10-K 1 vrtb12311510k.htm VESTIN REALTY MORTGAGE II, INC. DECEMBER 31, 2015 10K vrtb12311510k.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, 2015

Or

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

For the transition period from _________ to _________

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


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

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

Registrant’s telephone number, including area code 702.227.0965

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

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

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

None
(Title of class)

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

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

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

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

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

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

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

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

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

Class
   
Market Value as of
June 30, 2015
Common Stock, $0.0001 Par Value
 
$
9,492,499
       

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 30, 2016
Common Stock, $0.0001 Par Value
   
2,490,514
       


 
 

 


TABLE OF CONTENTS

     
Page
PART I
     
 
 
 
 
       
PART II
     
 
 
 
 
 
 
       
PART III
     
 
 
 
 
 
       
PART IV
     
 
   
   
EXHIBIT INDEX
 


 
 

 

PART I

Special Note Regarding Forward-Looking Statements

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

BUSINESS

General

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

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

Michael Shustek owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, which is our manager (the “manager” or “Vestin Mortgage”). The business of brokerage and placement of real estate loans have been performed by affiliated or non-affiliated mortgage brokers, including Advant Mortgage, LLC (“MVP Mortgage”), a licensed Nevada mortgage broker, which is indirectly wholly owned by Mr. Shustek.
Pursuant to a management agreement, our manager is responsible for managing our operations and implementing our business strategies on a day-to-day basis.  Consequently, our operating results are dependent to a significant extent upon our manager’s ability and performance in managing our operations and servicing our loans.

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

The consolidated financial statements include the accounts of VRM II; Building A, LLC, Building C, LLC, Wolfpack Properties, LLC; Devonshire, LLC; SE Properties, LLC; ExecuSuites, LLC; MVP Realty Advisors, LLC (“MVP Advisors”) and MVP Capital Partners II, LLC (“MVP CP II”).  All significant intercompany transactions and balances have been eliminated in consolidation.

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

In December 2013, we entered into a membership interest transfer agreement with MVP Capital Partners, LLC (“MVP Capital”) pursuant to which we increased our ownership interest from 40% to 60% in MVP Advisors, the manager of MVP REIT, Inc. (“MVP REIT”). At the same time, VRM I acquired from MVP Capital the remaining 40% interest in MVP Advisors.  Pursuant to the transfer agreement, we and VRM I did not pay any up-front consideration for the acquired interest but will be responsible for our proportionate share of future expenses of MVP Advisors. In recognition of MVP Capital’s substantial investment in MVP Advisors for which MVP Capital received no up-front consideration, the transfer agreement further provides that once we and VRM I have been repaid in full for any capital contributions to MVP Advisors or for any expenses advanced on MVP Advisors’ behalf (“Capital Investment”), and once we and VRM I have received an annualized return on our Capital Investment of 7.5%, then MVP Capital will receive one-third of the net profits of MVP Advisors. MVP REIT is a SEC-registered, non-traded REIT that seeks to invest predominantly in parking facilities located throughout the United States as its core assets.  Through our interest in MVP Advisors, we have directed, and may continue to direct, a portion of our cash towards development of the business of MVP REIT.  As of December 31, 2015, we have made loans of approximately $12.9 million to MVP Advisors, which amount has been fully allowed for as discussed under “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Capital and Liquidity” below. If MVP REIT is unable to deploy its initial offering proceeds and operate its business successfully, then our return on our investment in MVP Advisors and the ability of MVP Advisors to repay our loans could be adversely impacted.

During May 2015, our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%.  The purpose of MVP CP II is to act as the sponsor of MVP REIT II, a Maryland corporation, which was formed as a publicly registered non traded REIT (“MVP REIT II”). MVP REIT II’s registration statement for its initial public offering has been declared effective by the SEC on October 23, 2015.  MVP REIT II is offering up to $550,000,000 in shares of common stock, with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.

We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to our respective ownership interest.  As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II.  As part of the advisory agreement, MVP Advisors will receive a 1% annual asset management fee and 2.25% of the purchase price on all acquisitions.


MVP Advisors will also receive the lesser of 3% of contract sale price or 50% of the brokerage commission paid on dispositions of MVP REIT II assets which amount shall accrue until the MVP REIT II investors have a return of their net capital and a 6% annual cumulative non compounded return. In addition once the MVP REIT II investors have received a return of their net capital invested and a 6% annual cumulative, non-compounded return, then MVP Advisors will be entitled to receive 15% of the remaining proceeds. This fee will be payable under only one of the following events: (i) if MVP REIT II shares are listed on a national securities exchange; (ii) if MVP REIT II assets are sold, other than single assets sold in the ordinary course, or liquidated; (iii) upon a merger, share exchange, reorganization or other transaction pursuant to which MVP REIT II investors receive cash or publicly traded securities in exchange for their shares; or (iv) upon termination of the advisory agreement. The operating agreement of the Advisor provides that once we and VRM I have been repaid in full for any capital contributions to the Advisor or for any expenses advanced on the Advisor’s behalf, or capital investment, and once we and VRM I have received an annualized return on our capital investment of 7.5%, then Michael Shustek will receive 40% of the net profits of the Advisor.

Segments

We currently are authorized to operate three reportable segments, investments in real estate loans, investments in real property and investment in a real estate management company.  As of December 31, 2015, the Company operates all segments.

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

REAL ESTATE LOAN STRATEGIES

As of December 31, 2015, our loans were in the following states: Arizona, Nevada, and Ohio.  The loans we invest in are selected for us by our manager from among loans originated by affiliated or non-affiliated mortgage brokers.  When a mortgage broker originates a loan for us, that entity identifies the borrower, processes the loan application, brokers and sells, assigns, transfers or conveys the loan to us.  We believe that our loans are attractive to borrowers because of the expediency of our manager’s loan approval process, which takes about ten to twenty days.

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

Acquisition and Investment Policies

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

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


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

 
·
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, 2015 none of our loans had a prepayment penalty or exit fee.  Depending upon the amount by which lower interest rates are available to borrowers, the amount of the exit fees may not be significant in relation to the potential savings borrowers may realize as a result of prepaying their loans.

Extensions to Term of Loan

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

Interest Reserves

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

Balloon Payment

As of December 31, 2015, most of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term.  There are no specific criteria used in evaluating the credit quality of borrowers for real estate loans requiring balloon payments.  Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due.  As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due.  To the extent that a borrower has an obligation to pay real estate loan principal in a large lump sum payment, its ability to repay the loan may be dependent upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial amount of cash.  As a result, these loans can involve a higher risk of default than loans where the principal is paid at the same time as the interest payments.

REAL ESTATE INVESTMENT STRATEGIES

As of December 31, 2015, we had investments in six real estate properties consisting of office buildings. These properties are located in Nevada. In addition, we may invest in other real property, including but not limited to, office buildings, shopping centers, business and industrial parks, manufacturing facilities, multifamily properties, warehouses and distribution facilities, storage facilities, parking facilities, motel and hotel properties and recreation and leisure properties. We will not invest in unimproved land (although we may invest in loans secured by unimproved land) or construction or development of properties. We intend to lease properties owned by us and to hold properties until such time as we believe it is the optimal time to capitalize on the capital appreciation of our properties.

We invest principally in properties that generate current income.  Potential gain on sale of appreciated properties will be a secondary objective.


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

Maximizing Value of Acquired Properties

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

Leasing

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

Financing Sources

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

Borrowing

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

Competition

We have significant competition with respect to both our acquisition of real property and our mortgage lending business.  Our competitors include REITs, insurance companies, commercial banks, private investment funds, hedge funds, specialty finance companies and other investors, many of which have significantly greater resources than us. We may not be able to compete successfully for investments. In addition, the number of entities and the amount of funds competing for suitable investments may increase. If we pay higher prices for investments, our returns will be lower and the value of our assets may not increase or may decrease significantly below the amount we paid for such assets.


