adopted by our board of directors which is available at http://www.vestinrealtymortgage1.com/VRT_About/CommitteeCharters.aspx  It was established to assist our board of directors relating to compensation of the Company’s directors and its sole manager, Vestin Mortgage; and to produce as may be required an annual report on executive officer compensation.  Subject to applicable provisions of our bylaws and the Management Agreement with our manager, the compensation committee is responsible for reviewing and approving compensation paid by us to our manager.  During fiscal 2014 the Compensation Committee, consisting of Mr. Jacobs (chair), Mr. Seltzer and Mr. Leavitt held no meetings. During February 2015 April 13, 2011, the compensation committee met and reaffirmed the directors’ fees of $500 per meeting and the Manager’s fee.  No member of the Compensation Committee had a relationship that requires disclosure as a compensation committee interlock.

Our board of directors may establish other committees to facilitate the management of our business.

Criteria for Selecting Directors

In evaluating candidates, the Nominating Committee will consider an individual’s business and professional experience, the potential contributions they could make to our Board and their familiarity with our business.  The Nominating Committee will consider candidates recommended by our directors, members of our management team and third parties.  The Nominating Committee will also consider candidates suggested by our stockholders.  We do not have a formal process established for this purpose.

Stockholders are encouraged to contact the Chair of the Nominating Committee if they wish the Committee to consider a proposed candidate.  Stockholders should submit the names of any candidates in writing, together with background information about the candidate, and send the materials to the attention of Mr. Leavitt at the following address: 8880 W. Sunset Road, Suite 200, Las Vegas, NV 89148.  Stockholders wishing to directly nominate candidates for election to the Board must provide timely notice in accordance with the requirements of our Bylaws, between the 150th and 120th days prior to the anniversary of the date of mailing of the notice for the preceding year’s annual meeting of stockholders.

Code of Ethics

Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees of our manager.  The Code of Business Conduct and Ethics may be found on our web site at http://www.vestinrealtymortgage1.com/VRT_About/GovernanceDocuments.aspx.

EXECUTIVE COMPENSATION

We currently have no employees. Our day-to-day management functions are performed by our manager and related affiliates. Our executive officers are all employees of our manager or its affiliates and are utilized by our manager to provide management, acquisition, advisory and certain administrative services for us. We do not pay any of these individuals for serving in their respective positions.  We pay our manager a management fee of up to 0.25% of the amounts raised by us and Fund I through the sale of shares or units.  Payment of the management fee is reviewed by and subject to approval of our Compensation Committee.  For the year ended December 31, 2014, we paid our manager $276,000 for its management services, which represented approximately 13% of the revenues received by our manager and its affiliates in 2014.

Pursuant to our management agreement, we pay our manager a fee which is calculated as a percentage of our original capital contributions.  In addition, we may pay our manager or its affiliates for services rendered in selling properties acquired through foreclosure.  We also pay a fee to Strategix Solutions which is based upon the wages of the employees providing the services.  We have evaluated the risks entailed in these fee arrangements and we do not believe that such risks are reasonably likely to have a material adverse effect upon the Company.

 
Our manager or an affiliate also receives various fees from borrowers.  Such fees may include origination fees as well as charges for servicing, extending or modifying their loans.  We are not a party to such fee arrangements and have no control over them.  Many of these fees are paid on an up-front basis and, as a result, could create an incentive for our manager or an affiliate to make or extend riskier loans.  Funding risky loans could have a material adverse effect upon our operating results and financial condition.

Except as specified above, our independent directors receive $500 for each board meeting and committee meeting they attend, whether in person or by phone, and are reimbursed for travel expenses and other out-of-pocket costs of attending board and committee meetings.

The following table sets forth information with respect to our director compensation during the fiscal year ended December 31, 2014:

 
Name
 
Fees Earned
or Paid in
Cash
  
Stock
Awards
($)
    
Option
Awards
($)
    
Non-Equity
Incentive Plan
Compensation
($)
    
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
  
All Other
Compensation
(1)($)
    
Total ($)
Michael V. Shustek
$--
  
$
 —  
  
  
$
 —  
  
  
$
 —  
  
  
$
 —  
  
$
  
  
--
  
Kenneth A Seltzer
$2,500
    
—  
  
    
—  
  
    
—  
  
    
—  
  
  
  
 $
2,500
  
Donovan Jacobs
$3,000
    
—  
  
    
—  
  
    
—  
  
    
—  
  
$
  
 $
3,000
  
Fredrick J. Leavitt
$3,000
    
—  
  
    
—  
  
    
—  
  
    
—  
  
$
  
 $
3,000
  

(1)
Amount represents reimbursement of travel and other expenses incurred by directors to attend various director meetings.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Shown below is certain information as of March 30, 2015, with respect to beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of shares of common stock by the only persons or entities known to us to be a beneficial owner of more than 5% of the outstanding shares of common stock.  Unless otherwise noted, the percentage ownership is calculated based on 1,380,278 shares of our common stock as of March 30, 2015.

