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Note D - Investments in Real Estate Loans

6 Months Ended

Jun. 30, 2012

Investments In Real Estate Loans [Text Block]

NOTE D — INVESTMENTS IN REAL ESTATE LOANS

As of June 30, 2012 and December 31, 2011, 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.

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 June 30, 2012 and December 31, 2011, we had two and no investments in real estate loans, respectively, that had interest reserves.

Loan Portfolio

As of June 30, 2012, 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 4.5% 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 June 30, 2012, 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		15	$	13,274,000		8.65	%		99.30	%		68.87	%
Land		1		94,000		6.00	%		0.70	%		53.81	%
Total		16	$	13,368,000		8.63	%		100.00	%		68.75	%

Investments in real estate loans as of December 31, 2011, 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		17	$	15,855,000		10.15	%		97.55	%		70.96	%
Construction		1		165,000		8.00	%		1.02	%		90.50	%
Residential		1		138,000		11.69	%		0.85	%		89.73	%
Land		1		94,000		6.00	%		0.58	%		53.81	%
Total		20	$	16,252,000		10.09	%		100.00	%		70.86	%

*	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 June 30, 2012 and December 31, 2011, was 8.11% and 9.77%, 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 June 30, 2012 and December 31, 2011:

Loan Type	Number of Loans		June 30, 2012 Balance *		Portfolio Percentage			Number of Loans		December 31, 2011 Balance *		Portfolio Percentage

First deeds of trust		13	$	11,151,000		83.42	%		13	$	10,840,000		66.70	%
Second deeds of trust		3		2,217,000		16.58	%		7		5,412,000		33.30	%
Total		16	$	13,368,000		100.00	%		20	$	16,252,000		100.00	%

*	Please see Balance Sheet Reconciliation below.

The following is a schedule of contractual maturities of investments in real estate loans as of June 30, 2012:

Non-performing and past due loans (a)	$	1,000,000
July 2012 –September 2012		1,994,000
October 2012 –December 2012		2,464,000
January 2013 – March 2013		3,260,000
April 2013 – June 2013		3,433,000
July 2013 – September 2013		467,000
Thereafter		750,000

Total	$	13,368,000

(a)

Amounts include the balances of non-performing loans

The following is a schedule by geographic location of investments in real estate loans as of June 30, 2012 and December 31, 2011:

	June 30, 2012 Balance *		Portfolio Percentage			December 31, 2011 Balance *		Portfolio Percentage

Arizona	$	450,000		3.37	%	$	3,282,000		20.20	%
California		467,000		3.49	%		647,000		3.98	%
Colorado		--		--			300,000		1.85	%
Michigan		1,741,000		13.02	%		--		--
Nevada		8,832,000		66.07	%		5,928,000		36.48	%
Oregon		--		--			4,434,000		27.28	%
Texas		1,058,000		7.91	%		1,661,000		10.21	%
Utah		820,000		6.14	%		--		--
Total	$	13,368,000		100.00	%	$	16,252,000		100.00	%

*	Please see Balance Sheet Reconciliation below.

Balance Sheet Reconciliation

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

	June 30, 2012 Balance			December 31, 2011 Balance
Balance per loan portfolio	$	13,368,000		$	16,252,000
Less:
Allowance for loan losses (a)		(1,629,000	)		(5,485,000	)
Balance per consolidated balance sheets	$	11,739,000		$	10,767,000

(a)

Please refer to Specific Reserve Allowance below.

Non-Performing Loans

As of June 30, 2012, we had one loan considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due). This loan is currently carried on our books at a value of approximately $0.0 million, net of allowance for loan losses of approximately $1.0 million, which does not include the allowances of approximately $0.6 million relating to performing loans as of June 30, 2012. Except as otherwise provided below this loans has been placed on non-accrual of interest status and may be the subject of pending foreclosure proceedings.

At June 30, 2012, the following loan types were non-performing:

Loan Type	Number Of Non-Performing Loans		Balance at June 30, 2012		Allowance for Loan Losses			Net Balance at June 30, 2012
Commercial		1	$	1,000,000	$	(1,000,000	)	$	--
Total		1	$	1,000,000	$	(1,000,000	)	$	--

At December 31, 2011, the following loans were non-performing:

Loan Type	Number Of Non-Performing Loans		Balance at December 31, 2011		Allowance for Loan Losses			Net Balance at December 31, 2011
Commercial		4	$	7,571,000	$	(3,724,000	)	$	3,847,000
Total		4	$	7,571,000	$	(3,724,000	)	$	3,847,000

Asset Quality and Loan Reserves

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

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

Prevailing economic conditions;

Historical experience;

The nature and volume of the loan portfolio;

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

Evaluation of industry trends; and

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

Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses on an individual loan basis; we do not have a general allowance for loan losses. Additions to the allowance for loan losses are made by charges to the provision for loan loss. As of June 30, 2012, our ratio of total allowance for loan losses to total loans with an allowance for loan loss is 73%. The following is a breakdown of allowance for loan losses related to performing and non-performing loans as of June 30, 2012 and December 31, 2011.