We will compete with numerous other persons while seeking to attract tenants to real property we acquire. These persons or entities may have greater experience and financial strength than us. There is no assurance that we will be able to attract tenants on favorable terms, if at all. For example, our competitors may be willing to offer space at rental rates below our rates, causing us to lose existing or potential tenants and pressuring us to reduce our rental rates to retain existing tenants or convince new tenants to lease space at our properties. Each of these factors could adversely affect our results of operations, financial condition, value of our investments and ability to pay distributions.

Regulation

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

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

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

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

Employees

We have 25 employees through our majority owned subsidiary MVP Advisors.  Our manager has provided and will continue to provide most of the employees necessary for our operations, not related to MVP Advisors except as described in this report regarding Strategix Solutions, LLC.  As of December 31, 2015, the Vestin entities had a total of three full-time and no part-time employees.  Except as hereinafter noted, all employees are at-will employees and none are covered by collective bargaining agreements.  John Alderfer, our former CFO, is a party to an employment, non-competition, confidentiality and consulting contract with Vestin Group, Inc., through December 31, 2016.

During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services.  Strategix Solutions also provides accounting and financial reporting services to VRM I, Fund III and MVP REIT.  Our CFO and other members of our accounting staff are employees of Strategix Solutions.  Strategix Solutions is managed and owned by our CFO, Ms. Gress.  As of December 31, 2015, Strategix Solutions dedicates to us a total of three full time employees.


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

Available Information

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

PROPERTIES

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

Investments in Real Estate

The following table provides information regarding each of the properties we owned an interest in as of December 31, 2015:
 
Property Description  Location Year Built  Leasable Square Feet  Acquisition Closing Date      Aggregate Purchase Price        Percentage Owner       
Occupancy at
December 31, 2015
 
Wolfpack Properties LLC single-tenant office building
Las Vegas, Nevada
2008
22,000
04/30/14
  $ 6,500,000       72 %     100 %
Building C office building
Las Vegas, Nevada
2008
47,500
07/31/14
  $ 15,000,000       72 %     89 %
Building A office building
Las Vegas, Nevada
2008
47,500
08/29/14
  $ 15,000,000       72 %     100 %
Devonshire office building
Las Vegas, Nevada
2008
22,000
04/30/14
  $ 6,400,000       72 %     100 %
SE Properties office building
Las Vegas, Nevada
2008
22,000
04/30/14
  $ 6,100,000       72 %     100 %
ExecuSuites office building
Las Vegas, Nevada
2008
22,000
04/30/14
  $ 6,100,000       72 %     94 %
 
LEGAL PROCEEDINGS

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

MINE SAFETY DISCLOSURES

None.


PART II

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

Market Information

Our common stock is traded on the Nasdaq Global Select Market under the symbol VRTB and began trading on May 1, 2006.  The price per share of common stock presented below represents the highest and lowest sales price for our common stock on the Nasdaq Global Select Market.
 
2015
 
High
   
Low
 
First Quarter
  $ 4.82     $ 2.76  
Second Quarter
  $ 5.35     $ 3.28  
Third Quarter
  $ 3.87     $ 3.05  
Fourth Quarter
  $ 3.41     $ 2.45  
 
2014
 
High
   
Low
 
First Quarter
  $ 7.40     $ 5.00  
Second Quarter
  $ 6.33     $ 3.82  
Third Quarter
  $ 6.37     $ 4.20  
Fourth Quarter
  $ 5.25     $ 3.00  

On February 18, 2016, the Company received a deficiency notification from NASDAQ that it failed to maintain, for the last thirty (30) business days, a minimum of $5,000,000 in its Market Value of Publicly Held Shares to remain on the NASDAQ Global Capital Markets.  The NASDAQ rules provide the Company with a compliance period of 180 calendar days in which to regain compliance.  The Company is currently considering applying to transfer the Company’s securities to The Nasdaq Capital Market.

Holders

As of March 30, 2016, there were approximately 589 holders of record of 2,490,514 shares of our common stock.

Dividend Policy

During June 2008, our Board of Directors decided to suspend the payment of dividends.  No dividends were declared during the years ended December 31, 2015 or 2014.  In light of our accumulated loss, we do not expect to pay dividends in the foreseeable future.

Recent Sales of Unregistered Securities

None

Equity Compensation Plan Information

None

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

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


The following is a summary of our stock acquisitions during the year ended December 31, 2015, as required by Regulation S-K, Item 703.

Period
 
(a) Total Number of Shares Purchased
   
(b) Average Price Paid per Share
   
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
 
January 1 – January 31, 2015
    --     $ --       --     $ 395,615  
February 1 – February 28, 2015
    --       --       --       395,615  
March 1 – March 31, 2015
    --       --       --       395,615  
April 1 – April 30, 2015
    --       --       --       395,615  
May 1 – May 31, 2015
    23,425       3.89       23,425       304,641  
June 1 – June 30, 2015
    45,224       4.94       45,224       81,487  
July 1 – July 31, 2015
    --       --       --       81,487  
August 1 – August 31, 2015
    --       --       --       81,487  
September 1 – September 30, 2015
    --       --       --       81,487  
October 1 – October 31, 2015
    --       --       --       81,487  
November 1 – November 30, 2015
    --       --       --       81,487  
December 1 – December 31, 2015
    --       --       --       81,487  
Total
    68,649     $ 4.58       68,649     $ 81,487  

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

The following is a financial review and analysis of our financial condition and results of operations for the years ended December 31, 2015 and 2014. This discussion should be read in conjunction with our financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this annual report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see “Special Note Regarding Forward-Looking Statements” above for a description of some of these risks and uncertainties.

RESULTS OF OPERATIONS

OVERVIEW

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

As of December 31, 2015, we have acquired, along with affiliated entities, six properties of which our share of the purchase price totaled $15.4 million, including closing costs.  During the year ended December 31, 2015, we funded two loans totaling approximately $4.6 million.  During the year ended December 31, 2014, we funded ten loans totaling approximately $7.6 million.  As of December 31, 2015, our loan-to-value ratio was 58.61%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals.
 
Through our interest in MVP Advisor, we have directed, and may continue to direct, a portion of our cash towards development of the business of MVP REIT.  As of December 31, 2015, we have made loans of approximately $12.9 million, which amount has been fully allowed for, to our 60% owned subsidiary, MVP Advisors, the manager of MVP REIT.  MVP REIT is a SEC-registered, non-traded REIT that seeks to invest predominantly in parking facilities located throughout the United States as its core assets.  We believe MVP Advisors has the opportunity to generate fees for the services it will render to MVP REIT.  However, MVP REIT recently completed its initial publicly registered offering in September 2015 and the fees paid to date to MVP Advisors have not been significant.  We may not realize interest income from the loan to MVP Advisors or any return on our investment in MVP Advisors until it is able to generate sufficient fees to service the interest on our loan and generate a return on our investment. On March 20, 2014, our board of directors agreed to continue funding MVP Advisors.  We recorded an impairment of this investment due to uncertainty as to when we will be repaid the amounts loaned.  To further support development of the business of MVP REIT, MVP Advisors also has agreed to waive certain fees and expense reimbursements it otherwise would have been entitled to receive under the terms of its advisory agreement with MVP REIT. MVP Advisors ability to repay the loans and the return on our investment in MVP Advisors will likely depend upon the success of MVP REIT’s ability to successfully deploy the offering proceeds. We expect such investments to ultimately generate a return through management fees payable by MVP REIT to MVP Advisors.  If MVP REIT is unable to deploy the capital and operate its business successfully, then our return on our investment in MVP Advisors and the ability of MVP Advisors to repay our loans could be adversely impacted.