Name and Address of
Beneficial Owner
  
Amount and Nature of
Beneficial Ownership
  
Percent of Class
         
Vestin Realty Mortgage II, Inc.
8880 West Sunset Road, Suite 200
Las Vegas, NV 89148
  
Sole voting and investment power of 134,545 shares
  
9.7%
         
Michael V. Shustek
8880 West Sunset Road, Suite 200
Las Vegas, NV 89148
  
Sole voting and investment power of 154,680 shares
  
11.2%
         
He Zhengxu
5220 Belsera Court
Reno, NV 89519
  
Shared voting and investment power of 126,579 shares
  
9.2%


 
The following table sets forth the total number and percentage of our common stock beneficially owned as of March 31, 2015, by:

 
·
Each director;

 
·
Our chief executive officer, chief financial officer and the officers of our manager who function as the equivalent of our executive officers; and

 
·
All executive officers and directors as a group.

Unless otherwise noted, the percentage ownership is calculated based on 1,380,278 shares of our total outstanding common stock as of March 30, 2015.

     
Common Shares Beneficially Owned
  
Beneficial Owner
Address
  
Number
    
Percent
  
               
Michael V. Shustek (1)
8880 W. Sunset Road, Suite 200, Las Vegas, NV  89148
     154,680       11.2 %
Donovan Jacobs
2710 Alpine Blvd Suite 0
Alpine, CA 91901
     --       --  
Kenneth A Seltzer
17 Candlewyck Dr.
Henderson, NV  89052
     --       --  
Fredrick J. Leavitt
650 Du Fort Ave.
Henderson, NV  88002
     --       --  
All directors and executive officers as a group (5 persons)
       154,680       11.2 %

**  Less than one percent of our total outstanding common stock.

(1)
Mr. Shustek is Manager of Vestin Mortgage.  Mr. Shustek is the beneficial owner of 154,680 shares of our common stock, representing approximately 11.2% of our outstanding common stock (based upon 1,380,278 shares of common stock outstanding at March 31, 2015).  Mr. Shustek directly owns 129,680 shares of our common stock (totaling 9.4%) and indirectly owns and has economic benefit of 25,000 shares of our common stock (totaling 1.8%) through his ownership of Vestin Mortgage.

Mr. Shustek has sole voting and dispositive power with respect to shares owned directly by himself and with respect to shares owned by Vestin Mortgage.  Voting and dispositive power with respect to shares owned by VRM II is shared with the members of VRM II’s Board of Directors.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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, thereby providing us with additional capital to make additional loans.

Please refer to Note K – Related Party Transactions in Part II, Item 8 Consolidated Financial Statements of this Annual Report on Form 10-K, for information regarding our related party transactions, which are incorporated herein by reference.




Director Independence.  The Board of Directors has determined that each of the current non-employee Directors (i.e., Messrs. Jacobs, Leavitt and  Seltzer) are “independent,” as that term is defined in Rule 4200(a)(15) of The Nasdaq Stock Market, Inc.’s listing requirements. In making these determinations, the Board of Directors did not rely on any exemptions to The Nasdaq Stock Market, Inc.’s requirements.

PRINCIPAL ACCOUNTING FEES AND SERVICES

During the year ended December 31, 2014 and 2013, De Joya Griffith, LLC (“De Joya Griffith”) services to us as follows:

   
December 31, 2014
    
December 31, 2013
  
Audit Fees
   $ 63,000     $ 63,000  
Audit Related Fees
   $ --     $ --  
Tax Fees
   $ --     $ --  
All Other Fees
   $ --     $ --  

De Joya Griffith did not perform any non-audit services for us in the years ended December 31, 2014 and 2013.

The Audit Committee has direct responsibility to review and approve the engagement of the independent auditors to perform audit services or any permissible non-audit services.  All audit and non-audit services to be provided by the independent auditors must be approved in advance by the Audit Committee.  The Audit Committee may not engage the independent auditors to perform specific non-audit services proscribed by law or regulation.  All services performed by our independent auditors under engagements entered into from May 6, 2003 to April 1, 2006, were approved by the Audit Committee of Vestin Group, all services performed after April 1, 2006, were approved by our Audit Committee, pursuant to our pre-approval policy, and none was approved pursuant to the de minimis exception to the rules and regulations of the Securities Exchange Act of 1934, Section 10A(i)(1)(B), on pre-approval.