	As of June 30, 2012
	Balance		Allowance for loan losses *			Balance, net of allowance

Non-performing loans – no related allowance	$	--	$	--		$	--
Non-performing loans – related allowance		1,000,000		(1,000,000	)		--
Subtotal non-performing loans		1,000,000		(1,000,000	)		--

Performing loans – no related allowance		11,151,000		--			11,151,000
Performing loans – related allowance		1,217,000		(629,000	)		588,000
Subtotal performing loans		12,368,000		(629,000	)		11,739,000

Total	$	13,368,000	$	(1,629,000	)	$	11,739,000

	As of December 31, 2011
	Balance		Allowance for loan losses*			Balance, net of allowance

Non-performing loans – no related allowance	$	--	$	--		$	--
Non-performing loans – related allowance		7,571,000		(3,724,000	)		3,847,000
Subtotal non-performing loans		7,571,000		(3,724,000	)		3,847,000

Performing loans – no related allowance		6,241,000		--			6,241,000
Performing loans – related allowance		2,440,000		(1,761,000	)		678,000
Subtotal performing loans		8,681,000		(1,761,000	)		6,920,000

Total	$	16,252,000	$	(5,485,000	)	$	10,767,000

*	Please refer to Specific Reserve Allowances below.

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

Specific Reserve Allowances

As of June 30, 2012, we have provided a specific reserve allowance for one non-performing loan and two performing loans based on updated appraisals of the underlying collateral and/or our evaluation of the borrower. The following table is a roll-forward of the allowance for loan losses for the six months ended June 30, 2012 and 2011 by loan type.

Loan Type	Balance at 12/31/2011		Specific Reserve Allocation		Sales		Loan Pay Downs and Settlements			Transfers to REO and Notes Receivable			Balance at 6/30/2012

Commercial	$	5,412,000	$	19,000	$	--	$	(1,535,000	)	$	(2,267,000	)	$	1,629,000
Construction		73,000		--		--		(73,000	)		--			--
Total	$	5,485,000	$	19,000	$	--	$	(1,608,000	)	$	(2,267,000	)	$	1,629,000

Loan Type	Balance at 12/31/2010		Specific Reserve Allocation		Sales		Settlements			Transfers to REO & Other Assets		Balance at 6/30/2011

Commercial	$	5,708,000	$	127,000	$	--	$	(997,000	)	$	--	$	4,838,000
Construction		72,000		--		--		--			--		72,000
Total	$	5,780,000	$	127,000	$	--	$	(997,000	)	$	--	$	4,910,000

Troubled Debt Restructuring

As of June 30, 2012 and December 31, 2011 we had three and seven loans, respectively, totaling approximately $2.2 million and $4.4 million, respectively, that met the definition of a Troubled Debt Restructuring or TDR. When the Company modifies the terms of an existing loan that is considered 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. Impairment on these loans is generally determined by the lesser of the value of the underlying collateral or the present value of expected future cash flows. During the previous 12 months there have been four loans that became TDR loans and all remain performing. The following is a breakdown of our TDR loans that were considered performing and non-performing as of June 30, 2012 and December 31, 2011:

As of June 30, 2012
	Total				Performing				Non-Performing
Loan Type	Number of Loans		Fund Balance		Number of Loans		Fund Balance		Number of Loans		Fund Balance

Commercial		4	$	2,217,000		3	$	1,217,000		1	$	1,000,000
Total		4	$	2,217,000		3	$	1,217,000		1	$	1,000,000

As of December 31, 2011
	Total				Performing				Non-Performing
Loan Type	Number of Loans		Fund Balance		Number of Loans		Fund Balance		Number of Loans		Fund Balance

Commercial		6	$	4,212,000		4	$	2,276,000		2	$	1,936,000
Construction		1		165,000		1		165,000		--		--
Total		7	$	4,377,000		5	$	2,441,000		2	$	1,936,000

Commercial – As of June 30, 2012 and December 31, 2011 we had 17 commercial loans, four and three of which, respectively, were modified pursuant to TDR. During January 2012, our one TDR construction loan was modified into a new loan which reduced the principal balance to approximately $4.0 in total, of which our portion is approximately $0.1 million. The interest rate was changed from 3% paid and 5% accruing monthly to 7% paid monthly. The accrued interest balance of approximately $1.0 million, of which our portion is $23,000, was reclassified as a notes receivable. During April 2012 this loan was paid in full and the second deed of trust, which was another TDR loan, was reclassified as a notes receivable. For additional information, see “Non-Performing” of this Note D – Investments in Real Estate Loans and Note I – “Notes Receivable”.

Construction – As of December 31, 2011, we had one construction loan modified pursuant to TDR. During January 2012, we restructured the loan into a new loan which is a commercial loan.

Extensions

As of June 30, 2012, our manager had granted extensions on five outstanding loans, totaling approximately $8.4 million, of which our portion was approximately $3.0 million, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent, or as part of a TDR. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing. Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan. In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal. Subsequent to their extensions, one of the six loans became non-performing. These loans had a total principal amount at June 30, 2012, of approximately $4.3 million, of which our portion is approximately $1.0 million.