During May 2015, our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%.  The purpose of MVP CP II is to act as the sponsor of MVP REIT II. MVP REIT II has filed its initial registration statement with the Securities Exchange Commission and all of the states.  MVP REIT II’s registration statement has been declared effective by the SEC on October 22, 2015.  MVP REIT II is a proposed $550,000,000 offering with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.

We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to our respective ownership interest.  As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II.  As part of the advisory agreement, MVP Advisors will receive a 1% annual asset management fee and 2.25% of the purchase price on all acquisitions.  MVP Advisors will also receive the lesser of 3% of contract sale price or 50% of the brokerage commission paid on dispositions of MVP REIT II assets which amount shall accrue until the MVP REIT II investors have a return of their net capital and a 6% annual cumulative non compounded return. In addition once the MVP REIT II investors have received a return of their net capital invested and a 6% annual cumulative, non-compounded return, then MVP Advisors will be entitled to receive 15% of the remaining proceeds. This fee will be payable under only one of the following events: (i) if MVP REIT II shares are listed on a national securities exchange; (ii) if MVP REIT II assets are sold, other than single assets sold in the ordinary course, or liquidated; (iii) upon a merger, share exchange, reorganization or other transaction pursuant to which MVP REIT II investors receive cash or publicly traded securities in exchange for their shares; or (iv) upon termination of the advisory agreement. The operating agreement of the Advisor provides that once we and VRM I have been repaid in full for any capital contributions to the Advisor or for any expenses advanced on the Advisor’s behalf, or capital investment, and once we and VRM I have received an annualized return on our capital investment of 7.5%, then Michael Shustek will receive 40% of the net profits of the Advisor.

As of December 31, 2015 we have made loans of approximately $1.1 million to MVP CP II.  Similar to our investments in MVP Advisor in connection with MVP REIT, the return on our investment in MVP CP II in connection with MVP REIT II, including the ability of MVP CP II to repay its loans, will likely depend upon the success of the pending public offering of MVP REIT II and the ability of MVP CP II and MVP Advisor to successfully deploy the offering proceeds. As with our investment in MVP REIT, while we expect any such investments to ultimately generate a return through management fees payable by MVP REIT II to MVP CP II and MVP Advisor, the amount of fees may not be significant during the near term as MVP REIT II begins its operations. If MVP REIT II is unable to raise sufficient capital in its publicly registered offering or deploy the capital and operate its business successfully, then our return on our investment in MVP CP II and the ability of MVP CP II to repay our loans could be adversely impacted.  Based on this uncertainty, we have determined to fully impair the balance of our $1.1 million loan to MVP CP II.  As of December 31, 2015, MVP REIT II has fulfilled its minimum offering of $2.0 million in subscriptions and has not purchased any properties or earned any income.
 
On January 14, 2014, we, VRM I and MVP REIT sold MVP PF Baltimore 2013, LLC to a third party for $1,550,000 which resulted in a nominal loss. On April 1, 2014, MVP REIT exercised the Purchase Right to acquire our and VRM I’s interest in five parking facilities and our interest in a storage facility, in each case, net of the assumed debt secured by the real estate. In exchange, we and VRM I received MVP REIT’s interest in four office properties, net of the assumed debt secured by the real estate. The difference between the net amount of the assets exchanged was paid in cash. Following this transaction, MVP REIT holds a 100% interest in the five parking facilities and storage facility. We and VRM I together hold 100% interest in the four office properties.  These transferred properties have been reported as Discontinued Operations in the accompanying statement of operations.  See “Note F – Assets held for sale” to the Financial Statements included in Part II, Item 8 Consolidated Financial Statements  of this Annual Report on Form 10-K.

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

During April 2015, we committed to a plan to sell all interests in our six office buildings, at which point we began classifying the related assets as assets held for sale, and the related liabilities as liabilities related to assets held for sale. Additionally, we have classified the six office building’s results as discontinued operations.  On January 29, 2016, we closed on the sale of its interest in three office buildings that it owned with VRM I through various subsidiaries.  The first building was owned by Building C, LLC and is located at 8930 West Sunset Road, Las Vegas, Nevada (the “8930 Building”).  The second building was owned by SE Property Investments, LLC and is located at 8905 West Post Road, Las Vegas, Nevada (the “8905 Building”) and the third building was owned by ExecuSuite Properties, LLC and is located at 8945 West Post Road, Las Vegas, Nevada (the “8945 Building”).

The sales price for the 8930 Building is $12.1 million less the current debt on the property of approximately $8.1 million, which was assumed by the purchaser for a net of approximately $4.0 million of which our share was approximately $2.9 million.  The sales price for the 8905 Building is $5.6 million less the current debt on the property of approximately $3.3 million, which was assumed by the purchaser for a net of approximately $2.3 million of which our share was approximately $1.6 million.  The sales price for the 8945 Building is $5.0 million less the current debt on the property of approximately $3.0 million, which was assumed by the purchaser for a net of approximately $2.0 of which our share was approximately $1.4 million.

We and VRM I, through its subsidiaries, have the right, for a period of one year from the Closing Date, to repurchase one or more of the buildings at a price equal to (i) the sales price for each building, plus (ii) $65,000 for the 8930 Building, $30,000 for the 8905 Building and $30,000 for the 8945 Building, plus (iii) twelve percent less any profit realized by the purchaser of the building being repurchased.  Each purchaser is managed by Stable Development, LLC, a limited liability company owned and managed by Lance Bradford.  Mr. Bradford is the former President of MVP REIT, whose advisor, MVP Advisors is wholly owned by us and VRM I.

As of December 31, 2015, VRM II purchased 5,000 shares of MVP REIT II’s outstanding common stock for $125,000.

Our financial results, including the sources of our revenues and expenses, for the year ended December 31, 2015 reflect, in significant part, the shift in our investment focus from real estate secured loans to direct investments in real estate and investments in a real estate management company.  So long as such real estate investments remain part of our investment portfolio, we would expect that, in the near term, rental income will continue to be a significant source of revenue and interest expense will make up a greater portion of our total expenses.  Our advisor fee income related to our investment in MVP Advisors also may become a more significant source of revenues in the future, depending upon the level of success achieved by MVP Advisors in its management of MVP REIT.


While we do not anticipate any near term change in the composition of our revenues, we may, from time to time, decide to sell one or more of our investments, including our real property investments, and redeploy those assets in investments in real estate secured loans, direct investments in real property or other real property related investments.  For example, during April 2015, we committed to a plan to sell all interests in our six office buildings.  This plan may result in a further change in the composition of our revenues depending upon how we redeploy the proceeds from such sale.