PART IV

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following are filed as part of this Report:

(a) 1.  Financial Statements

The list of the financial statements contained herein are contained in Part II, Item 8 Consolidated Financial Statements on this Annual Report on Form 10-K, which is hereby incorporated by reference.

(a) 3.  Exhibits
Reference is made to the Exhibit Index appearing immediately after the signature page to this report for a list of exhibits filed as part of this report.





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
Vestin Realty Mortgage I, Inc.
     
 
By:
/s/ Michael V. Shustek
   
Michael V. Shustek
   
President and Chief Executive Officer
 
Date:
March 30, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
  
Capacity
  
Date
         
/s/ Michael V. Shustek
  
President and Chief Executive Officer and Director
  
March 30, 2015
Michael V. Shustek
  
(Principal Executive Officer)
    
         
/s/ Tracee Gress
  
Chief Financial Officer
  
March 30, 2015
Tracee Gress
  
(Principal Financial and Accounting Officer)
    
         
/s/ Donovan J. Jacobs
  
Director
  
March 30, 2015
Donovan J. Jacobs
        
         
/s/ Kenneth A. Seltzer
  
Director
  
March 30, 2015
Kenneth A. Seltzer
        
         
/s/ Fredrick J. Leavitt
  
Director
  
March 30, 2015
Frederick J. Leavitt
        
         







Exhibit No.
  
Description of Exhibits
2.1(1)
  
Agreement and Plan of Merger between Vestin Fund I, LLC and the Registrant
2.2(5)
  
Membership Interest Purchase Agreement between VRM I, VRM II and Northstar Hawaii, LLC
3.1(1)
  
Articles of Incorporation of the Registrant
3.2(1)
  
Bylaws of the Registrant
3.3(1)
  
Form of Articles Supplementary of the Registrant
4.1(1)
  
Reference is made to Exhibits 3.1, 3.2 and 3.3, 10.1 and 10.5
4.2(2)
  
Specimen Common Stock Certificate
4.3(1)
  
Form of Rights Certificate
10.1(1)
  
Form of Management Agreement between Vestin Mortgage and the Registrant
10.2(1)
  
Form of Rights Agreement between the Registrant and the rights agent
10.3 (4)
  
Agreement between Strategix Solutions, LLC and Vestin Realty Mortgage II, Inc. for accounting services.
10.4 (6)
  
Deed in Lieu Agreement, dated as of February 7, 2012
10.5(7)
  
First Amendment to Rights Agreement, dated as of July 9, 2012, between Registrant and the rights agent
10.5(7)
  
Second Amendment to Rights Agreement, dated as of July 9, 2012, between Registrant and the rights agent
10.6 (8)
  
Membership Interest Transfer Agreement, dated as of December 19, 2013, between Registrant and MVP Capital Partners, LLC.
14 (3)
  
Vestin Realty Mortgage I, Inc. Code of Business Conduct and Ethics
21.1*
  
List of subsidiaries of the Registrant
31.1*
  
Section 302 Certification of Michael V. Shustek
31.2*
  
Section 302 Certification of Tracee Gress
32*
  
Certification Pursuant to 18 U.S.C. Sec. 1350
101*
  
The following material from the Company's annual report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2014 and 2013, (ii) Consolidated Statements of Operations for the years ended December 31, 2014 and 2013, (iii) Consolidated Statements of Other Comprehensive Income for the years ended December 31, 2014 and 2013, (iv) Consolidated Statement of Equity for the years ended December 31, 2014 and 2013, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013, and (vi) Notes to the Consolidated Financial Statements.

(1)
  
Incorporated herein by reference to Post-Effective Amendment No. 3 to our Form S-4 Registration Statement filed on January 4, 2006 (File No. 333-125347)
(2)
  
Incorporated herein by reference to Post-Effective Amendment No. 4 to our Form S-4 Registration Statement filed on January 31, 2006 (File No. 333-125347)
(3)
  
Incorporated herein by reference to the Transition Report on Form 10-K for the ten month transition period ended April 30, 2006 filed on June 28, 2006 (File No. 000-51964)
(4)
  
Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on May 8, 2009 (File No. 000-51964)
(5)
  
Incorporated herein by reference to the Form 8-K/A filed on August 14, 2012 (File No. 000-51964)
(6)
  
Incorporated herein by reference to the Form 10-K filed on March 16, 2012 (File No. 000-51964)
(7)
  
Incorporated herein by reference to the Form 8-K filed on July 13, 2012 (File No. 000-51964)
(8)_
  
Incorporated herein by reference to the Form 8-K filed on December 26, 2013 (File No. 000-51964)
*
  
Filed concurrently herewith.