SUMMARY OF FINANCIAL RESULTS

Comparison of operating results for the year ended December 31, 2015, to the year ended December 31, 2014

Total Revenue:
 
2015
   
2014
   
$ Change
   
% Change
 
Interest income from investment in real estate loans
  $ 645,000     $ 979,000     $ (334,000 )     (34 %)
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
    1,623,000       560,000       1,063,000       190 %
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
    552,000       198,000       354,000       179 %
Acquisition fee income
    1,830,000       --       1,830,000       100 %
Advisor fee
    566,000       379,000       187,000       49 %
            Total
  $ 5,216,000     $ 2,116,000     $ 3,100,000       147 %

Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans.  Acquisition fee and advisor fee income is related to MVP Advisors, which advises MVP REIT and MVP RIET II and earns certain fees for these services.  During the year ended December 31, 2015, MVP REIT purchased 11 properties which resulted in acquisition fee income of approximately $1.8 million.  On November 25, 2014, Shustek Investments Inc., a company wholly owned by our CEO Mike Shustek, entered into a loan purchase contract with us to acquire a loan with a book value of approximately $2.4 million. The loan was originated during March 2009 with an original principal balance of $7.45 million earning interest at a rate of 11%.  The borrower made principal payments during the life of the loan; however, they also received extensions for the maturity of the note. As of the date of the loan purchase contract, the loan was extended through January 2015.  The purchase price of the loan was approximately $3.0 million, which includes the purchase of interest assigned to third parties. As additional consideration we may receive 50% of any amount collected in excess of the purchase price less any expenses incurred by Shustek Investments. After three years, the 50% shall be reduced to 33%. This transaction resulted in a gain on sale of loan – related party totaling approximately $0.6 million for the year ended December 31, 2014.  During year ended December 31, 2015 this loan was paid in full, and we received approximately $1.6 million.


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

Operating expenses:
 
2015
   
2014
   
$ Change
   
% Change
 
Management fees – related party
  $ 1,096,000     $ 1,098,000     $ (2,000 )     (0.18 %)
MVP REIT II organization and offering costs
    1,329,000       --       1,329,000       100 %
Wages and benefits
    3,330,000       1,784,000       1,546,000       86 %
Acquisition expense
    1,000       29,000       (28,000 )     (96 %)
Depreciation
    2,000       --       2,000       100 %
Forgiveness of debt – related party
    --       533,000       (533,000 )     (100 %)
Professional fees
    1,073,000       1,237,000       (164,000 )     (13 %)
Seminars
    1,175,000       308,000       867,000       281 %
Consulting
    221,000       413,000       (192,000 )     (46 %)
Insurance
    259,000       267,000       (8,000 )     (3 %)
Commissions
    3,162,000       722,000       2,440,000       337 %
Travel
    867,000       686,000       181,000       26 %
Other
    1,209,000       766,000       443,000       57 %
            Total
  $ 13,724,000      $ 7,843,000      $ 5,881,000       74 %

Wages and benefits were higher during the year ended December 31, 2015 due to increase in staff compared to the year ended December 31, 2014.  During the year ended December 31, 2015, MVP Advisors incurred and paid 5.25% commission, approximately $3.2 million, to third party brokers for all MVP REIT common shares sold.  During the year ended December 31, 2014, a forgiveness of debt was recognized due to the reduction of liabilities due from MVP REIT to MVP Advisors totaling approximately $0.5 million.  The increase in 2015 for seminar and travel expenses compared to 2014 is due to increase in selling activity for 2015.

During May 2015, our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%.  The purpose of MVP CP II is to act as the sponsor of MVP REIT II. MVP REIT II has filed its initial registration statement with the Securities Exchange Commission and all of the states. MVP REIT II’s registration statement has been declared effective by the SEC as of October 23, 2015.  MVP REIT II is a proposed $550,000,000 offering with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.  We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to their ownership interest.  During the year ended December 31, 2015, our portion of these costs and expenses totaled approximately $1.3 million.

Non-operating income (loss):
 
2015
   
2014
   
$ Change
   
% Change
 
Gain related to recovery of allowance on note payable – related party
   $ 24,000      $ 1,774,000      $ (1,750,000 )     (98 %)
Other income
    2,000       --       2,000       100 %
Interest expense     3,000       3,000       --       --  
Recovery from settlement with loan guarantor
    79,000       78,000       1,000       1 %
Gain (loss) on marketable securities
    2,000       42,000       (40,000 )     (95 %)
Loss on marketable securities – related party
    (324,000 )     (120,000 )     (204,000 )     (170 %)
Income (loss) on investment in equity method investee
    --       66,000       (66,000 )     (100 %)
            Total
  $ (220,000 )   $ 1,837,000     $ (2,057,000 )     (111 %)

During the year ended December 31, 2014, we received payments on balances owed from MVP REIT which resulted in a recovery of allowance on note receivable of approximately $1.8 million.  The purchase and subsequent sale of marketable securities occurred during the year ended December 31, 2015 and 2014, resulting in a gain of approximately $2,000 and $42,000, respectively. During December 2015 and 2014, management recognized a loss of approximately $324,000 and $120,000 on VRM I’s common stock.  For additional information see Note G – Investment in Marketable Securities of the Notes to the Consolidated Financial Statements included in Part II, Item 8  Financial Statements  of this Annual Report on Form 10-K.
 
Discontinued operations, net of income taxes:
 
2015
   
2014
   
$ Change
   
% Change
 
Net gain on sale of real estate owned held for sale
  $ --     $ 837,000     $ (837,000 )     (100 %)
Expenses related to real estate owned held for sale
    (328,000 )     (654,000 )     326,000       (49 %)
Recovery from fully impaired real estate held for sale
    396,000       2,259,000       (1,863,000 )     (82 %)
Income from investment in equity method investee – held for sale
    --       20,000       (20,000 )     (100 %)
Impairment of assets held for sale
    (10,800,000 )     --       (10,800,00 )     100 %
Income from assets held for sale, net of income taxes
    1,454,000       778,000       676,000       86 %
            Total
  $ (9,278,000 )   $ 3,240,000     $ 12,518,000       (386 %)

Discontinued operations related to properties that have been foreclosed on and are recorded as assets held for sale.  During 2014, we recorded a net loss of approximately $0.1 million on the sale of Baltimore.  In 2014, MVP REIT exercised its Purchase Right to acquire our and VRM I’s interest in the five parking facilities and our interest in a storage facility.   Under the agreement between us, VRM I and MVP REIT, MVP REIT agreed that we and VRM I would receive a 7.5% return on our joint venture investments with MVP REIT. With this return, along with reimbursements of the loss on Baltimore and the incurred acquisition fees, we and VRM I received a greater amount of consideration than what was transferred to MVP REIT.  This transaction resulted in our net gain on sale of real estate owned held for sale of approximately $0.8 million.  During 2015 there were no similar transaction.  Income of approximately $1.5 million is from assets held for sale during the year ended December 31, 2015 which are related to the six office buildings currently held for sale.  During the years ended December 31, 2015 and 2014 we received settlements related to 1701 Commerce for $0.4 million and $2.3 million, respectively.  Impairment of assets held for sale of $10.8 million recorded in 2015 per purchase agreement.  For additional information see Note F – Assets Held for Sale of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements  of this Annual Report on Form 10-K.

CAPITAL AND LIQUIDITY

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

During the year ended December 31, 2015, net cash flows used in operating activities were approximately $5.6 million.  Operating cash flows were used for the payment of normal operating expenses such as management fees, accounting fees, legal bills and expenses related to real estate owned held for sale.  During the year ended December 31, 2015, cash flows related to investing activities consisted of cash used for investments in Delaware Statutory Trust of $1.8 million, investments in new real estate loans of approximately $5.2 million and purchases of real estate loans from third parties of approximately $0.2 million.  In addition, cash flows related to investing activities consisted of cash provided by loan payoffs and sale of investments in real estate loans to third parties of approximately $8.4 million.  Cash flows used in financing activities consisted of purchase of treasury stock of approximately $0.6 million, cash for payments on notes payable of approximately $0.5 million and distribution to non-controlling interest entity for real estate held for sale of approximately $80,000.


On November 25, 2014, Shustek Investments Inc., a company wholly owned by our CEO Mike Shustek, entered into a loan purchase contract with us to acquire a loan with a book value of approximately $2.4 million. The loan was originated during March 2009 with an original principal balance of $7.45 million earning interest at a rate of 11%. The borrower made principal payments during the life of the loan; however, they also received extensions for the maturity of the note. As of the date of the loan purchase contract, the loan was extended through January 2015.  The purchase price of the loan was approximately $3.0 million, which includes the purchase of interest assigned to third parties. As additional consideration we may receive 50% of any amount collected in excess of the purchase price less any expenses incurred by Shustek Investments. After three years the 50% shall be reduced to 33%. This transaction resulted in a gain on sale of loan – related party totaling approximately $0.6 million for the year ended December 31, 2014.  During the year ended December 31, 2015 this loan was paid in full and we received approximately $1.6 million.

At December 31, 2015, we had approximately $4.2 million in cash, $0.1 million in marketable securities – related party, and approximately $54.4 million in total assets.  We intend to meet short-term working capital needs through a combination of proceeds from loan payoffs, loan sales, rental revenue, sales of real estate owned held for sale and/or borrowings.  We believe we have sufficient working capital to meet our operating needs during the next 12 months.

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

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

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

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

Through our interest in MVP Advisor, we have directed, and may continue to direct, a portion of our cash towards development of the business of MVP REIT. As of June 30, 2013, we and MVP CP had loaned approximately $3.6 million and approximately $1.2 million, respectively, to MVP Advisors related to MVP REIT, Inc.  On June 30, 2013, MVP CP decided to forgive the full amount of its $1.2 million loan.  We have not forgiven the balance due from MVP Advisors. However the decision by MVP Advisors to forgive the full amount of its loans created uncertainty as to when we will be repaid the amounts loaned to MVP Advisors. Based on this uncertainty, we determined to treat as fully impaired the balance of this investment and note receivable.


During the six months ended June 30, 2014, we provided additional advances to MVP Advisor of $1.0 million.  As of December 31, 2015 and 2014, we had notes receivable from MVP Advisor of approximately $12.9 million and $7.7 million, respectively, which amount has been fully allowed for. To further support development of the business of MVP REIT, MVP Advisors also has agreed to waive certain fees and expense reimbursements it otherwise would have been entitled to receive under the terms of its advisory agreement with MVP REIT. MVP Advisors ability to repay the loans and the return on our investment in MVP Advisors will likely depend upon the success of MVP REIT’s public offering and its ability to successfully deploy the offering proceeds. While we expect any such investments to ultimately generate a return through management fees payable by MVP REIT to MVP Advisors, such fees may not be significant in the near term as MVP REIT only recently completed its initial public offering in September 2015, and over the next 12 months, there may be a diminution of our liquid assets.  If MVP REIT is unable to deploy the offering proceeds and operate its business successfully, then our return on our investment in MVP Advisors and the ability of MVP Advisors to repay our loans could be adversely impacted.

During May, 2015 our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%.  The purpose of MVP CP II is to act as the sponsor of MVP REIT II. MVP REIT II has filed its initial registration statement with the Securities Exchange Commission and all of the states. As of the date of this filing, MVP REIT II has been declared effective on October 23, 2015.  MVP REIT II is a proposed $550,000,000 offering with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.

We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to our respective ownership interest.  As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II.  As part of the advisory agreement, MVP Advisors will receive a 1% annual asset management fee and 2.25% of the purchase price on all acquisitions.  MVP Advisors will also receive the lesser of 3% of contract sale price or 50% of the brokerage commission paid on dispositions of MVP REIT II, assets which amount shall accrue until the MVP REIT II investors have a return of their net capital and a 6% annual cumulative non compounded return. In addition once the MVP REIT II investors have received a return of their net capital invested and a 6% annual cumulative, non-compounded return, then MVP Advisors will be entitled to receive 15% of the remaining proceeds. This fee will be payable under only one of the following events: (i) if MVP REIT II shares are listed on a national securities exchange; (ii) if MVP REIT II assets are sold, other than single assets sold in the ordinary course, or liquidated; (iii) upon a merger, share exchange, reorganization or other transaction pursuant to which MVP REIT II investors receive cash or publicly traded securities in exchange for their shares; or (iv) upon termination of the advisory agreement. The operating agreement of the Advisor provides that once we and VRM I have been repaid in full for any capital contributions to the Advisor or for any expenses advanced on the Advisor’s behalf, or capital investment, and once we and VRM I have received an annualized return on our capital investment of 7.5%, then Michael Shustek will receive 40% of the net profits of the Advisor.  As of December 31, 2015 we have made loans of approximately $1.1 million to MVP CP II, which have been impaired.

We maintain working capital reserves of approximately 3% in cash and cash equivalents, certificates of deposits and short-term investments or liquid marketable securities.  This reserve is available to pay expenses in excess of revenues, satisfy obligations of underlying properties, expend money to satisfy our unforeseen obligations and for other permitted uses of working capital.  As of March 30, 2016, we have met our 3% reserve requirement.

Investments in Real Estate Loans Secured by Real Estate Portfolio

We offer five real estate loan products consisting of commercial property, construction, acquisition and development, land, and residential loans.  The effective interest rates on all product categories range from 8% to 15%.  Revenue by product will fluctuate based upon relative balances during the period.  We had investments in eight real estate loans, as of December 31, 2015, with a balance of approximately $4.6 million as compared to investments in 12 real estate loans, as of December 31, 2014, with a balance of approximately $7.6 million.

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


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, 2015, we do not have any interests in off-balance sheet special purpose entities nor do we have any interests in non-exchange traded commodity contracts.

RELATED PARTY TRANSACTIONS

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



CRITICAL ACCOUNTING ESTIMATES

Revenue Recognition

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


The following table presents a sensitivity analysis, averaging the balance of our loan portfolio at the end of the last six quarters, to show the impact on our financial condition at December 31, 2015, from fluctuations in weighted average interest rate charged on loans as a percentage of the loan portfolio:

Changed Assumption
 
Increase (Decrease) in Interest Income
 
Weighted average interest rate assumption increased by 1.0% or 100 basis points
  $ 70,000  
Weighted average interest rate assumption increased by 5.0% or 500 basis points
  $ 382,000  
Weighted average interest rate assumption increased by 10.0% or 1,000 basis points
  $ 703,000  
Weighted average interest rate assumption decreased by 1.0% or 100 basis points
  $ (70,000 )
Weighted average interest rate assumption decreased by 5.0% or 500 basis points
  $ (382,000 )
Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points
  $ (703,000 )

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

Allowance for Loan Losses

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

The following table presents a sensitivity analysis to show the impact on our financial condition at December 31, 2015, from increases and decreases to our allowance for loan losses as a percentage of the loan portfolio:

Changed Assumption
 
Increase (Decrease) in Allowance for Loan Losses
 
Allowance for loan losses assumption increased by 1.0% of loan portfolio
  $ 46,000  
Allowance for loan losses assumption increased by 5.0% of loan portfolio
  $ 231,000  
Allowance for loan losses assumption increased by 10.0% of loan portfolio
  $ 461,000  
Allowance for loan losses assumption decreased by 1.0% of loan portfolio
  $ (46,000 )
Allowance for loan losses assumption decreased by 5.0% of loan portfolio
  $ (231,000 )
Allowance for loan losses assumption decreased by 10.0% of loan portfolio
  $ (461,000 )


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

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

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

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

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

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

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

Real Estate Owned Held for Sale

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

 
FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Vestin Realty Mortgage II, Inc. and subsidiaries (“the Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, other comprehensive loss, equity and other comprehensive loss, and cash flows for each of the two years in the period ended December 31, 2015. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vestin Realty Mortgage II, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.  Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ RBSM LLP


New York, New York
March 30, 2016



VESTIN REALTY MORTGAGE II, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
   
ASSETS
 
   
December 31, 2015
   
December 31, 2014
 
Assets
           
Cash and cash equivalents
  $ 4,228,000     $ 7,541,000  
Prepaid expenses
    323,000       205,000  
Prepaid expense – related party
    --       91,000  
Investment in marketable securities - related party
    262,000       461,000  
Interest and other receivables
    42,000       3,000  
Investment in MVP REIT II
    200,000       --  
Investments in Delaware Statutory Trusts
    1,800,000       --  
Notes receivable, net of allowance of $1,099,000 and $6,543,000 at December 31, 2015 and 2014, respectively
    --       --  
Investment in real estate loans, net of allowance for loan losses of $2,450,000 at December 31, 2015 and 2014
    2,161,000       5,187,000  
Fixed assets, net of accumulated depreciation of $1,000 and $0 at December 31, 2015 and 2014, respectively
    21,000       --  
Due from related parties
    408,000       301,000  
Assets held for sale
    44,923,000       55,427,000  
Total assets
  $ 54,368,000     $ 69,216,000  
LIABILITIES AND EQUITY
 
Liabilities
               
Accounts payable and accrued liabilities
  $ 928,000     $ 618,000  
Note payable
    --       23,000  
Due to related parties
    5,265,000       1,437,000  
Liabilities related to assets held for sale
    30,684,000       31,056,000  
Total liabilities
    36,877,000       33,134,000  
Commitments and contingencies
               
Equity
               
Vestin Realty Mortgage II, Inc. stockholders’ equity:
               
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding
    --       --  
Treasury stock, at cost, 0 shares at December 31, 2015 and 2014
    --       --  
Common stock, $0.0001 par value; 100,000,000 shares authorized; 2,490,514 and 2,578,420 shares issued and outstanding at December 31, 2015 and 2014, respectively.
    --       --  
Additional paid-in capital
    266,576,000       267,081,000  
Accumulated deficit
    (252,997,000 )     (238,165,000 )
Accumulated other comprehensive income
    --       --  
Total Vestin Realty Mortgage II, Inc. stockholders’ equity
    13,579,000       28,916,000  
Non-controlling interest
    3,912,000       7,166,000  
Total equity
    17,491,000       36,082,000  
Total liabilities and equity
  $ 54,368,000     $ 69,216,000  

The accompanying notes are an integral part of these consolidated financial statements.
 
-23-



VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
      For the Years ended December 31,  
      2015       2014  
Revenues
               
Interest income from investment in real estate loans
  $ 645,000     $ 979,000  
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
    1,623,000       560,000  
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
    552,000       198,000  
    Acquisition fee income     1,830,000       --  
    Advisor fee     566,000       379,000  
Total revenues     5,216,000       2,116,000  
Operating expenses
               
Management fees - related party
    1,096,000       1,098,000  
MVP REIT II organization and offering costs
    1,329,000       --  
Wages and benefits
    3,330,000       1,784,000  
Acquisition expense
    1,000       29,000  
Depreciation
    2,000       --  
Forgiveness of debt – related party
    --       533,000  
Professional fees
    1,073,000       1,237,000  
Seminars
    1,175,000       308,000  
Consulting fees
    221,000       413,000  
Insurance
    259,000       267,000  
Commissions
    3,162,000       722,000  
Travel
    867,000       686,000  
Other
    1,209,000       766,000  
Total operating expenses
    13,724,000       7,843,000  
Loss from operations
    (8,508,000 )     (5,727,000 )
Non-operating income (loss)
               
Gain related to recovery of allowance on note payable – related party
    24,000       1,774,000  
Interest expense
    (3,000 )     (3,000 )
Other income
    2,000       --  
Recovery from settlement with loan guarantor
    79,000       78,000  
Income  on investment in equity method investee
    --       66,000  
Gain on sale of marketable securities
    2,000       42,000  
Loss on sale of marketable securities – related party
    (324,000 )     (120,000 )
Total other non-operating income (loss), net
    (220,000 )     1,837,000  
Provision for income taxes
    --       --  
Loss from continuing operations
    (8,728,000 )     (3,890,000 )
Discontinued operations, net of income taxes
               
Net gain on sale of real estate owned held for sale
    --       837,000  
Expenses related to real estate owned held for sale
    (328,000 )     (654,000 )
Impairment of assets held for sale
    (10,800,000 )     --  
Income from investment in equity method investee
    --       20,000  
Recovery from fully impaired real estate held for sale
    396,000       2,259,000  
Income from assets held for sale, net of income taxes
    1,454,000       778,000  
Total income (loss) from discontinued operations
    (9,278,000 )     3,240,000  
Net loss   $ (18,006,000 )   $
(650,000
Allocation of income (loss) to non-controlling interest - related party     (3,174,000 )    
455,000
 
Net loss attributable to common stockholders   $ (14,832,000   $
(1,105,000
Basic and diluted income (loss) per weighted average common share                
      Continuing operations   $ (3.44 )   $ (1.41
      Discontinued operations   $ (3.65   $ 1.21  
      Total basic and diluted loss per weighted average common share   $ (5.84   $ (0.42
Weighted average common shares outstanding     2,538,774       2,670,143  

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


VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
 

   
For The Years
Ended December 31,
 
   
2015
   
2014
 
             
Net loss
  $ (18,006,000 )   $ (650,000 )
                 
Unrealized holding loss on available-for-sale securities – related party
    --       (341,000 )
Unrealized holding gain on available-for-sale securities
    --       10,000  
                 
Comprehensive loss
    (18,006,000 )     (981,000 )
Less: net income (loss) attributable to noncontrolling interest
    (3,174,000 )     455,000  
                 
Comprehensive loss attributable to Vestin Realty Mortgage II, Inc.
  $ (14,832,000 )   $ (1,436,000 )

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



VESTIN REALTY MORTGAGE II, INC.
 
CONSOLIDATED STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE LOSS
 
                                                       
   
Treasury Stock
   
Common Stock
                               
   
Shares
   
Amount
   
Shares (1)
   
Amount
   
Additional
Paid-in-Capital
   
Accumulated Deficit
   
Accumulated Other Comprehensive Income
   
Noncontrolling Interest – Related Party
   
Total
 
                                                       
                           
 
                         
Stockholders' Equity at December 31, 2013
    --     $ --       2,709,174     $ --     $ 267,745,000     $ (237,060,000 )   $ 331,000     $ 6,127,000     $ 37,144,000  
                                                                         
Net Income (Loss)
    --       --       --       --       --       (1,105,000 )     --       455,000       (650,000
                                                                         
Unrealized (loss)  on Marketable Securities - Related Party
    --       --       --       --       --       --       (331,000     --       (331,000
Comprehensive Income
    --       --       --       --       --       --       --       --       (981,000
                                                                         
Distributions to non controlling interest
    --       --       --       --       --       --       --       (62,000     (62,000
                                                                         
Reverse split
    --       --       --       --       (2,000     --       --       --       (2,000 )
                                                                         
Non-controlling interest
    --       --       --       --       --       --       --       646,000       646,000  
                                                                         
Retire Treasury Stock
    (130,754     663,000       --       --       (662,000 )     --       --       --       --  
                                                                         
Purchase of Treasury Stock
    130,754       (663,000     (130,754 )     --       --       --       --       --       (663,000 )
                                                                         
Stockholders' Equity at December 31, 2014
    --     $ --       2,578,420     $ --      $ 267,081,000     $ (238,165,000)     $ --     $ 7,166,000     $ 36,082,000  
                                                                         
Net Income (Loss)
    --       --       --       --       --       (14,832,000     --       (3,174,000     (18,006,000
                                                                         
Unrealized Gain on Marketable Securities - Related Party
    --       --       --       --       --       --       --       --       --  
Comprehensive Income
    --       --       --       --       --       --       --       --       (18,006,000
                                                                         
Distributions to non controlling interest
    --       --       --       --       --       --       --       (80,000     (80,000 )
                                                                         
Reverse split
    --       --       --       --       --       --       --       --       --  
                                                                         
Non-controlling interest
    --       --       --       --       --       --       --       --       --  
                                                                         
Retire Treasury Stock
    (87,906     505,000       --       --       (505,000     --       --       --       --  
                                                                         
Purchase of Treasury Stock
    87,906       (505,000     (87,906     --       --       --       --       --       (505,000
                                                                         
Stockholders' Equity at December 31, 2015
    --     $ --       2,490,514     $ --      $ 266,576,000     $ (252,997,000   $ --     $ 3,912,000     $ 17,491,000  
 
 
(1)
Per share data is based on the average number of shares outstanding during the periods, except for the book value and market price which are based on the information at the end of the periods. All per share data has been adjusted to retroactively reflect the 1for 4 reverse stock split effected in January 2014.
 

The accompanying notes are an integral part of these consolidated financial statements.
 
-26-

VESTIN REALTY MORTGAGE II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
    For the years Ended December 31,  
    2015     2014  
Cash flows from operating activities:
           
Net loss
  $ (18,006,000 )   $ (650,000 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation
    2,000       10,000  
Recovery of allowance for doubtful notes receivable
    (552,000 )     (198,000 )
Gain on sale of marketable securities
    (2,000 )     (42,000 )
Loss on marketable securities – related party
    324,000       120,000  
Income on investment in equity method investee – held for sale
    --       (86,000 )
Forgiveness of debt-related party
    --       533,000  
Gain on sale of real estate owned held for sale
    --       (837,000 )
Gain related to recovery of allowance for notes receivable – related party
    (24,000 )     (1,774,000 )
Gain related to recovery from settlement with loan guarantor
    (79,000 )     (78,000 )
Gain related to recovery of allowance for loan loss
    (1,623,000 )     (560,000 )
Recovery from fully impaired real estate held for sale
    (396,000 )     (2,259,000
Impairment of assets held for sale
    10,800,000       --  
Change in operating assets and liabilities:
               
Interest and other receivables
    (39,000 )     2,000  
Assets held for sale, net of liabilities
    24,000       447,000  
Due to/from related parties, net
    3,721,000       846,000  
Prepaid expenses – related party
    (323,000 )     --  
Other assets
    296,000       126,000  
Accounts payable and accrued liabilities
    312,000       (311,000 )
Net cash used in operating activities
    (5,565,000 )     (4,711,000 )
Cash flows from investing activities:
               
Investments in real estate loans
    (5,217,000 )     (14,269,000 )
Purchase of investments in real estate loans from third parties
    (200,000 )     (468,000 )
Proceeds from loan payoffs
    5,971,000       6,546,000  
Sale of investments in real estate loans to:
               
  VRM I
    --       2,823,000  
  Third parties
    2,472,000       8,060,000  
Investment in Delaware Statutory Trust
    (8,200,000 )     --  
Payments on Delaware Statutory Trust
    6,400,000       --  
Proceeds from notes receivable
    552,000       198,000  
Proceeds from notes receivable – related party
    24,000       1,774,000  
Proceeds from recovery from settlement with loan guarantor
    79,000       78,000  
Proceeds related to real estate held for sale
    --       2,552,000  
Collection from recovery of loan loss
    1,623,000       560,000  
Proceeds from recovery of fully impaired  real estate held for sale
    396,000       2,259,000  
Payment of noncontrolling interest portion of proceeds related to real estate held for sale
    --       (764,000 )
Payments on assets transferred, net
    --       (958,000 )
Purchase of investments in real estate
    --       (6,263,000 )
Payments on purchase of assets
    --       (212,000 )
Purchase of marketable securities
    (109,000 )     (1,946,000 )
Purchase of marketable securities – related party
    (125,000 )     --  
Purchase of fixed assets
    (23,000 )     --  
Investment in MVP REIT II
    (200,000 )     --  
Investment in and note receivable from MVP Realty Advisors, LLC
    --       (1,365,000 )
Investment in equity method investee
    --       (3,000,000 )
Additional investment from noncontrolling interest investors
    --       84,000  
Proceeds from sale of VREO XXV, LLC
    --       39,000  
Asset purchase – assets held for sale
    (115,000 )     --  
Proceeds from sale of marketable securities
    109,000       7,675,000  
Net cash provided by investing activities
    3,437,000       3,373,000  
Cash flows from financing activities:
               
Principal payments on notes payable
    (189,000 )     (8,190,000 )
Purchase of treasury stock
    (505,000 )     (662,000 )
Distribution to noncontrolling interest entity held for sale
    (80,000 )     (62,000 )
Proceeds from note payable
    166,000       7,750,000  
Proceeds from note payable on assets held for sale
    --       4,143,000  
Payments on note payable on assets held for sale
    (577,000 )     --  
Payment of noncontrolling interest portion of proceeds from note payable held for sale
    --       (1,763,000 )
Net cash (used in) provided by financing activities
    (1,185,000 )     1,216,000  
NET CHANGE IN CASH
    (3,313,000 )     (122,000 )
Cash, beginning of period
    7,541,000       7,663,000  
Cash, end of period
  $ 4,228,000     $ 7,541,000  
Supplemental disclosures of cash flows information:
               
Interest paid
  $ 3,000     $ 400,000  
Non-cash investing and financing activities:
               
Note payable related to prepaid D&O insurance
  $ 166,000     $ 262,000  
Unrealized loss on marketable securities - related party
  $ (324,000 )   $ (341,000 )

The accompanying notes are an integral part of these consolidated financial statements.
 
-27-


VESTIN REALTY MORTGAGE II, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015

NOTE A — ORGANIZATION

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

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

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

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

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

The consolidated financial statements include the accounts of VRM II; Building A, LLC, Building C, LLC, Wolfpack Properties, LLC; Devonshire, LLC; SE Properties, LLC; ExecuSuites, LLC; MVP Realty Advisors, LLC (“MVP Advisors”) and MVP Capital Partners II, LLC (“MVP CP II”).  All significant intercompany transactions and balances have been eliminated in consolidation.

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


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

During May 2015, our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%.  The purpose of MVP CP II is to act as the sponsor of MVP REIT II, a Maryland corporation, which was formed as a publicly registered non traded REIT (“MVP REIT II”). MVP REIT II has been declared effective on October 23, 2015.  MVP REIT II is a proposed $550,000,000 offering with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.

We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to our respective ownership interest.  As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II.  As part of the advisory agreement, MVP Advisors will receive a 1% annual asset management fee and 2.25% of purchase price on all acquisitions.  MVP Advisors will also receive the lesser of 3% of contract sale price or 50% of the brokerage commission paid on dispositions of MVP REIT II assets, which amount shall accrue until the MVP REIT II investors have a return of their net capital and a 6% annual cumulative non compounded return. In addition once the MVP REIT II investors have received a return of their net capital invested and a 6% annual cumulative, non-compounded return, then MVP Advisors will be entitled to receive 15% of the remaining proceeds. This fee will be payable under only one of the following events: (i) if MVP REIT II shares are listed on a national securities exchange; (ii) if MVP REIT II assets are sold, other than single assets sold in the ordinary course, or liquidated; (iii) upon a merger, share exchange, reorganization or other transaction pursuant to which MVP REIT II investors receive cash or publicly traded securities in exchange for their shares; or (iv) upon termination of the advisory agreement. The operating agreement of the Advisor provides that once we and VRM I have been repaid in full for any capital contributions to the Advisor or for any expenses advanced on the Advisor’s behalf, or capital investment, and once we and VRM I have received an annualized return on our capital investment of 7.5%, then Michael Shustek will receive 40% of the net profits of the Advisor.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

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

Management Estimates

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


Investments in Real Estate Loans

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

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

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

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

Allowance for Loan Losses

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

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


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

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

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

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

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

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

Discontinued Operations

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

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

Real Estate Owned Held for Sale

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


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

 
·
Management commits to a plan to sell the properties;

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

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

 
·
The sale of the property is probable;

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

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

Acquisitions

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

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

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


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

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

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

Costs directly associated with all operating property acquisitions and those development and redevelopment acquisitions that meet the accounting criteria to be accounted for as business combinations are expensed as incurred. Our acquisition expenses are directly related to our acquisition activity and if our acquisition activity was to increase or decrease, so would our acquisition costs. Costs directly associated with development acquisitions accounted for as asset acquisitions are capitalized as part of the cost of the acquisition. During the year ended December 31, 2015, the Company did not capitalize any such acquisition costs.

Impairment of Long Lived Assets

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

Cash and Cash Equivalents

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


Revenue Recognition

The Company recognizes interest income from loans on an accrual basis over the expected terms of the loans using the effective interest method.  The Company may recognize fees, discounts, premiums, anticipated exit fees and direct cost over the terms of the loans as an adjustment to the yield.  The Company may recognize fees on commitments that expire unused at expiration.  The Company may recognize interest income from available-for-sale securities on an accrual basis over the life of the investment on a yield-to-maturity basis.  Interest is fully allowed for on impaired loans and is recognized on a cash basis method.  The receipt of previous loan or note receivable allowances or impairments are recognized as revenue.

Advertising Costs

Advertising costs incurred in the normal course of operations are expensed as incurred.  The Company had no advertising expense for the years ended December 31, 2015 and 2014.

Investments in Real Estate and Fixed Assets

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

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

Investment in Marketable Securities

Investment in marketable securities consists of stock in VRM I and MVP REIT II, related parties.  The securities are stated at fair value as determined by the closing market prices as of December 31, 2015 and 2014.  All securities are classified as available-for-sale.

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

Basic and Diluted Earnings Per Common Share

Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been exercised.  We had no outstanding common share equivalents during the periods ended December 31, 2015 and 2014.

Common Stock Dividends

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


Treasury Stock

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

We record our treasury stock using the cost method.  Under the Maryland General Corporation Law, shares of its own stock acquired by a corporation constitute authorized but unissued shares.

Segments

We currently are authorized to operate three reportable segments, investments in real estate loans, investments in real property and investment in a real estate management company.  As of December 31, 2015, the Company operates in all segments.

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

Reclassifications

Amounts listed in connection with assets held for sale, including liabilities related to assets held for sale, in the 2014 consolidated financial statements have been reclassified to conform to the December 31, 2015 presentation. This reclassification resulted in no net effect on the 2014 consolidated financial statements.

Principles of Consolidation

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


Non-controlling Interests

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

Income Taxes

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

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

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

NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

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

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

We maintain cash deposit accounts and certificates of deposit that, at times, may exceed federally-insured limits.  To date, we have not experienced any losses.  As of December 31, 2015 and 2014 we had approximately $3.9 and $5.5 million of funds, respectively, in excess of the federally-insured limits.

As of December 31, 2015, 100% of our loans were loans in which we participated with other lenders, most of whom are our affiliates.


As of December 31, 2015, 93% of our loans were in Nevada compared to 69% and 27% in Nevada and California, respectively, at December 31, 2014.

At December 31, 2015 and 2014, the loan to our largest borrower represented approximately 53% and 32%, respectively, of our total investment in real estate loans.  This real estate loan is a commercial loan secured by property located in Nevada, with a first lien position.  The interest rate is 15%, the outstanding balance is approximately $2.5 million and the loan is considered a non-performing loan.

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

Common Guarantors

As of December 31, 2014, two loans totaling approximately $0.5 million, representing approximately 6.8% of our portfolio’s total value, had a common guarantor.  At December 31, 2014, these loans were considered performing. As of December 31, 2015, these loans were paid in full.

As of December 31, 2014, there were two loans, totaling approximately $1.1 million, representing approximately 14.3% of our portfolio’s total value, which had a common guarantor.  At December 31, 2014, these loans were considered performing. As of December 31, 2015, these loans were paid in full.

As of December 31, 2015, two loans totaling approximately $1.7 million, representing approximately 38% of our portfolio’s total value, have a common guarantor.  These loans were originated in 2015.

As of December 31, 2015, three loans totaling approximately $0.3 million, representing approximately 7% of our portfolio’s total value, have a common guarantor.  At December 31, 2014 these loans represented less than 5% of our portfolio.

NOTE D — INVESTMENTS IN REAL ESTATE LOANS

As of December 31, 2015 and 2014, most of our loans provided for interest only payments with a “balloon” payment of principal payable and any accrued interest payable in full at the end of the term.  As of December 31, 2015 and 2014, three loans had variable interest rates adjusted quarterly at a rate of prime plus 3.30% (6.55% as of December 31, 2015 and 2014). The balance on these loans was approximately $0.3 million as of December 31, 2015 and 2014.

In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time.  At December 31, 2015 and 2014, we had one investment in real estate loans that had interest reserves.

Loan Portfolio

As of December 31, 2015, we had five available real estate loan products consisting of commercial, construction, acquisition and development, land and residential.  The effective interest rates on all product categories range from 8% to 15% which includes performing loans that are being fully or partially accrued and will be payable at maturity.  Revenue by product will fluctuate based upon relative balances during the period.


Investments in real estate loans as of December 31, 2015, 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
    7     $ 4,541,000       11.85 %     98.48 %     60.14 %
Construction
    1       70,000       0.12 %     1.52 %     0.44 %
Total
    8     $ 4,611,000       11.79 %     100.00 %     58.61 %
 
Investments in real estate loans as of December 31, 2014, were as follows:
 
Loan Type
 
Number of Loans
   
Balance *
   
Weighted Average Interest Rate
   
Portfolio Percentage
   
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
 
                               
Commercial
    11     $ 5,579,000       10.88 %     73.04 %     43.43 %
Construction
    1       2,058,000       9.00 %     26.96 %     67.63 %
Total
    12     $ 7,637,000       10.37 %     100.00 %     53.03 %

*
Please see Balance Sheet Reconciliation below.

The “Weighted Average Interest Rate” as shown above is based on the contractual terms of the loans for the entire portfolio including non-performing loans.  The weighted average interest rate on performing loans only, as of December 31, 2015 and 2014, was 11.79% and 10.37%, respectively.  Please see “Non-Performing Loans” and “Asset Quality and Loan Reserves” below for further information regarding performing and non-performing loans.

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

The following is a schedule of priority of real estate loans as of December 31, 2015 and 2014:
 
Loan Type
 
Number of Loans
   
December 31 2015 Balance*
   
Portfolio Percentage
   
Number of Loans
   
December 31, 2014 Balance*
   
Portfolio Percentage
 
                                     
First deeds of trust
    8       4,611,000       100.00 %     11       7,342,000       96.14 %
Second deeds of trust
    --       --       --       1       295,000       3.86 %
Total